1. Financial Bootcamp – Module 3 “The Golden Ratios”

2. 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

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

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

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

6. 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?”

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

8. 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

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

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

11. 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

12. 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?”

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

14. 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

15. 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.)

16. 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?”

17. 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]

18. 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

19. 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?”

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

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

22. 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