So even though nonprofits aren’t designed to generate profits, they still have revenue and expenses that must be meticulously accounted for. However, nonprofit ratios can be a useful tool to monitor an organization’s performance—especially in identifying trends that may be negatively impacting an organization. They should, however, be expected to be good stewards of the profit that is generated.

How Non-Profit Organizations Should Distinguish Restricted vs Unrestricted Funds in Bookkeeping

The leverage ratio measures how heavily leveraged an organization is.  In other words, how reliant is an organization on debt? In its simplest form, it shows how many dollars of current assets an organization has to cover its current obligations. There is an “overheard myth” that organizations shouldn’t spend money on administrative expenses, but this simply would be unsustainable. At Altruic Advisors, our nonprofit accountants have helped more than 500 organizations across the country with outsourced accounting, Form 990 preparation, and nonprofit audit services.

• On the balance sheet, non-profits differentiate funds by listing them in separate categories within the net assets section.
• Accounts payable means the organization owes money to vendors in the near future.
• The fundraising efficiency ratio, also known as the fundraising expense ratio, evaluates how much it costs your organization to raise a dollar in donations.
• In addition to the current ratio, non-profit organizations can also analyze the composition of their current assets.
• This provides a large-scale view of the return on investment for your organization’s fundraising campaigns.
• The Statement of Activities helps stakeholders understand the financial performance of the nonprofit and how funds are being utilized.

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• This will help your organization identify any areas where action is needed and make informed decisions about how to improve your fiscal management.
• Non-profit organizations must employ meticulous bookkeeping practices to distinguish between funds with donor restrictions and those without.
• For instance, an organization might use unrestricted net assets to invest in new technology, expand its services, or cover shortfalls in other areas.
• Your nonprofit needs to save money on a regular basis to build your reserve fund in the case of emergencies (just like individuals).
• It also helps them assess the organization’s cash flow management and make informed decisions regarding funding and investments.
• They provide a sense of stability and security, allowing the organization to plan for the future and invest in impactful initiatives.

Discover how financial ratios for nonprofits serve as KPIs to assess your organization’s financial health, with examples and best practices. Grants or scholarships distributed by an organization can also be considered deductions. A nonprofit providing $100,000 in scholarships annually records this as a reduction in net assets. These deductions highlight financial commitments that affect an organization’s ability to sustain operations.

Key Financial Ratios for Nonprofits

This financial data can also help donors or grantors determine whether to support your nonprofit. For nonprofit professionals looking to deepen their understanding of financial management and improve their skills in managing net assets, a variety of resources are available. Here are some recommended books, courses, and websites that provide valuable insights and professional assistance in nonprofit financial management. To illustrate the practical application of net asset management and reporting, https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ let’s look at how real nonprofit organizations handle these challenges.

• Instead, net assets indicate the organization’s capacity to carry out its mission and sustain its operations.
• The FASB Accounting Standards Codification Topic 958 requires important additional disclosures regarding liquidity, restrictions, etc. for creditors, donors, and others.
• It involves updating donors on the use of their funds, seeking their input if changes are needed, and ensuring their ongoing engagement and support for the organization.
• To be considered solvent, an organization needs to have a positive net worth, meaning it owns more than it owes, with a manageable amount of debt.
• A few pieces may need to be found on the income statement or other financial statements.
• It works alongside the statement of financial position, which provides a snapshot of assets, liabilities, and net assets at a given point in time.
• To determine your organization’s target benchmark or goal, use a risk assessment, trend analysis or benchmarking with comparable organizations.

During an audit, both restricted and unrestricted funds must be examined to verify that they are being used in accordance with donor restrictions and organizational goals. Effective management of a nonprofit’s financial resources hinges on the meticulous development and monitoring of budgets. Robust internal controls are vital for ensuring compliance and preserving the organization’s financial health.

Reporting of investment income.

This is often achieved by maintaining separate accounts for each category within the organization’s chart of accounts. By segregating funds, nonprofits can provide accurate reporting to donors, management, and regulators. This is the least liquid of unrestricted net assets and is not required.• Net assets with donor restrictions can be time, purpose, or permanently restricted (i.e., endowment). This procedure is discussed in another article , “Reclassing Net Assets in QuickBooks”.

• Proper division between unrestricted, temporarily restricted, and permanently restricted funds ensures that resources are allocated correctly for various programs and operational needs.
• Understanding the fundamental accounting concepts is essential for anyone involved in the financial management of a nonprofit organization.
• Navigating the accounting standards for restricted net assets is a fundamental aspect of nonprofit financial management.
• The reclassification process also involves updating financial statements to reflect the change in the nature of the net assets.
• This article explores how the platform helped amplify their mission, allowing the team to focus on empowering individuals overcoming substance use disorders and achieving new milestones.
• Understanding the nuances between these types of funds is what makes nonprofit accounting challenging.
• For instance, if a nonprofit has three main programs, then each of the three programs will be listed along with each program’s expenses.

Expenses

The second category, net assets with donor restrictions, includes funds designated for specific purposes or timeframes. Donors may require contributions to be spent only on certain programs or stipulate that the principal amount be maintained indefinitely while only the investment earnings are used. Endowments are a common example, where the original donation remains intact while the generated income supports ongoing activities.