Board Members: Understand These Two Ratios to Help Evaluate Your Nonprofit’s Finances

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Do you perceive the monetary reviews that you just obtain every month along with your board packet? Monetary oversight is a serious duty of all nonprofits board members, not simply the treasurer. By the point you end studying this text, you should have two fast instruments that will help you higher use these monetary reviews. Simply as for-profit companies use ratios to judge their funds, nonprofits can use comparable ratios to assist higher perceive their monetary reviews. This text explains two key ratios that each board member wants to know. Data for the ratios comes from the Assertion of Monetary Place (known as the Steadiness Sheet in for-profit accounting). Board members ought to obtain this report month-to-month.

The primary ratio to find out is your Present Ratio which is a normal measure of liquidity calculated by dividing present belongings by present liabilities. A present ratio of 1.5:1 is usually thought-about acceptable as a result of this means greater than enough funds can be found to fulfill short-term money wants. For instance, in case your present belongings are $50,000 and your present liabilities are $25,000, then your present ratio is 2:1. This implies you could have the sources readily available to pay all of your present money owed and extra. In case your present belongings are $25,000 and your present liabilities are $50,000 you could have a ratio of 1:2 and wouldn’t have the ability to pay your present money owed.

Board members can use the present ratio to take a look at the short-term state of affairs (often a interval of a yr or much less). For instance, in case your present ratio signifies you could have twice as a lot money readily available as you want instantly, this can be the time to determine a reserve account or start a brand new program or service you could have delayed due to lack of sources. In case your present ratio exhibits that you may’t pay your present debt, this can be the time to implement a brand new fundraising endeavor or discover a strategy to cut back bills.

The second key ratio is the Debt Ratio which measures the connection of whole liabilities to whole belongings of the nonprofit. That is an indicator of economic solvency and may positively be lower than 1.0. For instance, in case your whole belongings are $50,000 and your whole liabilities are $40,000, you possibly can pay all your money owed and nonetheless have $10,000 within the financial institution. On this case, your debt ratio could be.9. Larger ratios might point out monetary issues sooner or later. For instance, in case your whole belongings are $50,000 and your whole liabilities are $60,000, then the debt ratio could be.83 – and you possibly can not pay your whole liabilities ought to the necessity come up

Board members can use the debt ratio to take a look at the long-term well being of the nonprofit. The next ratio right here might point out severe monetary issues sooner or later as many nonprofits sadly found within the current financial downturn. It might be acceptable to have a minor downside with a present ratio so long as there’s a plan in place to rectify the state of affairs. Nevertheless, board members shouldn’t settle for a debt ratio greater than 1.0 and ideally this ratio needs to be decrease.

© 2010 Jane B. Ford

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