Donors and agencies, who evaluate nonprofit performance, often look to see that most of your organization’s funds are being used for core programming purposes. However, different sources recommend differing practices and policies for allocating disbursements among the functional categories. As a result, it is important to develop consistent guidelines within your own organization to determine which of your disbursements go to program support and which to management and general activities or fundraising.
Some functional disbursement ratios are:
| Program Disbursements |
| Total Disbursements |
If high, most of the disbursements are related to programming. Relatively little is spent on management or on fundraising.
| Fundraising Disbursements |
| Total Disbursements |
If high, a large percentage of disbursements are spent on fundraising efforts. Prospective donors may infer that too high a portion of their contribution will be expended on fundraising, rather than on program services.
Financial indicators from the Statement of Position (balance sheet)
Short term liabilities coverage ratio (quick ratio)
Will there be enough cash to pay bills in the immediate or near future? Add together all assets that can be used to pay bills over a specific period of time, such as one month or three months and compare this with the bills that must be paid within that same period of time.
| (Total Cash + Unrestricted Deposits + Accounts Receivable) |
| (Current Accounts Payable + Current Accruals) |
If high, there may be too much in cash, some of which could be earning more if invested. If low, you may be in danger of a cash flow crisis, not enough cash to pay pressing bills.
Current Ratio
Will cash flow be adequate to pay bills over the next year?
| Current Assets |
| Current Liabilities |
If high, same as above. Note: even if the current ratio is adequately calculated for the year, there may be periods within the year where there is insufficient cash to pay bills.
Deferred Receipts
Deferred receipts traditionally refer to cash that has been received for some restricted condition that has not yet been met.
| Deferred Receipts |
| (Cash + Savings) |
If deferred receipts exceed cash and savings, you may be spending restricted cash for purposes other than those which the donor intended, or using monies designated for future purposes to meet current disbursements.
Financial indicators using information from more than one financial statement
Fund balance ratio or unrestricted net assets ratio
The fund balance ratio, or the unrestricted net assets ratio, measures the amount of unrestricted, disbursable equity to the organization’s annual operating disbursements.
| Unrestricted Net Assets |
| Annual Disbursements |
If low, the organization has little unrestricted, disbursable equity available to meet temporary cash shortages, an emergency, or deficit situation in the future. This may be the case even in organizations with significant unrestricted net assets, if the major portion of equity is tied up in fixed assets.
Days’ Receivables
The days’ receivables ratio measures the average number of days it takes to collect on a sale or service performed for a fee. This ratio is useful to organizations that earn significant portions of their receipts from fees charged to clients or from product sales.
| (Accounts Payable x 365) |
| Total Purchases |
If high, payments taking longer than 30 or 60 days may result in friction with community vendors. In addition, the organization may be incurring additional costs as a result of late or deferred payments (e.g., late fees, interest disbursements, etc.). A very long days’ payables ratio or a sudden increase in days payable may indicate an inability to pay bills.
Failure to produce financial information
In order to assess the financial health of your organization, timely and reliable financial information must be available. Lack of adequate financial information may indicate that inadequate time is set aside by staff to perform the accounting function, that staff needs more training in financial statement perpetration, or those financial systems need to be improved.
Summary
Ultimately, the most important performance measure of a nonprofit cannot be found in financial statements at all. To determine “success”, a nonprofit must measure progress against its goals. Determining how many patients/clients were served and at what cost is not difficult. These calculations show how efficient the organization is – not how effective it has been at providing compassionate, professional care for these patients/clients. It is important to remember that financial indicators are powerful tools for nonprofit managers especially when used in pursuit of meaningful goals.
Hassan Altaf, Chartered Accountant and graduate of the inaugural ICD/Rotman Governance Essentials Program for Directors of Nonprofits, is actively involved in the nonprofit sector both as a director on boards and committees and as an external auditor and workshop facilitator. He can be reached by e-mail at hassan@altaf.ca.
