Financial Bootcamp – Module 3 “The Golden Ratios”

Objectives Introduce the five “Golden Ratios” of not-for-profits Explain why these five ratios are valuable Explain how to obtain these ratios for your affiliate

Purpose of the Ratios To evaluate affiliate performance To convey successes to Board, staff, donors, etc. To identify and alleviate financial issues

Uses of the Ratios Reporting to the Board on the financial health of the organization Developing a strategic plan Soliciting donors for contributions

The Five Ratios Working Capital Ratio Debt-to-Equity Ratio Fund Mix Ratio Growth Ratio Program Emphasis Ratio

Working Capital Ratio Determines how much money is available relative to money owed Capital is the readily available assets an affiliate has that can be turned into cash Answers: “Does the organization have enough money to pay its bills on time?”

Total Current Assets / Total Current Liabilities Working Capital Ratio Total Current Assets / Total Current Liabilities Form 990: Line 20 / Line 21

Working Capital Ratio Example: $100,000 / $50,000 = 2 or 2:1 More than 3 means an affiliate has over 3 times the money needed to operate. This money is therefore idle and could be spent on programs or invested to gain interest. Less than 1 means the affiliate owes more money than it actually has available. Less Than 1 More Than 1 2 to 3 More Than 3 Bad Decent Ideal Wasteful

Debt-to-Equity Ratio Determines long-term financial health Measures the level of financial risk Answers: “Can the affiliate avoid bankruptcy?”

Total Liabilities / (Liabilities + Fund Balances) Debt-to-Equity Ratio Total Liabilities / (Liabilities + Fund Balances) Form 990: Line 21 / (Line 21+Line 22)

The higher the number = the greater the risk. Debt-to-Equity Ratio Example: $50,000 / ($50,000 + $50,000) = .5 The higher the number = the greater the risk. 0 to .3 .31 to .49 More Than .5 Good Decent Dangerous

Fund Mix Ratio Evaluates the flexibility of an affiliate to spend its money Puts the Working Capital and Debt-to-Equity ratios in proper perspective Answers: “How restricted is the affiliate’s cash?”

Total Unrestricted Funds / Total Assets Fund Mix Ratio Total Unrestricted Funds / Total Assets Form 990: [Part X] Line 27 / Line 16

Fund Mix Ratio Example: $75,000 / $100,000 = .75 or 75% Affiliates want to maximize this number This number represents what percentage of your funding is unrestricted and can be spent in any (ethical) way Higher percentage = greater spending flexibility 100 – Fund Mix Ratio = Percentage of Restricted Funds

Restricted Funds There is nothing wrong with restricted funds Restricted funds must be spent in a particular way (i.e., on a particular project) A high percentage of restricted funds limits your affiliate’s ability to spend money on necessary or unexpected expenses (e.g., vehicle repairs, training, etc.)

Growth Ratio Compares financial growth across multiple years Useful for taking a “big picture” perspective of the affiliate’s financial health Answers: “How much are we growing, financially?”

Current Fund Balance – Previous Fund Balance / Previous Fund Balance Growth Ratio Current Fund Balance – Previous Fund Balance / Previous Fund Balance Form 990: Line 22 [Year 2] – Line 22 [Year 1] / Line 22 [Year 1]

Growth Ratio Example: ($150,000 - $100,000) / $100,000 = .5 or 50% The best method of evaluation is to perform a growth ratio for a 3-5 year period to evaluate overall trends. Negative Number Positive Number Organizational Decline Organizational Growth

Program Emphasis Ratio Compares how much the affiliate spends on providing services versus sustaining itself Looks at affiliate overhead and administrative costs Should never be more than 25% Answers: “How much are we spending on the mission?”

Program Emphasis Ratio (Management & General + Fundraising) / Total Revenue Form 990: (Line 15 + Line 16a/b) / Line 12

Program Emphasis Ratio Example: ($50,000 + $10,000) / $300,000 = .2 or 20% 0 - .1 .11 - .2 .21-.25 More Than .25 Very low Typical High Too High

Reporting Affiliates are recommended to perform these ratios each year These ratios should be shared with the Board and in the annual report, explaining any anomalies Strategies should be implemented to alleviate ratios outside of the industry norms