Ratio analysis is a popular financial manage-ment tool in corporate sector. However, itsuse in the NPO sector has been very limit-ed. This is mainly because corporate ratios are notdirectly relevant. At the same time, ratios forNPOs have not been developed or popularized.

Use of ratios can help us understand our fi-nances better. It can also help us explain ourfinancial needs and priorities more effectively toour donors, supporters and the public.

CCllaassssiiffiiccaattiioonnFor NPOs, financial ratios can be classified into two broad categories:1. Organisational Ratios and 2. Program Ratios. While organisationalratios look at the entire organisations finan-cials and health, program ratios can help under-stand and compare individual programs.

Organisational ratios can be classified into atleast four categories, depending on what a partic-ular ratio tells us:

LLiiqquuiiddiittyy:: Do we have enough money to run theorganisation smoothly?EEffffiicciieennccyy:: Is the organisation functioningefficiently?SSuussttaaiinnaabbiilliittyy:: Is the organisation sustainable inthe long run?PPrroopprriieettyy:: Is the organisations financial behaviour proper and ethical?

LLiiqquuiiddiittyy RRaattiioossRunning out of cash is a frequent problem that manyNPOs face. Mostly this happens due to delays in dis-bursal of funds. But lack of sufficient operating capitalis also a key factor. Liquidity ratios can help us under-stand how likely are we to face this kind of problems.Once we know this, we can take steps to prevent thisfrom happening repeatedly.

CCuurrrreenntt RRaattiiooThe current ratio gives you an idea whether you canmeet your short term liabilities easily. This ratio com-pares two items. One is current assets. This consists ofcash and other assets which will turn into cash withinone year (bank, short term deposits/ investments,grants receivable, loans and advances, etc.).

The second item is current liabilities. This consistsof liabilities that will become due within one year(sundry creditors, salary payable, grants payable, pro-visions for expenses, loan instalments due within oneyear, etc.)

AccountAble148. Organisational Ratios-1 Dec09-Jan10 Released: Dec 10

AccountAble 148 1

IN THIS ISSUEClassification Liquidity Ratios Current Ratio

Efficiency Ratiospg1

pg2 pg3

Funds Utilisation Ratio Frugality Ratio Programme Expenses Ratio pg3 Personnel Cost Ratio pg4

Days Cash Ratio Backup Funds Ratio Repayment Capacity Ratio

LLiiqquuiiddiittyyCurrent RatioDays Cash RatioBackup Funds RatioRepayment

Capacity Ratio

PPrroopprriieettyyRecoveries to Cost

RatioOwn funds Build-up

RatioAccomodative

Borrowings Ratio

EEffffiicciieennccyy Funds Utilization

Ratio Frugality RatioProgram Expenses

RatioPersonnel Cost Ratio

SSuussttaaiinnaabbiilliittyyGrowth RateSelf Sufficiency

RatioDependence Ratio Infrastructure Ratio

ww

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2It is often easy to pick these items from your balance sheet,if the accounts have been presented well. Once you have thesefigures, use the following formula:

CCuurrrreenntt AAsssseettssCCuurrrreenntt RRaattiioo ==

CCuurrrreenntt LLiiaabbiilliittiieess

In the for-profit and government sectors, a current ratio of2:1 is considered an indicator of reasonable financial strength.This value is probably as relevant for NPOs as well. A ratio of lessthan 1.0 indicates that the organization does not have sufficientcurrent assets to meet current payment obligations.

However, one peculiar problem that NGOs might face isrestrictions within the current assets. For instance, funds for oneproject cannot easily be used for another project. Similarly, theIndian and Foreign Funds cannot be used inter-changeably.Therefore, it may be useful to assess liquidity separately forFCRA and Indian funds.

DDaayyss CCaasshh RRaattiiooImagine that for some reason you stop receiving fresh funds. Howmany days can you run the operations normally in this situation?This is what the Days' Cash Ratio tells you.

To calculate this ratio, you need to know the cash and bankbalances. To this you can also add bank deposits, if these can bebroken on demand. Project advances and salary advances can beincluded. However, personal advances to staff should not beincluded. The resulting figure is divided by your annual operatingexpenses, as given in the Income & Expenditure Account. Thiswould include your program expenses and administrativeexpenses, but not depreciation.

((CCaasshh ++ CCaasshh EEqquuiivvaalleennttss))DDaayyss CCaasshh RRaattiioo = XX 336655

AAnnnnuuaall OOppeerraattiinngg EExxppeennsseess -- DDeepprreecciiaattiioonn

How many days' cash should you keep? This could vary from oneorganization to another. However, generally, an organization shouldhave enough cash/ bank balance to last for at least 90 days.

Please keep in mind that here cash does not mean currency notes alone. By cash, we mean cash in hand as well asin bank.

BBaacckkuupp FFuunnddss RRaattiiooWhat happens if you run out of cash? You can fall back on yourreserves and investments made from unrestricted funds. Thisratio tells us how many days can we survive on emergency

funds. To work this out, we just need the figure of investmentswhich can be encashed in case of emergency.

These could be mutual fund investments, government securi-ties, bonds etc. Fixed deposits with banks should not be includ-ed here, as these are treated as cash equivalent. Normally thesewould be investments against unrestricted funds. If you have anominal corpus1, then investments made against these can alsobe added.

