A discussion about financial ratios

The financial efficiency ratios displayed on the charity’s summary page reflect results over the most recent three-year span, not any one particular year (unless the charity has filed fewer than three financial reports with our office).

The three-year data table and ratios displayed on a charity’s summary page provides important clues about whether donations to the charity are being used as donors intended, but they do not tell the whole story. While most donors understand that running a charity requires some administrative and management costs, many do not have an objective standard for appropriate costs.

Several factors can affect a charity’s expenses, such as its size, age, mission, and location. For example, a charity in an area with a high cost of living will need to pay more for office space, supplies, and salaries than a comparable organization in a less costly area. Ratios can be helpful when you are comparing organizations of similar size and age that are located in the same area or similar locales and have similar missions and programs, and when you are tracking an individual nonprofit's progress over time. As an example of the problem of comparing organizations with very different missions, compare the program service ratio of a neighborhood food bank (95%) to that of a local art museum (72%). If a potential donor did not know that the median program service ratio for art museums is 71% and for food banks is 94%, comparing the two organizations on this criteria alone would not result in a wise giving decision.

Special circumstances can also affect a charity’s ratios. For example, an organization that is building an endowment will, in the short run, see its fundraising ratio rise and its program ratio fall. In the long run, though, a successful endowment drive may enable the charity to spend more on programming and less on fundraising.

The financial ratios presented on the Secretary of State’s website, when considered alongside all of the information disclosed by the charity over time, can provide valuable insights, but they should not be used in isolation to approve or condemn a charity. They do not measure the impact of an organization’s programs or services. Since quantifiable outcome measures are lacking for the sector, if the financial ratios look off, donors should inquire further with the charity. Dig into the details of its Form 990s, which are also available on our website, and call the charity to ask how its programs are run. Remember that the best way to decide which organization deserves your financial support is to know its programs and know the people running the charity, know other people who are involved with it, or be involved with it yourself.