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.
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