EEnnccaasshhaabbllee IInnvveessttmmeennttssBBaacckkuupp FFuunnddss = XX 336655RRaattiioo AAnnnnuuaall OOppeerraattiinngg

EExxppeennsseess -- DDeepprreecciiaattiioonn

If this ratio is too high, it may imply that we are holding up pub-lic funds for an emergency that may never occur. On the otherhand, if the ratio is too low, it may mean that the slightest hitchwill upset our program activities. So probably a ratio of 60-90days will work for most NGOs. Do keep in mind that this cushionis in addition to the one provided by Days' Cash Ratio.

RReeppaayymmeenntt CCaappaacciittyy RRaattiiooThe main reason for collapse of the housing loan market in USA in2008-09 was low repayment capacity. People who had borrowedmoney to buy houses did not have enough income to repay these intime. This set off a chain of events - the world economy has yet torecover from the shock.

Fortunately, most NGOs do not face this problem because banksdon't usually give loans to NGOs. However, some organisations,especially in the micro-finance sector do borrow funds. Will they beable to repay the loans on schedule? The Repayment Capacity Ratio

AccountAble 148

AccountAble148. Organisational Ratios-1 Dec09-Jan10 Released: Dec 10

1AccountAble 67: Corpus. www.AccountAid.net

3helps us understand this.

RReeppaayymmeenntt =OOwwnn FFuunnddss

CCaappaacciittyy RRaattiioo TToottaall BBoorrrroowwiinnggss

Total borrowings include Borrowings from banks, Loans frommanagement/ employees/ key persons etc. Own funds areessentially unrestricted funds. These may include corpus funds,funds accumulated from income generation activities, generaldonations, miscellaneous income etc.

What happens if an NGO has borrowed more than it canrepay? There is a risk that it might start delaying implementa-tion of projects, and use the grant funds to repay loans.

EEffffiicciieennccyy RRaattiiooOnce we have taken care of our liquidity, we turn to anotherimportant question: How efficient are we in using the resourcesthat we raise from public and grant-making agencies? The effi-ciency ratios help us look at this from several angles.

FFuunnddss UUttiilliissaattiioonn RRaattiiooThe ability of an NGO to use the available funds for its missionis an important consideration. Most grant-makers worry thatthe NGO will sit on their funds rather than use it. Similarly, theGovernments design tax exemption schemes for NPOs basedon their spending2. The formula for this ratio is:

MMoonneeyy UUttiilliizzeedd FFuunnddss UUttiilliizzaattiioonn RRaattiioo == XX 110000

MMoonneeyy RReecceeiivveedd

Calculating the ratio is rather simple, if the Receipts andPayments Account is available. You need to simply pick up thefunds received during the year from the Receipts side.Compare these with the funds utilized, as given on thePayment side. Remember that you must include the purchaseof fixed assets in the utilization figure. However, non-programadvances and loans should usually be excluded.

In the Indian context, this ratio would range from about 85-100%, as an average, over 2-3 years. In a particular year, theratio may dip or increase significantly. This may occur becausea large grant was received towards the end of a financial year.

This money would be utilized in the following year. Similarly, ifyou receive a multi-year grant in the first year, the ratio will beunfavourable in that year, but will become better in later years.

FFrruuggaalliittyy RRaattiiooIt is generally believed that NPOs should spend as little as fea-sible on their own administration. This ratio shows how muchan NPO spends on administration as compared to the overallexpenditure.

AAddmmiinn.. EExxpp..++ PPuurrcchhaassee FFrruuggaalliittyy ooff ooffffiiccee aasssseettssRRaattiioo == XX 110000

TToottaall FFuunnddss UUttiilliizzeedd

What are administrative expenses? This can lead to heatedarguments and confusion. Mostly costs such as rent, electrici-ty, stationery, telephone, salary of administration staff, ac-counts department, board meetings, office overheads, etc. areconsidered asadministrative expenses. Part of the ChiefFunctionary's salary should also be considered as administra-tive expense. Assets purchased during the year for administra-tion or office should be added.

Total funds utilized would include all the expenses of theorganization i.e. program, administrative, fundraising etc.Purchase of assets during the year, whether for office or pro-grams, should be added to this.

How much should this ratio be? This is another vexing ques-tion. The answer depends on what is treated as administration.If the suggestion given above is accepted, then administrativeexpenses would usually range from 10-15%. However, if allsalaries (including program staff) are considered as adminis-trative expenses, then this ratio could go up to as much as 60-75% in many cases. This is particularly true for NGOs workingon awareness or advocacy programs, which usually requires asignificant number of staff. As against this, the FCRA Bill 2010has laid down a limit of 50%.

PPrrooggrraammmmee EExxppeennsseess RRaattiiooThis is the flip side of the frugality ratio. It tells us about theproportion of funds spent on program activities.

DDiirreecctt PPrrooggrraamm EExxpp.. ++

PPrrooggrraammmmee ==

PPuurrcchhaassee ooff PPrrooggrraamm AAsssseettssxx110000

EExxppeennsseess RRaattiioo TToottaall FFuunnddss UUttiilliizzeedd

Direct Program Expenses are expenses directly associatedwith a particular program/activity. Assets purchased for use

AccountAble 148

2For instance, in India, the exemption is based on fulfilling the minimum

spending requirements, which is currently 85% of revenue, but is likely to goup effectively to 100% next year. In the US, NPOs are required to distribute5% of their net assets each year to remain exempt from tax.

4 AccountAble 148

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