Nonprofit Financial Ratios: What to Do When the Number Is Bad

The request usually arrives on someone else’s form: a funder asks for months of cash, a lender wants your current ratio, or a new treasurer asks about last year’s operating margin. If finance is not your background, it is tempting to attach the statements and hope for no follow-up questions.

Organizations with operating expenses under $250,000 a year make up 41% of the leaders who apply to the Center for Nonprofit Coaching (67 of 152 in our intake data), and at that size the executive director is often the finance team. Five nonprofit financial ratios give your board a basic review of financial health. This page, part of our nonprofit financial management guide, gives each formula, a worked example and what to do when a number is bad.

Which Financial Ratios Should a Nonprofit Track?

Track five ratios: months of cash for liquidity, the operating reserve ratio for your cushion, the program expense ratio for how spending splits, revenue concentration for dependence on one funder, and the operating margin for whether revenue covered expenses. Together they show whether you can pay the bills, absorb a shock and keep the business model working.

The inputs come from your nonprofit financial statements. Ask your bookkeeper for a statement of functional expenses if you lack one.

• Months of cash. Cash at a point in time, usually year-end, divided by average monthly operating expenses before depreciation. The Nonprofit Finance Fund glossary defines it as how many months you could operate if revenue stopped.
• Operating reserve ratio. Net assets without donor restrictions, minus fixed assets net of their debt, divided by annual expenses minus depreciation and amortization. Multiply by 12 for months. The formula is from Gross Mendelsohn, a CPA firm, in 2018.
• Program expense ratio. Program expenses divided by total expenses, both from the statement of functional expenses.
• Revenue concentration. Revenue from your largest source, or top few sources, divided by total revenue, which Wegner CPAs (2025) calls a revenue concentration index.
• Operating margin. The change in net assets without donor restrictions divided by total revenue and support without donor restrictions. Gross Mendelsohn calls it the profit margin ratio.

The reserve and margin formulas use unrestricted figures because money a donor restricted to one program or a future year cannot pay this month’s rent.

How Do You Calculate Each Ratio?

Take revenue and expenses from the statement of activities, cash and net assets from the statement of financial position, and divide. The example below uses made-up round figures for an illustrative after-school program, so you can repeat each step with your own year-end statements.

The program spends $480,000 a year and rents its space, so it has no fixed assets or depreciation. At year-end it holds $32,000 in cash and $80,000 in net assets without donor restrictions. Program expenses are $384,000. Revenue without donor restrictions is $470,000, of which $282,000 comes from one county contract paid by reimbursement.

Read the first two rows together. The reserve ratio says two months, while the bank balance covers less than one. The difference is mostly unpaid county reimbursements. They count in net assets, but they cannot cover payroll. That gap between grant payments is what days cash on hand is meant to catch.

What Is a Good Number for Each Ratio?

No single number is right for every nonprofit. Each benchmark below is one named source’s guideline with its year. The Nonprofit Finance Fund says the right amount of cash depends on the organization, and Gross Mendelsohn says the same of ratio benchmarks generally. Compare your ratios with your own last three years first.

• Months of cash. “Fewer than three months of cash is often perilously tight,” according to the Nonprofit Finance Fund (2018). In its 2025 State of the Nonprofit Sector Survey of 2,206 respondents, 52% had three months or less and 18% had one month or less.
• Operating reserve ratio. Gross Mendelsohn (2018) sets no single target: an organization whose individual gifts rise and fall with the economy probably needs a higher one. The board sets its own target in a reserve policy, and the reserve ratio tracks it.
• Program expense ratio. Standard 8 of the BBB Wise Giving Alliance Standards for Charity Accountability (accessed in 2026) asks for at least 65% of total expenses on program activities.
• Revenue concentration. Wegner CPAs (2025) treats more than 30% from your top source as high risk.
• Operating margin. Gross Mendelsohn (2018) says a positive margin is generally the goal, with the target set in the budget. In the 2025 survey, 36% of respondents ended 2024 with an operating deficit.

Against those guidelines, the illustrative program has under one month of cash, a program ratio above 65% and twice the 30% concentration line.

Your own last three years are the benchmark that fits your organization.

Is the Program Expense Ratio a Good Measure?

It is a partial measure. The program expense ratio shows how total expenses split between programs and support costs, but it says nothing about results, and it moves with how shared costs, such as the executive director’s salary, are allocated. Treat it as a question about allocation and investment.

In 2013 the heads of the BBB Wise Giving Alliance, GuideStar and Charity Navigator told donors in an open letter that “many charities should spend more on overhead,” though at the extremes the ratio can help root out fraud and poor financial management. Gross Mendelsohn adds that a very high program ratio can mean an organization is underinvesting in the infrastructure it needs.

If your ratio looks low, ask your bookkeeper how shared costs were split before you defend it. The letter warns that a narrow focus on overhead can create the starvation cycle, which leaves charities without what they need to serve people well.

What Should You Do When a Ratio Is Bad?

Treat a bad ratio as the start of a conversation. First ask what caused it and whether it was planned, then talk with the person who can change it, then make one move you can check next month. Write the cause and the move down, so the board sees both at the next meeting.

• Months of cash below one. Ask which payments are late and which bills fall due in the next 13 weeks. Build a 13-week cash forecast with your bookkeeper and call your largest funder about payment timing. If payroll is at risk, the steps for leading through a financial crisis apply.
• A thin reserve. Ask the board how large a cushion it wants and how fast to build it. A small monthly contribution line in next year’s budget turns the target into a habit.
• A low program expense ratio. Once the allocation of shared costs checks out, ask the board what the support spending bought.
• High revenue concentration. Tell the board plainly what happens if this funder pays late or leaves, and propose a target for a second source with a review date.
• A negative operating margin. Ask whether the deficit was planned, such as a board-approved use of reserves, or a surprise. Two surprise years in a row open the conversation about rebuilding the budget around reliable revenue.

In the illustrative program, cash and concentration are one problem. A single funder pays late, so the bank balance drops, and the first conversation is with the county about payment timing.

How Do You Present a Bad Ratio to the Board?

Present a bad ratio before anyone asks. Name the number, explain what caused it, propose your response and say what you need from the board. A one-page note sent with the board packet lets the meeting spend its time on the decision rather than the arithmetic.

1. The number, its trend over three years and the guideline you compare it with.
2. The cause, in one or two sentences.
3. Your proposed response, and when you will report back.
4. The decision or help you need from the board.

Agree on the figures with your treasurer beforehand, so the treasurer’s review supports the note in the meeting. In the strongest board and executive director partnerships we see, both sides can say where governance ends and management begins. A workable split is that the board decides how much risk the organization carries and you decide how to manage it.

Put the five ratios on the reporting calendar your written financial policies set, so a bad number arrives inside a trend the board already knows. If the statements still feel shaky, start with the financial literacy an executive director needs.

What Can You Calculate This Week?

Calculate months of cash this week. Take the cash balance from last month’s statement of financial position, divide it by one month of operating expenses before depreciation, and write down the one question the result raises for your next meeting with your treasurer.

The Center for Nonprofit Coaching does not do accounting, and when a problem needs technical work, such as restructuring a chart of accounts, we say so during matching. A coach works on the leadership side, what the number means for your decisions and how to raise it with your board and funders, through coaching for executive directors carrying the finances.

Six coaching sessions cost $300, $400 or $600 for organizations with operating expenses under $250,000, under $500,000 or over $500,000 a year. Volunteer coaches donate their time, which keeps fees 85%+ below market rate. For a thinking partner on that board conversation, apply for coaching.

Frequently Asked Questions