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.
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