What are the financial benchmarks for a healthy nonprofit?
There are no magic rules that apply to all nonprofits. Type and size of organization, sources of revenue, and the length of time your organization has existed are just a few of the factors to consider. That said, there are several common measures that can be helpful in assessing the financial health of your nonprofit organization:
- The quick ratio ([current assets – inventories]/current liabilities) indicates your organization’s ability to meet short-term obligations. As a general guideline, a quick ratio of 1 or more is good.
- The debt ratio (total debt/total assets) indicates the proportion of debt relative to assets. A high value can suggest liquidity problems and, just as it would for an individual, may be perceived as a risk by creditors. A debt ratio of 1 or less is good.
- The defensive interval ratio ([cash + marketable securities]/[operational expenses/365]) measures the number of days an organization can operate without having to tap into long-term (fixed) assets. This lets you know how long your cash reserves will last. Most experts recommend maintaining enough cash on hand to cover three to six months of operating expenses.
It should be noted that in addition to standard financial analysis, an examination of your organization’s sources of revenue (e.g., grants, individual donations, fees for service, etc.) relative to total revenue can also be useful. This will help to identify opportunities to diversify revenue streams and assess potential areas of risk, such as if a large portion of funding is coming from only one source.