Calculating financial ratios from your income statement and balance sheet will give you a good idea of the fiscal health of your organization.
You can also use them as a gauge to how well financial performance is supporting the mission – or not.
Information is the first step to improving a less-than-desirable situation.
Most organizations struggle with a balance of covering core client services while not getting off mission with other financial means of support and activities.
One way to assess this is with the operating income ratio. To determine this ratio, divide income of core services by total expenses for core services. This will reveal how much outside support, if any, is needed to cover core service provision.
This ratio highlights situations in which general fundraising, operating grants or additional sources of earned revenue are perpetually needed to subsidize an organization’s core activities. This also has implications in growth, where outside funds will need to be raised in conjunction with core services income to support, for example, a new branch office, staff positions or array of client services.
For example: A micro-loan program generates $200,000 a year in interest and fees and $150,000 in activity-related grants while costing $800,000 to operate. In this case, the operating income ratio is .43. That means that 57 cents of each operating cost dollar must be covered by non-activity related funds, such as donations, operating grants or social enterprise revenue.
For additional information or guidance related to this article, contact Dalena McGrew at dmcgrew@vlcpa.com or 800.887.0437.
