TLDR
Funders calculate the same nine ratios from your audited financials and Form 990 before they read a single word of your narrative: program expense ratio, fundraising efficiency, current ratio, days cash on hand, debt-to-net-assets, revenue concentration, change in net assets without donor restrictions, operating reserves, and the months-of-liquid-unrestricted-net-assets calculation. Knowing your numbers before the funder calls them out is the difference between guiding the conversation and being graded by it.
Funders evaluate nonprofits the way credit analysts evaluate corporate borrowers: by reading the financial statements through a small set of well-defined ratios. The narrative in the grant proposal matters, but the narrative is read after the numbers are computed. A development director who walks into a foundation meeting unable to answer “what is your program expense ratio” or “how many days of cash on hand do you have” is starting the conversation behind. This guide covers the nine ratios that come up most often, where each one comes from, what the benchmarks are, and what the number is signaling.
Why ratios beat absolute numbers
Two organizations with $5 million in revenue can have completely different financial health. One has $4 million in operating cash, three months of reserves, and a 78% program expense ratio. The other has $200,000 in cash, ten days of expenses on hand, and a single-funder concentration of 65%. The revenue is identical; the risk profile is incomparable. Ratios normalize for size and structure, which is exactly what a funder needs when evaluating across a portfolio of grantees.
The ratios below are computable directly from the audited statement of financial position, the statement of activities, and Form 990. The data sources are public - funders pull them from Candid, ProPublica’s Nonprofit Explorer, or the organization’s own filings. There is no upside in hoping the numbers don’t get checked. They do.
The nine ratios funders calculate
1. Program expense ratio
Formula: Program services expenses · Total expenses
Source: Statement of functional expenses; Form 990 Part IX, line 25, columns B and A
Benchmark: 75% and above is healthy; Charity Navigator awards full marks at 70%; below 60% raises concern; above 90% can suggest underreported overhead.
The most-cited ratio in the nonprofit sector. The Better Business Bureau Wise Giving Alliance applies a 65% standard, Charity Navigator applies 70%, and many institutional funders aim for 75%. The reason the ratio gets so much weight is structural: it answers “of every dollar this organization spends, how much went to mission?” That is the question donors and funders are most interested in.
The ratio is sensitive to functional expense allocation choices. Allocating the executive director’s time across program, management, and fundraising based on actual effort can move the ratio by several points. The allocations should be defensible and consistent year over year.
2. Fundraising efficiency
Formula: Fundraising expenses · Total contributions
Source: Statement of functional expenses; Form 990 Part IX
Benchmark: $0.25 of fundraising expense per $1.00 raised or lower is widely considered efficient. $0.35 is borderline. Above $0.50 raises concern.
Watch the inputs: total contributions includes all charitable revenue (foundation grants, corporate gifts, individual donations, special events), not just unrestricted gifts. Government grants are typically excluded because they aren’t fundraised in the same sense.
3. Current ratio
Formula: Current assets · Current liabilities
Source: Statement of financial position
Benchmark: 1.5 and above is healthy; below 1.0 indicates the organization may not be able to meet its short-term obligations.
The classic liquidity ratio borrowed from corporate finance. For nonprofits, “current assets” should include cash, receivables expected within twelve months, and short-term investments. “Current liabilities” includes accounts payable, accrued expenses, and the current portion of any debt. Restricted cash that cannot be used to pay general operating obligations should be excluded - funders sometimes ask whether the current ratio reflects only liquid unrestricted assets.
4. Days cash on hand
Formula: (Cash and cash equivalents · Total annual operating expenses) — 365
Source: Statement of financial position; statement of activities
Benchmark: 60 days is minimum; 90 days is healthier; 180 days is strong.
A blunt liquidity check. Nonprofits with grant-driven cash flow can show favorable days cash on hand in one quarter and tight cash in the next. Funders sometimes look at the average across the most recent four quarters rather than a year-end snapshot to avoid being misled by timing.
5. Operating reserves (months)
Formula: Unrestricted net assets available for operations · Average monthly operating expenses
Source: Statement of financial position; statement of activities
Benchmark: 3-6 months per the National Council of Nonprofits.
This is the operating reserve ratio in months. The Nonprofit Finance Fund’s research has consistently identified that nonprofits with under three months of operating reserves are at significantly higher risk of program disruption when revenue timing slips. Six months is the strong-position target. Reserves above twelve months can prompt questions about whether the organization is hoarding rather than deploying.
The “available for operations” qualifier is important. Unrestricted net assets that are tied up in fixed assets (buildings, equipment) cannot be drawn on for monthly operating expenses. Funders increasingly ask for “liquid unrestricted net assets” which excludes property, plant, and equipment.
