• Liquidity ratios, such as the current ratio
• Comparison of total liabilities or total assets with net assets
• Cash flow projections

• Vertical analysis (looking at a simple line item as a percentage of total receipts or disbursements)
• Horizontal analysis (comparing prior periods with the current period)

Depending on the organization's size, a given amount will have a different impact. Take, for example, an organization that reports a deficit for the year of $25,000. Is that a red flag? In a smaller organization with minimal reserves, this deficit may point to serious over-spending or a failure to generate sufficient receipts. In a larger organization, this same $25,000 deficit may be immaterial as it only represents one percent of receipts. One organization may be intentionally depleting its cash reserves for an important program and this "deficit" may be a by-product of that decision. For another organization, a deficit of $25,000 may not be a concern on its own, but if it's the third year of continuous deficits, it becomes cause for concern.

Financial ratios, too, have different meanings in different situations. For instance, a new organization may end up spending 80% of its kitty on fundraising, whereas for an established organization, such a ratio would certainly be a red flag. But on closer examination, it may well be that the new organization's services are delivered by volunteers while the only paid staff they have is a fundraiser.

Just as a hospital and an auto manufacturer are in different businesses with different financial indicators, a specific ratio will mean something different in different types of nonprofits. There are different red flags for arts organizations than there are for human service organizations, and different red flags for organizations dependent on donations than for organizations dependent on member fee payments.

In many cases, ratio analysis is used to evaluate the organization's financial health. Ratios are a tool for comparing figures representing various aspects of an organization's financial status. The value of the tool is in identifying which figures to compare, and determining what the comparison might suggest. The importance of identifying the trends in your own organization and analyzing changes over time cannot be underestimated.

Financial Indicators from the Statement of Activity (Income Statement)

Surplus or deficit

If receipts are greater than disbursements for the year, the organization has generated a surplus. Likewise, if disbursements are greater than receipts for the year, the organization experiences a deficit. There is no rule that says organizations should have surpluses, deficits, or break even. Typically, nonprofits budget to break even. However, an organization may intentionally decide to spend down its cash reserves (expendable net assets) for a specific purpose such as starting a new program. This results in an operating deficit, albeit a planned one. Similarly, if a nonprofit has determined that it needs a cash reserve for specific future purposes, the Statement of Activity should reflect an operating surplus. In any case, an "unplanned" surplus, deficit, or even a break even position should be analyzed to determine its causes and to plan for the implications.

Budget to Actual for Receipts and Disbursements

Perhaps the most commonly used financial indicator is a comparison of budgeted receipts to actual receipts, and budgeted disbursements to actual disbursements. These comparisons are made on both a monthly and a year-to-date basis. Significant variations from budget should be investigated to check whether new projections should be made based on actual experience, and/or whether executive intervention is necessary.

Functional Disbursement Ratios

Donors and agencies, who evaluate nonprofit performance, often look to see that most of your organization's funds are being used for core programming purposes. However, different sources recommend differing practices and policies for allocating disbursements among the functional categories. As a result, it is important to develop consistent guidelines within your own organization to determine which of your disbursements go to program support and which to management and general activities or fundraising.