Your board members should have an understanding of the various financial reports your nonprofit is required to prepare. (See Nonprofits: Best Practices for Board Fiscal Responsibilities to learn more). In addition, board members should be familiar with these three key metrics:
Program Efficiency
Percentage of program expenses to total expenses. The higher the percentage, the more effective an organization is viewed as. Although, all organizations are different in forms of need.
Operating Reserve
Net assets available for use compared to total expenses. The ratio helps gauge whether there are certain available resources and whether those resources are sufficient. A common rule is no less than 25% or three months of expenses.
Liquid Funds Indicator
Combine net assets available for use and deduct any assets not considered liquid such as property and equipment and divide that amount by the average monthly expenses. The resulting indicator reveals how many months your nonprofit can continue to operate before it will exhaust its liquid funds in the absence of new inflows. A common rule is at least three to six months of operating cash reserves in case of a time of crisis.
