Leveraging Ratios to Better Understand Community Impact and Organizational Success

• May 25, 2022
• Monica Johnson

In following this series, we’ve gained an understanding of your nonprofit financial statements and recognized the benefits of monitoring key ratios to assess the organization’s financial health. Let’s now consider how ratios allow you to better understand your community impact and organizational success with key social or political matters.  

As a board member of a nonprofit, I observed the unprecedented circumstances management navigated during the pandemic. This triggered the following considerations:

• Are the organization’s financial and strategic goals in line with its overall mission?
• Are we serving the community well? In a moment of crisis, were we reaching those that were the very reason for our existence?
• How well are we managing key donor relationships and their interests?

While every nonprofit is different, the crisis helped identify key ratios critical to addressing these concerns.

Let’s look more closely at the ratios presented previously in the context of community impact or key donor relationships:

Current ratio

• Calculation: Current assets/Current liabilities
  • Why it’s important: A good indicator of your organization’s ability to meet short-term financial obligations.
  • Key donor relationships: This helps identify the point at which additional cash is necessary to fund operations. Communication is critical with key relationships to help donors recognize the impact of their dollars.

Program efficiency ratio

• Calculation: Program service expenses/Total expenses, Individual program expenses/Total expenses
  • Why it’s important: Compares total program expenses to total expenses to measure how your organization uses funding to fulfill its mission.
  • Community impact: Add considerations such as program revenue by program expense to arrive at operating results by program or the number of individuals served to provide a baseline for your measurement of success. This allows you to monitor which programs are sustainable or those that require significant contributions to maintain.

Staff/board development

• Various metrics, such as:
  • Demographics of employees and contractors utilized
  • Demographic considerations for board members
  • Why it’s important: Staff are responsible for carrying out the mission of the organization while board members provide guidance.
  • Community/social impact: These metrics highlight whether your organization and board leadership are reflective of the communities you serve. Consider this in the context of accomplishing your mission and recognizing whether you’re open to perspectives from people of different backgrounds. Inclusivity and diversity of thought provide the opportunity for a more creative environment, a stronger workplace culture and helps focus efforts on your constituents.

Consistent monitoring, whether monthly or quarterly, of key ratios can provide clarity. Considering the questions above, your organization can be responsive in critical periods and proactive in identifying new opportunities.

Stay tuned for the next blog in this series on how to focus on management considerations.

Previous posts in this series:

Setting the Foundation To Interpret Nonprofit Financial Statements

Using Financial and Nonfinancial Data to Calculate Key Ratios

Leveraging Financial and Nonfinancial Information to Improve Program Success

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