Using Ratio Analysis Effectively
by Chris A. Goeman, CPA, Audit Manager
Posted on January 15, 2015
Measuring financial performance is commonplace in most non-profit organizations. This is often in the form of budget to actual analysis as well as revenue, expense and change in net asset analysis, both of which focus on the operating statement. Commonly overlooked is analysis performed on the Statement of Financial Position, which provides information on the financial health of an organization. Ratio analysis can provide insight into the liquidity (short-term) and solvency (long-term) of your organization.
It may befit your organization to establish ratio benchmarks similar to the budgeting process in an effort to react quickly to potential problems and ensure long-term financial stability. Management should work in conjunction with the Board of Directors and other stakeholders, who are critical to the success of the organization to establish ratio benchmarks.
There are many factors that will need to be discussed when determining appropriate benchmarks tailored to your organization. For example in measuring liquidity, a higher level would indicate financial stability, but also could point to missed opportunities to fulfill the mission of the organization. There are also considerations such as the ability to obtain financing, planning for future capital improvements, and the overall risk tolerance of management and the board. The benchmarks should be revisited frequently as the internal and external environments change. For example, during periods of slow economic growth or recession, organizations may want to increase liquidity targets in an effort to ensure current service levels into the future.
Please consider using some of the ratios below to ensure your organization is properly
positioned to capitalize on future opportunities:
Current Ratio – Current Assets/Current Liabilities
Cash on Hand Ratio – Unrestricted Cash/Monthly Expenses
Debt to Equity Ratio – Total Debt/Total Unrestricted Net Assets
Debt to Assets Ratio – Total Debt/Total Assets