6-1 Discussion: Financial Analysis Tools Peer Responses

Alyssa F

The performance indicators that I am examining for my nonprofit, Found Family, Inc., include: if the organization can pay its current debts; if revenues are sufficient to cover expenses and how many months of operating expenses the unrestricted net assets can cover; if the organization relies more on debt or equity to finance operations; if the cost per output is decreasing over time; what percent of contributions remain after adjusting for the cost of raising contributions; if the costs of raising contributions are an appropriately small percentage of contributions received, and if the rate of total return on the investments is reasonable (ACC-325, 2018). 

Three key ratios that can help address some of these performance indicators include the liquidity ratios, the program effectiveness ratio, and the fund-raising efficiency ratio. The formulas for these ratios are as follows (ACC-325, 2018): 

· Liquidity Ratio: Current Assets (cash, A/R, inventory)/Current Liabilities

· This ratio shows the capability of the organization to cover all of its current liabilities (debt obligations due within the fiscal period) with its current assets (assets that will be in hand within the fiscal period.) This ratio is critical, because if the organization cannot cover its current obligations with the assets on hand, then it will default and incur penalties on those obligations, as well as likely carry higher interest rates on any liabilities going forward if applicable, which will cost the organization more. It can also result in cutting into the total assets of the organization, decreasing the overall value of the organization and possibly decreasing the number of donors or amount they are willing to donate. The minimum acceptable ratio value is 1, that indicates that the current assets are perfectly capable of covering the current liabilities in their entirety, but the higher the better, because that indicates more capability on the organization's part, especially if any unexpected expenses are incurred (such as in the event of a global pandemic) that might cut into available current assets. 

· Liquidity Ratio: Quick Assets (cash and A/R)/Current Liabilities

· Similar to the ratio above, but the quick assets do not include inventory because cash and accounts receivable can more quickly be turned to cash than inventory that needs to be sold. 

· Program Effectiveness Ratio: (Program Expenses/Total Expenses) x 100

· This ratio shows what percentage of total expenses are allocated to programs. Because the organization's main goal is to provide its program, the closer to 100% this percentage is, the better. There will more than likely be some general administration and management expenses that prevent it from being 100%, which is acceptable, so long as the majority of the expenses are allocated to the program. I would say that a reasonable goal would be 80%+, as that way most of the expenses are allocated to the programs that the organization promised to offer, while also being able to run and operate overall efficiently. If the percentage is lower than that, it may be indicative of poor expense allocation or perhaps administrative/management expenses being too high and in need of reworking. 

· Fund-Raising Efficiency Ratio: Fund-Raising Expenses/Public Support(Contribution Revenues)

· This ratio shows the portion of contributions received that the cost of fund-raising for those contributions represents. It shows how well the organization is earning money for each dollar put towards that objective. If the ratio is 1 or higher, then the company is only earning one dollar for every dollar spent, or is actually losing money on every dollar spent, which may be indicative of a fund-raising system that is not working as designed, whether it be targeting the wrong potential donors, using services/systems that are too expensive, etc. The lower the ratio, the higher the earnings. If the ratio is 0.3, then the fund-raising expenses represent 30% of contributions, so $0.30 of each dollar, meaning that $0.70 of each dollar is an earned contribution. If the ratio is 0.03, then the organization retains $0.97 of every dollar contributed, only $0.03 going to the fund-raising expenses. 

Based upon the results of the ratios, the organization will have a number of decisions to make. For instance, if the liquidity ratios show that the current/quick assets perhaps only cover a portion of the current liabilities, that would be a sign to not take on any more debt if possible for the time being, particularly short term debt due within a year period, and the organization may look at ways of increasing assets such as running a campaign to increase cash donations to have that cash on hand available for current liabilities. If the program efficiency ratio shows that a too-small percentage of total expenses are going to programs, then a restructure of total expenses may be necessary, which may include changing vendors for any software, payroll systems, physical equipment, etc., things that are a general organization expense and not necessarily specific to any program. If the fund-raising efficiency percentage is too high, then it may be worth considering running a campaign to increase donor contributions if lowering fund-raising expenses is impossible, or finding ways to cut fund-raising costs if possible, such as not outsourcing work to a person/vendor that needs to be paid if possible, maybe if fundraisers are held at off-site venues, holding them in house to not have to pay for the space, etc. 

References: 

 ACC-325. (2018). [VitalSource Bookshelf 10.0.1].  Retrieved from  vbk://9781307297560