Ratio Analysis &

Financial Benchmarking
Presented by:
Bob Prill, CPA and Tori Bryson, CPA
Hoffman, Stewart & Schmidt, P.C.

Agenda
Ratio Analysis
Benchmarking
Dashboards

Ratio Analysis
Used to evaluate relationships among

financial statement items

Used to identify trends over time for one
entity or to compare two or more entities at
one point in time
Three key types of ratios:
Liquidity
Profitability
Solvency

Liquidity Ratios
Measure the ability of the entity to repay its

short-term debts and meet unexpected cash

needs
Current ratio Measures the entitys ability to

pay its current obligations using current assets.

Calculated by dividing current assets by current
liabilities.

Liquidity Ratios
Quick ratio Quick assets are defined as cash,

marketable securities and accounts receivable

(very liquid assets). Calculated by dividing the
quick assets by current liabilities. Rule of
thumb for this ratio is 1:1.

A downward trend in these ratios could indicate

cash flow troubles.

Liquidity Ratios
Receivables turnover Measures the number of

times in a year an entity collects its receivables.

Calculated by dividing net credit sales by
average net receivables. A downward trend it
this ratio could indicate billing or collection
problems with accounts receivable.

Liquidity Ratios
Average collection period Measures the

number of days it takes to collect the average

receivable balance. A good rule of thumb is the
average collection period should not be
significantly greater than the entitys credit term
period. Calculated by dividing 365 days by the
receivables turnover. Lower is favorable.

Liquidity Ratios
Defensive Interval Ratio Measures the

adequacy of the resources of the entity to

support its mission. Calculated by dividing
quick assets by average monthly expenses.

Profitability Ratios
Profitability ratios measure an entitys

operating efficiency, including its ability to

generate income and cash flow.
Profit margin ratio Measures the entitys

ability to turn its revenue into net income.

Calculated by dividing net income by net sales.

Profitability Ratios
Asset turnover ratio Measures how efficiently

an entity is using its assets. Calculated by

dividing net sales by average total assets.

Both these ratios need to be compared to

industry statistics to be evaluated.

Profitability Ratios
Return on assets ratio Overall measure of

profitability. Measures how much net income

was generated for each $1 of assets the entity
has. Calculated by dividing net income by
average total assets or multiplying the profit
margin ratio by the asset turnover ratio.

Solvency Ratio
Measure long-term risk.
Debt to total assets ratio Measures the
percentage of assets provided by creditors.
Calculated by dividing total debt (liabilities) by
total assets.

Nonprofit Specific Ratios

Fundraising Efficiency Measures the relative

cost to produce voluntary contributions from

the general public. Calculated by dividing total
contributions by fundraising expense.

Nonprofit Specific Ratios

Program Service Expense Ratio Measures the

efficiency in the funds spent on the nonprofits

mission. Calculated by dividing total program
service expense by total expenses.

Nonprofit Specific Ratios

Supporting Service Expense Ratio Measures

the percentage of funds spent on supporting

services (management & general and
fundraising).

Nonprofit Specific Ratios

Unrestricted Net Asset Ratio Measures the

amount of unrestricted, spendable net assets in

relation to the nonprofits annual operating
expenses.

Nonprofit Specific Ratios

Net Temporarily Restricted Asset Ratio

Indicates if the nonprofit is borrowing from the

future or from net assets intended for future
periods. Calculated by dividing temporarily
restricted net assets (plus deferred revenue) by
cash and cash equivalents.

Benchmarking
Benchmarking is the use of nonfinancial

information and ratio analysis to identify

trends over time in one entity or to compare
to competitors at a point in time.
Used to establish internal goals, pinpoint

opportunities, identify strengths and

weaknesses.

Benchmarking
Before beginning with benchmarking each

entity should answer the following questions:

Why benchmark?
Who is going to use the results?
What are you going to measure?

Benchmarking
Why benchmark?
Save time by reviewing highlights
Track progress toward goals
Spot potential problems
Identify patterns
Provide meaningful information

Benchmarking
Who is going to use the results?
Knowing who is going to use the information is
key to determining what to measure.
Groups that may benefit from benchmarking are
the Board of Directors, senior leadership, and
program managers.
Each of these groups will measure different
metrics.

Benchmarking
What to measure?
Knowing what to measure and why is the key to
effective benchmarking. Below are five areas
to consider when selecting appropriate
benchmarks.
Mission related outcomes
Strategic initiatives
Drivers of success
Risk factors
Services and resources

Benchmarking
Mission related outcomes
A common nonprofit mission is to produce some
sort of beneficial change in a defined
population. These nonprofits measure success
of the mission by defining and measuring the
programs outcomes. An example of an
outcome would be improved health of the uninsured population of a community.
Incremental improvements in health might be
hard to measure, so the nonprofit would define
the outcome in terms of outputs, activities or
inputs.

Benchmarking
Outputs are the direct products of program

activities.
Examples include:
Number of patient visits
Number of classes taught
Number of counseling sessions conducted
Number of participants served

Benchmarking
Inputs are the resources that are dedicated to

or consumed by the program.

Examples include:
Money
Staff time
Volunteer time
Facilities

Benchmarking
Activities are what the program does with

inputs to fulfill the mission.

Examples include:
Feed homeless families
Provide job training
Educate public about signs of child abuse
Mentor youth

Benchmarking
Strategic Initiatives
Strategic initiatives tie into the strategic plans
major themes, directions or initiatives and
should define the benchmarking metrics.

Benchmarking
Drivers of Success
Drivers of success are the key performance
indicators, outcomes, goals or activities that are
essential for fulfilling the mission.
Risks Factors
Risks factors negatively affect the success of the
organization. They include regulatory
noncompliance, potential litigation, and
financial risk factors such as default on debt
obligations.

Benchmarking
Services and resources
Service responsiveness is the degree to which
existing services are responsive to existing
needs. It can be gauged by trends in clients
served, client satisfaction scores, retention
rates.
Service quality can be gauged by measures of

repeat business, complaints or referrals.

Benchmarking
Services and resources
Resource acquisition measures how effective
the organization is in getting necessary
resources such as contributions or required
staff.
Resource management includes a broad range

of financial indicators that manage financial

efficiency and budget adherence.

Dashboards
Dashboards are user-friendly tools for displaying
performance measures (benchmarks) to the
Board or management.
The dashboard displays several key indicators
that can demonstrate progress toward a goal
or warning signs of a pending problem.

Dashboards
Once an organization has determined what to
benchmark, they can present the information
in a dashboard format.
Dashboard typically come in two formats:
Scorecard format presents the key performance

indicators and whether they are trending up or

down.
Graphical format presents the key performance
indicators as graphs and charts.

Dashboards
Example of a simple scorecard

Dashboards
Example of graphical presentation

Dashboards
Comparison to industry standards

Dashboards
Comparison to Peers

Questions?

Thank You!
Bob Prill, CPA
rprill@hss-cpas.com
Tori Bryson, CPA
tori@hss-cpas.com
Hoffman, Stewart & Schmidt, P.C.
4900 Meadows Road, Suite 200
Lake Oswego, Oregon 97035
(503) 220-5900