DEFENSIVE INTERVAL This ratio measures the number of months ’ expenses the organization can cover if no additional inflows of quick assets occur . It ’ s particularly useful when contribution inflows are highly variable . A high or increasing value generally is better than a low value .
LIQUID FUNDS INDICATOR This indicator shows the number of months before the non-profit will completely exhaust its liquid funds , assuming no additional revenue inflows . Because it excludes plant , property and equipment , it ’ s more conservative than the defensive interval ratio . But like the defensive internal ratio , high or increasing values are positive indicators .
Using Funds Wisely
How efficiently and effectively do you use your resources ? Consult these ratios :
FUNDRAISING EFFICIENCY In recent years , many donors have focused on the amount non-profits spend on fundraising compared with the amount raised . This ratio shows the average dollar amount raised for each dollar in fundraising spending .
PROGRAM EXPENSE RATIO The ratio evaluates a non-profit ’ s mission efficiency by considering the extent of funding that goes to programs , as opposed to administrative or other expenses . Alternatively , stakeholders may scrutinize the administrative expense ratio , calculated by swapping out program expense for administrative expense .
Overusing A Single Funding Source RELIANCE RATIOS Finally , reliance ratios can reveal an unhealthy dependence on one funding source . To determine your reliance on any specific funding type ( for example , government grants and contracts , individual donations or earned income ), divide the amount of that funding by total income .
Say the ratios show your organization receives almost all of its support from government funding and individual donations . You can see those sources recede in a recession or depression , threatening survival . If you haven ’ t already done so , diversify your income now .
Avoid “ Garbage In , Garbage Out ”
Ratios are only as reliable as the data used to compute them . Be sure to take steps to ensure the financial information you use is accurate , complete and calculated in a consistent manner . For comparison purposes , Doeren Mayhew ’ s non-profit CPAs might be able to put you in touch with other non-profits that use ratios . ■
Ratio Formulas
CURRENT RATIO Current assets Current liabilities
ACCOUNTS PAYABLE RATIO
Accounts payable aged more than 90 days
Total accounts payable
ACCOUNTS RECEIVABLE RATIO
Accounts payable aged more than 90 days
Total accounts receivable
DEBT-TO-TOTAL ASSETS RATIO ( Short-term + long-term debt ) Total assets
DEFENSIVE INTERVAL
Cash plus marketable securities ( excluding permanently restricted investments ) plus current receivables
Total assets
LIQUID FUNDS INDICATOR Net assets less restricted endowments , land and plant , property and equipment
Total assets
FUNDRAISING EFFICIENCY Contributed income Fundraising expense
PROGRAM EXPENSE RATIO Program expense Total expenses
Issue 1 | 2021 VIEWpoint 9