Brief #5 discusses the use of financial efficiency ratios to evaluate and compare nonprofit organizations. Recent technological advances have made nonprofit financial reports and electronic databases widely available to analysts, further popularizing financial comparisons. In this brief, we summarize both the advantages and dangers of such analyses. The chief advantage is that managers and donors can productively use financial comparisons for decision-making. The chief disadvantage is that analysts tend to over-rely on these measures when making judgments regarding the effectiveness or donation-worthiness of nonprofit organizations.

Read the Association of Fundraising Professional's coverage of the cost of fundraising ratio.

Related resources

BBB Wise Giving Alliance: Standards for Charity Accountability

GuideStar: Why Ratios Aren't the Last Word

Charity Navigator: Evaluating Charities: Why the Numbers Count

Put Barber: Comment on Charity Navigator, The "Hardest Place in Nation to Raise Money?"

Tony Poderis: The Fallacy of Financial Ratios, Part 1; Part 2

Paul Nelson: Useful, But Limited

Liz Keating and Peter Frumkin: How to Assess Nonprofit Financial Performance

Jennifer Lammers: Know Your Ratios? Everyone Else Does

Peter Swords: How to Read the IRS Form 990 & Find Out What it Means

NCNA and NHSA: Rating the Raters: An Assessment of Organizations and Publications That Rate/Rank Charitable Nonprofit Organizations