There are two ratios specific to a nonprofit’s financial statements used in ratio analysis: program spending ratio and fundraising ratio. Ratio analysis is a method for taking two or more informational elements and using them together to obtain additional information about the performance of an organization.
The program spending ratio is effective for comparing the percentage a nonprofit is spending on programs to how much it is spending on fundraising and administration. The higher the number the better. For charity groups, it is recommended to have at least sixty-five percent. The following equation is used to determine this calculation.
Not only does the nonprofit’s board of directors find this ratio useful but more and more donors, charity rating groups and regulators and using it to indicate whether a nonprofit is indeed using funds prudently and effectively.
The fundraising ratio is also being closely watched by donors, charity rating groups and regulators alike. This ratio allows a snapshot of the percentage of dollars being spent to raise a nonprofit’s contributions and grant revenue. The following equation is used to determine this calculation.
Contribution Revenue + Grant Revenue
A high ratio is cause for alert. It indicates fundraising is inefficient and perhaps the nonprofit’s funds could be better allocated to serve its mission and programs. Interestingly, in 2002, the IRS sent out “educational” letters to nonprofits with proportionately low fundraising expenses. The letter advised the nonprofit to review their fundraising tactics and warned them the IRS would continue to monitor this in the future.