Analyzing Financial Information Using Ratios
A resource article by Kate Barr, executive director, Nonprofits Assistance Fund _____________________________________________________________________________________
Leaders of nonprofits who seek to understand the organization’s financial situation usually start by reviewing the financial reports. Understanding the financial information is the building block of any financial discussion. Beyond understanding the reports, much can be learned from analysis of the information and interpretation of what it is telling you. The basic analysis includes comparing financial reports to a benchmark such as the budget or the financial report from the previous year. One essential question is: does this information match our expectations? For a more technical financial analysis, ratios can be used to deepen the understanding and interpretation. Financial ratios are an established tool for businesses and nonprofits. While there are dozens of ratios that can be calculated, most nonprofits can use a handful of them to learn more about their financial condition. This tool provides the description and calculation of 14 ratios including a mix of balance sheet and income statement ratios. Individual nonprofits must decide for themselves which calculations are valuable. To make the most of ratio calculations, start with some fundamental guidelines. Financial ratios are useful if they are: • • • • • Calculated using reliable, accurate financial reports (such as an annual audit or final report) Calculated consistently from period to period Used in comparison to benchmarks or goals Viewed both at a single point in time and as a trend over time Interpreted in the context of both internal and external factors
Nonprofits Assistance Fund © 2008
Nonprofit Financial Ratios
Fourteen of the most frequently used financial ratios for nonprofit organizations are defined on these pages. A spreadsheet with the ratio calculations is also...
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