7.13READING: TEN FINANCIAL RATIOS
An effective way of determining the relevance and effectiveness of the financial strength and sustainability of a not for profit is through the regular provision of key financial ratios to the managers and board. The following ten financial ratios could be considered as key measures of financial performance.
1.Net surplus margin: The percentage surplus from every dollar of income. The higher the net surplus margin, the more the organisation is converting income into profit. If this ratio is too high, the income may not be being put to good social goals. If too low, there could be problems.
2.Current ratio: This is an important indicator of an organisation’s liquidity. This is its capacity to meet financial obligations to pay staff, creditors, bank loans, etc. A ratio of 1:1 means the organisation has no working capital. A higher ratio indicates a higher capacity for paying debt.
3.Administrative costsas a proportion of overall expenditure: The higher the administrative costs, the less the organisation has to spend on direct services.
4.Assets Ratio: Assets as a proportion of liabilities. Ideally this ratio should be well above 1:1.
5.Efficiency:Individual expense items as a proportion of total funding. This will normally mean staff costs as a ratio of all expenses; and perhaps leases and other fixed costs − or even car expenses. These can be established and benchmarked against a reasonable level and then tracked.
6.Capital gearing: Long-term loans and current liabilities as a proportion of reserves.
7.Reserves as a proportion of operating expenses: This is an indicator of how long the organisation could operate without funding.
8.Depreciation as a proportion of total expenses: This reflects the importance of depreciation on the balance sheets and identifies the possibility of incurring a deficit.
9.Growth of income as proportion of total income:This is a good indicator of revenue growth.
10.Brokerage costs as a proportion of funding: This ratio measures how much the organisation is contracting out.
Key ratios can be identified, tracked and presented monthly to the Board.
There can be targeted goals set at the annual budget.
Key financial ratios can be benchmarked against those of other organisations.
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