Is Your Non-Profit Using Relevant Ratios in These Uncertain Times ?
By Patrick Fuelling , CPA Shareholder , Doeren Mayhew
Financial statements play an important role in assessing your organization ’ s health . However , they aren ’ t necessarily the best way to communicate performance to stakeholders . Ratios , on the other hand , grab information from your financial statements and can be presented as easy-to-process snapshots , an effective tool in the COVID-19-related economic crisis .
Ratios help board members and other decision-makers keep an eye on your non-profit ’ s overall financial condition , identify worrisome and promising trends and make informed decisions . Among other things , they can provide a picture of your organization ’ s current financial standing , its adequacy and use of resources , and its reliance on certain funding types .
Gauging Financial Health
Here are some ways to calculate your organization ’ s general financial health via ratios :
CURRENT RATIO The current ratio indicates the ability to satisfy short-term financial obligations — that is , debts due within the coming year . A current ratio of “ 1 ” or more generally demonstrates the ability to meet those obligations .
ACCOUNTS PAYABLE RATIO It can reflect cash flow or more severe financial problems . For example , the organization may be having trouble paying its bills on time .
ACCOUNTS RECEIVABLE RATIO As the accounts receivable ratio gets higher , the risk of collection or billing problems — and , in turn , cash flow issues due to lack of expected revenue — grows .
DEBT-TO-TOTAL ASSETS RATIO Indicates the relationship between a non-profit and the creditors . As the total debt-to-total assets ratio gets lower , the more well run an organization is and less leveraged .
Covering Costs
These ratios compare your non-profit ’ s liquid assets to the ongoing cost of operations :
8 VIEWpoint Issue 1 | 2021