6. Liquid unrestricted net assets (months)
Formula: (Unrestricted net assets ’ Property, plant, equipment ’ Net unrestricted long-term debt) · Monthly operating expenses
Source: Statement of financial position
Benchmark: 3 months minimum; 6 months strong.
A more conservative version of the operating reserve ratio. The Nonprofit Finance Fund developed this calculation to address the fact that real estate-heavy organizations can show large net assets that aren’t actually available to spend. Reporting both the operating reserve ratio and the liquid unrestricted net assets ratio is the most transparent approach.
7. Revenue concentration
Formula: Largest single funder revenue · Total revenue
Source: Statement of activities; Schedule B; internal donor records
Benchmark: Below 25% is healthy; 25-40% is monitored; above 40% is a structural risk.
Single-funder dependence is the most common cause of nonprofit financial collapse. A federal grantee that loses its funding line, a foundation grantee whose program officer leaves, an individual major donor whose circumstances change - any of these can take an organization with 50%+ concentration into existential risk within a year. Funders watch the concentration trend as much as the absolute number. Improvement is what matters; perfection is rare.
8. Change in net assets without donor restrictions (3-year trend)
Formula: Year-over-year change in unrestricted net assets
Source: Statement of activities, comparative columns
Benchmark: Positive in at least two of three years; positive trend over time.
The headline operational sustainability number. Negative changes year after year mean the organization is consuming its unrestricted reserves to fund operations - which is unsustainable, by definition. One bad year is forgivable; three in a row is a structural problem.
9. Debt-to-net-assets
Formula: Total liabilities · Total net assets
Source: Statement of financial position
Benchmark: Below 0.5 is healthy; above 1.0 indicates leverage that constrains future flexibility.
Nonprofit debt is usually low; debt-to-net-assets is most relevant for organizations with mortgages on real estate or significant capital project loans. A community development financial institution will look harder at this ratio for borrower nonprofits than a foundation will for grantees.
Where to find these numbers in your statements
The audit produces every input you need. The statement of activities provides revenue (segmented by donor restriction status) and total expenses (segmented functionally). The statement of financial position provides current and total assets, current and total liabilities, and net assets by class. The statement of functional expenses provides the program/management/fundraising split. Form 990 reproduces most of this information in standardized lines. The board financial report should include the calculated ratios alongside the underlying statements - we cover that structure in the board financial report guide.
If the audit is complete and the ratios still take an hour to compute, the chart of accounts likely isn’t producing them automatically. That’s a fixable structural issue, and it’s worth fixing because monthly internal review depends on the same calculations. Internal financials that show ratios alongside dollars are easier to interpret, and the executive director who sees the program expense ratio drop two months before year-end has time to respond.
What to do with the numbers
The point of computing these ratios is not to chase benchmarks. It’s to surface structural risks early. Three habits that make ratio analysis useful:
- Compute monthly, not annually. The annual audit ratio is a confirmation, not a discovery. The internal management dashboard should show ratios refreshed at every monthly close so the leadership team and the finance committee see trends as they form.
- Compare to peers in your size band. A 70% program expense ratio looks different on a $500K organization than a $5M one. BDO and Independent Sector publish size-banded benchmarks; the Nonprofit Finance Fund publishes regional medians. Use peer data, not aspirational targets from larger organizations.
- Tell the story behind the numbers. A funder who sees the operating reserve ratio drop from five months to two will notice. The development director who proactively explains the cause - a major capital purchase that drew on reserves, a multi-year grant that ended on schedule - controls the narrative. Surprising the funder with the explanation after they’ve drawn their own conclusion is harder.
When ratios contradict the narrative
The most common credibility hit is when the grant proposal claims one thing and the financials show another. A proposal that emphasizes financial stability while the audit shows three consecutive years of negative changes in unrestricted net assets is internally inconsistent. A proposal claiming diversified funding while Schedule B shows 70% from a single source is internally inconsistent. Funders read both. Make sure the proposal narrative aligns with what the ratios show, or address the gap directly: explain what changed, what the recovery plan is, and what the trajectory looks like.
The ratios are not the test. They are the framing. Knowing your numbers and being ready to explain them is the work.
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- Program expense ratio
- Program services expenses divided by total expenses. The most-cited financial ratio in nonprofit due diligence; benchmarks of 75% or above are widely treated as healthy.
DEFINITION
- Days cash on hand
- Cash and cash equivalents divided by daily operating expenses. Measures the number of days an organization can sustain operations from current cash without new revenue.
DEFINITION
- Operating reserve ratio
- Unrestricted net assets available for operations divided by average monthly operating expenses. Expressed in months. Three to six months is the National Council of Nonprofits target range.
DEFINITION
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