Financial sustainability indicators
One way that your organisation's board can help keep track of the organisation's financial risks is to use some indicators of financial performance. There are many indicators and ratios that could be used - below we have listed those that we think are most appropriate for Australian not-for-profit organisations.
The ratios should be calculated from your financial records at the date they were generated.
The results also need to be viewed in the context of your organisation's overall circumstances, including its strategy and financial history.
It's important to take note of ratio trends over time. Significant changes in your organisation's circumstances need to be uncovered and questioned.
Your fundraising/sustainability should be a standing agenda item and tracked over time.
Core funding reliance ratio
Core funding sources (your largest 2 or 3 pieces of funding) : Total revenue (all of your funding)
This ratio highlights your organisation's ability to meet its commitments. In a normal business a ratio of less than 1.5 is cause for action. If it falls below 1 then you have serious issues and you need to consider seeking advice (it could indicate solvency issues).
If, on the other hand, you have a very high ratio (e.g. 2.5) you might be able to find more efficient ways of using that cash (e.g. investment).
As a board set where you think your risk on this might sit. Do you want to adopt a conservative approach and set it between 2 and 2.5 or do you want to sail closer to the wind at 1.5?
Current ratio (liquidity ratio)
Current assets (assets that can be converted to cash easily) : Current liabilities (what your organisation owes others)
This ratio highlights your organisation's ability to meet its commitments. In a normal business a ratio of less than 1.5 is cause for action. If it falls below 1 then you have serious issues and you need to consider seeking advice (it could indicate solvency issues).
If, on the other hand, you have a very high ratio (e.g. 2.5) you might be able to find more efficient ways of using that cash (e.g. investment).
As a board set where you think your risk on this might sit. Do you want to adopt a conservative approach and set it between 2 and 2.5 or do you want to sail closer to the wind at 1.5?
Survival (D-Day) calculation
Assume all your income stops today and you can only draw on your reserves.
Reserves - Forward Committments = How long you can last
This indicator is used to demonstrate to the board how long you could last in a cash crisis (e.g. all of your funding stops). However unlikely this situation is, it gives the board an indication of how long they have to source new income.
As a board set where you think your risk on this might sit. Do you want to adopt a conservative approach and ensure you commit 12 months of cover into reserves or do you want to sail closer to the wind at 3?
Some typical revenue risks:
- Stability of revenue from primary sources
- Predictability of pledges/bequests
- Reliability of government grants and contracts
- Level of dependence on one or two major donors
- Funders policies/actions on overheads and annual support
- Economic health of the community
- Timing of funding commitments to agencies (advance or arrears?)
- Publicity that could adversely affect current or future revenues
- Regulatory/Policy changes
Some typical spending risks:
- The extent to which economic downturns or other types of events may effect demand for services, either up or down
- The extent of funding commitments made for longer than one year
- Amount of unsecured debt you carry (what's your debtor policy?)
- Long‐term leases (get out clauses?)
- Level of dependency of programs on stable, individual funding streams
- Ability to downsize operations quickly and meet employee commitments