How Can I Measure the Liquidity of My Nonprofit?
Financial performance measurement is a strategy a Nonprofit organization can use for evaluating operations, programs, services and financial stability. One of the key measurement tools is financial ratio analysis. It involves taking data from your organization’s financial statements, using it to calculate ratios appropriate for your Nonprofit, and then benchmarking those ratios against past performance, management objectives or other organizations.
Utilizing financial ratio analysis can help you assess your organization’s overall financial condition and liquidity and flag patterns that might not be conducive to your success.
If we look closer at liquidity, there are certain measures that can be used to ensure your organization has a sufficient level of cash flow for continued programmatic operations and growth. There are three main financial ratios you may want to consider to measure liquidity:
- Current ratio equals current assets divided by current liabilities. A 2-3 ratio generally indicates that the organization has adequate liquid funds to pay its current obligations.
- Quick ratio equals current assets (less any inventory amounts) divided by current liabilities. A ratio of 1 – 2 generally indicates an organization has adequate liquid funds to pay its current obligations without selling inventory.
- Organizational liquidity funds indicator equals expendable net assets divided by average monthly total expenses. Expendable net assets are calculated as net assets less restricted endowments, fixed assets and prepaid expenses. This indicator measures how many months the organization has before it will consume its liquid assets, assuming that no additional revenue flows into it. The higher the ratio, the better the liquidity.
Once calculated, these ratios can be used to benchmark your organization by comparing it to other similar Nonprofits. Comparing your organization’s performance to benchmarks allows you to zero in on areas with the greatest potential for improvement. Using this information, you may be able to improve performance without making significant changes in your operations. Further, when comparing against similar Nonprofits, you might improve performance by simply adopting best practices used by your peers. You can obtain information on other nonprofits’ metrics from websites such as GuideStar and Charity Navigator.
Using monthly, quarterly or even yearly financial ratio analysis can help you understand your organization’s liquidity and provide you with valuable insight into its financial future. You will be able to identify the strengths and weaknesses of your organization and take appropriate actions to improve its liquidity.
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