Understanding Financial Ratios,
Analyzing Unrestricted Net Assets
& Setting a Proper Reserve
Presented by:
Gelman, Rosenberg & Freedman CPAs
Jennifer Arminger, CPA, Partner
Robert Albrecht, CPA, Partner
Presenters
Gelman, Rosenberg & Freedman CPAs
Jennifer Arminger, CPA is an Audit Partner with Gelman, Rosenberg and
Freedman, CPAs and specializes in auditing and accounting services for taxexempt organizations, both locally and nationwide. Additionally, she has
extensive expertise in compliance audits in accordance with Uniform Guidance
(formerly A-133), and helps manage the employee benefit plan audit practice at
the firm.
Robert Albrecht, CPA is an Audit Partner with Gelman, Rosenberg and Freedman
CPAs, and specializes in auditing and consulting for nonprofit organizations that
receive funding from agencies of the US Government. Recognized as the firm’s
leader with respect to international non-governmental organizations, Mr. Albrecht
has traveled to over 100 countries on behalf of the firm’s international clients.
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Understanding Financial Ratios
The Nonprofit
 Measuring the success of a nonprofit is often based on the
organization’s missions and the ability to fulfill the mission in an
effective manner
 Non-quantitative definition of “success”
 Key ratios can help quantify
 Understanding the Key Differences in Nonprofit Financial Statements:
 Unrestricted, Temporarily Restricted & Permanently Restricted
 FASB 116 – Contribution Revenue & Valuing Donated Services
 Statement of Functional Expenses
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Understanding Financial Ratios
Liquidity Ratios
This determines a nonprofit’s ability to pay its obligations on time.
It also will assess a nonprofit’s ability to continue operations within
a short time frame.
Current (Quick) Ratio:
Current Assets (Less Inventory)
Current Liabilities
Net Working Capital:
Current Assets (Less Inventory) – Current Liabilities
Days of Cash on Hand:
Cash and Cash Equivalents
Monthly Expenses
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Understanding Financial Ratios
Measuring Financial Distress or Vulnerability
These ratios can help predict a nonprofit’s long-term viability. The
ratios are generally measured by positive net assets. Alternatively,
leverage:
Nonprofit-Specific Leverage:
Indication of how much of a nonprofit’s assets are funded by other
people’s money
TRNA + PRNA
Total Assets
Revenue Concentration: Revenue source as a percentage of
total revenue
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Understanding Financial Ratios
Measuring Financial Distress or Vulnerability
Other Ratios to Measure Liquid Reserve
Unrestricted Net Assets – Net Fixed Assets – Deposits
Cash, Current Investments and Grants Receivable
 Can also be compared to Cash, Current Investments and Grants
Receivable
 How much is available prior to setting a reserve?
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Understanding Financial Ratios
Program Efficiency Measures
The primary efficiency measure used to assess nonprofits is the
program efficiency ratio:
Program Expenses
Total Expenses
This measure indicates what percentage of the resources consumed
are used by program service.
What is the best practice?
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Understanding Financial Ratios
Activities Efficiency Measures
This measure indicates what percentage of resources are used to
support general operations & fundraising of the organization.
Management & General + Fundraising
Total expenses
Key Ratios for Watchdog Organizations such as
Charity Navigator & Guidestar
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Analyzing Unrestricted Net Assets
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2015
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Analyzing Unrestricted Net Assets
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Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Analyzing Unrestricted Net Assets
Quick Ratios
Example:
Quick Ratio: 1,090,000 / 95,000 = 11.47
Above 1 indicates positive results
Leverage: 295,000 + 45,000 + 645,000 / 1,310,000 = .75
Below 1 indicates positive results
Working Capital: 1,090,000 – (95,000 + 45,000 + 645,000) =
305,000
Positive results indicate positive working capital on hand
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Analyzing Unrestricted Net Assets
Quick Ratios
Example:
Unrestricted Net Asset Ratio – Measures amount of unrestricted,
spendable net assets, in relation to the nonprofit organization’s
annual operating expenses
Unrestricted Net Assets (325,000)
Total Annual Expenses (988,000)
= 33%
UR Net Assets – Fixed Asset – Deposits (105,000)
Total Expenses (988,000)
= 11%
What does this tell us?
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Setting a Proper Reserve
State of the Sector
In the Annual Report produced by the Nonprofit Finance
Fund based on annual survey findings, the following
information was determined:
2015 Results Regarding Reserves:
 23% of nonprofits had 6 months of cash reserve
 Majority of nonprofits had less than 3 months reserve
 12% had less than 30 days reserve
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Setting a Proper Reserve
 Specific to each organization
 Consider future capital investments
(replacement cost for IT & other fixed assets,
office space, etc.)
 Unexpected situations (repairs, loss of funding
stream, unanticipated budget shortfalls)
 Who should set the reverse – Board or
Management?
 Establish formal policy
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Setting a Proper Reserve
Other Considerations for Reserve
 How much money to set aside at all times
 Defining the circumstances that will result in the reserve being
used
 A process to determine whether or not to use the reserve
 The process and time frame for repayment
 Determine any limitations on what the reserve can be used for
Understanding Financial Ratios, Analyzing Unrestricted Net Assets & Setting a Proper Reserve
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Future Seminars
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Gelman, Rosenberg
& Freedman CPAs
Gelman, Rosenberg & Freedman
Certified Public Accountants
4550 Montgomery Avenue
Suite 650 North
Bethesda, MD 20814
301-951-9090
www.grfcpa.com
Jennifer Arminger, CPA
Audit Partner
[email protected]
Robert Albrecht, CPA
Audit Partner
[email protected]
GRF Expertise
 GRF CPAs works with 500+ nonprofit organizations locally,
nationally and internationally, and travels to over 60
countries on behalf of our clients
 GRF CPAs annually conducts 100+ Single Audits for
nonprofits, which receive federal funding and need to
comply with Uniform Guidance
 Our CPAs host seminars, workshops and presentations to
keep clients current with industry regulations
 GRF CPAs is an industry-recognized, award-winning firm
with 35 years of experience working with nonprofits
 GRF CPAs is committed to technical excellence, personal
attention, ongoing communication, staff continuity,
community service and diversity
 “Personal attention will never become obsolete”
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