Question

Explain in your own words what types of ratios or measures monitoring groups often use to measure whether nonprofit organizations are operating properly, and in the best interests of donors. Then, in your own words, explain why you agree, or don’t agree, that these are useful and appropriate ways to judge nonprofit organizational performance

Answer 1

Finacial ratios can be used to evaluate financial strength of a Non profit organisation. Although many financial ratios can be used to evaluate but some of the key ratios are:-

1. Operating reserve ratio- it indicates liquidity position of the organisation by indicating how long an organisation can sustain without getting any donation .

Formuale :- unrestricted donation-(fixed assets-Debts related to fixed asset) / (Annual expenses-depreciation -amortization) . we can calculate months by multiplying it with 12.

   Higher operating reserve ratio better it is , as it indicates Financial stability of the concern

2. Program expense ratio:-It indicates how much expense an organisation is incurring for programs related to its objective and how much funds are used for administrative purposes.

formulae:- Total program expenses/ total expenses. Higher ratio is considered good as it indicates organisation is performing its ojective by keeping other expenses in control

3.Profit margin ratio:- It indicates whether organisation is making proper allocation of donations received and have surplus for infrastructure and operational expenses

Formulae:- Change in unrestricted assets/total unrestricted revenue and support. A higher ratio indicates operational efficiency of organisation

We can use different types of ratios to analyze financial and liquidity position of the company depending on the type of organisation.

advantages of Ratio analysis:- Ratio analysis helps an individual to analysis liquidity , profitability and operational efficiency of an organisation.

1.It is very important to conduct ratio analysis for non profit organisation like eductaional or religious institutions as lot of human force depend on them for living as they generate employment opportunties to lot of people and if they are not financially strong such organisations wont be able to pay employees salary on time.

2. People who donate would like to donate only to those organisations , who spend their donation on the cause for which they donate. this can be evaluted by doing program expense ratio

3. Non profit organisations have to pay creditors for the supplies they receive either for their programs or for administrative purpose. If creditors are not sure of financial position of such organisation , they will not give credit

4. Further for any decision on planning programs or infrastructure develoment of organisation, managements needs to analyse their financials and also ability to sustain if donations do not come in future.

and we can find lot of such examples to prove that ratio analysis is important . only difference in these organisations are that the way ratios are calculated and type of ratios used are different from any other profit organisations.