NON-PROFIT FINANCE AND MANAGEMENT

Based on Colgate University’s May 2009 Financial Report

Revised 4-28-10
FINANCIAL RATIOS
Dollars in Thousands ($000’s)
Ratio Name Description Calculation
Operating Margin or Net This is the increase or ($1,144) Operating Deficit /
Income Ratio decrease in unrestricted net $150,868 (Unrestricted
assets from operating expenses) = -.00758%
activities divided by total
unrestricted operating Both figures are found on
expenses. One could call the Statement of Activities.
this a profit ratio.
The -$1.144 million is the
A ratio or percentage of 0% decrease in unrestricted net
or less means the institution assets from operations while
just broke even or had a the $150.868 million is total
loss. A ratio of 3-5% is unrestricted operating
healthy. expenses.
Net Working Capital This ratio determines The numerator includes
Ratio, Liquidity Ratio, or whether an institution has (cash + accounts receivable
“Quick Ratio”, Solvency enough cash and liquidity + intermediate investments
measure – all are the same on hand to pay its short- + inventories + prepaid
concept. term expenses. expenses + student Loans
receivable) / ( Accounts
A ratio around 1.50 is ok. payable + Deposits and
A ratio around 1.25 or deferred revenues) =
below means that the Liquidity Ratio
organization may struggle
to pay its bills during the $46,673 / $27,646 = 1.69
year depending on when its
revenues come in. A ratio Current Assets/Current
of 1.0 or below indicates the Liabilities
institution had serious cash
flow problems during the These figures are all found
year and must borrow funds on the Statement of
to pay basic expenses. Financial Position. First 6
lines of assets and first 2
lines of liabilities.
Financial Equilibrium This concept measures the If total revenues grow at 2%
growth of revenues and and total expenses grow at
expenses from one year to 5%, there is a deficit. If it
the next to determine if the happens over several years,
institution has a structural there is a serious problem.
 financial imbalance. The
goal is for revenues to grow
at a rate at or above the rate
at which total expenses
grow.
Ratio Name Description
Expendable Financial This measures an
Resources to Operations organization’s ability to
Ratio cover its operating expenses
from resources it can use to
pay operating expenses. A
2:1 ratio indicates a
relatively wealthy
institution, but a 1:1 ratio
means they have just
enough resources to fund
their operating budget.
Net Investment in Plant This ratio describes how
Ratio much debt an institution has
in relationship to the value
of its fixed assets (land,
building and equipment).
This is just one measure of
how one can relate debt to
the assets being funded.
Auxiliary Income Ratio This measures how
profitable auxiliary
operations are. These
operations include housing,
bookstore, dining, hotels,
parking garages, etc.
This ratio should be a
positive percentage since
Auxiliary operations should
make a profit and subsidize
the rest of the enterprise.
Tuition Discount Ratio This measures how heavily
an institution is discounting
its revenue. How much
scholarship aid does the
University need to provide
students to attract them to
enroll.
2
Try to examine these
growth rates for the largest
revenue (net tuition) and the
largest expense
(compensation)
Calculation
Unrestricted Net Assets
$436,052 Bal Sheet +
Temporarily Restricted Net
Asset $60,441 = $496,493 /
$150,868 total operating
expenses = 3.29
Total debt used for
buildings and fixed assets /
Land, buildings and
equipment after
depreciation ($165,062 p.16
/ $324,222 p. 9) = 51%
(Total Auxiliary Revenues –
Total Auxiliary Expenses) /
Total Auxiliary Revenues
($25,785 - $23,789) /
$25,785 = 7.74%
Both figures are found on
the Statement of Activities
$34,250 / $110,186 = 31%
Both figures are found on
the Statement of Activities
in the revenue section.
A figure above 45% is
worrisome since the

Ratio Name Description
Tuition Dependency Ratio This describes how much of
an institution’s total
revenue is coming from
tuition. Often, less wealthy
institutions will have a high
percentage of revenue
coming from tuition.
A high tuition dependency
ratio is above 70%.
Similar ratios can be used
for hospitals.
Administrative Support This measures how much
Ratio administrative expenses are
incurred in proportion to the
mission-driven elements of
the organization.
Fundraising Expense This measures how much
Ratio money an organization
spent on fundraising versus
the amount of donations it
collected in a year.
A lower ratio is better, but
sometimes a school will get
a very large gift and the
ratio will be unusually low.
Pledges Receivable Ratio Measures how much future
pledges and contributions
an organization has in
relation to total net assets.
It’s an indication of future
wealth to some extent.
3
institution has to provide
more of its revenue and its
endowed scholarship to
attract students.
Calculation
Net tuition and fees / Total
operating revenues
$75,936 / $149,724 = 51%
Found on Statement of
Activities
Institutional Support / Total
Operating Expenses
$28,528 / $150,868 = 19%
Found on Statement of
Activities
The notes to the financial
statements will sometimes
report total spending on
fundraising expenses.
The Colgate Statement does
not report this, but it is
simply the total fundraising
expenses divided by Total
Unrestricted Operating
Expenses.
Pledges or contributions
receivable / Total Net
Assets
$5,084 / $731,889 = 1%
Ratio Name Description
Return on Net Asset Ratio This measures whether the
institution generated more
or less financial wealth
from one year to the next.
One should examine the
real rate of return versus
nominal return. If inflation
is at 4%, the real return was
3% for a total 7% return.
It’s useful to examine this
over a period of several
years. Low endowment
returns could depress this
figure while large operating
profits would increase the
return.
Endowment Ratio Measures the total
endowment over the
institution’s operating
expenses. It is a key
measure of an institution’s
wealth and financial
flexibility. The higher the
ratio the better.
Endowment Return This indicates how well the
endowment performed.
The long-term endowment
return has typically been
8%. In the last 5 years,
average returns have been
in the 15% range.
4
Calculation
Total Net Assets for 2009 –
Total Net Assets for 2008) /
Total Net Assets for 2008
($731,889 - $906,348) /
$906,348 = -19%
Both figures are found on
the Statement of Financial
Position
The numerator is the
increase or decrease in total
Net Assets divided by the
net assets at the beginning
of the year or prior year.
Total endowment / Total
operating expenses
Long-term investments
($592,807) / Total expenses
($150,868) = 393% or 3.93
An endowment that is 3-4
times your operating budget
is a very wealthy institution.
An endowment that equals
the operating budget is
modestly endowed.
In the financial statement
notes there is a section on
“investments” which should
report the total investment
return (-$158,555 on p.10-
11)/ total market value
($592,807 on p.10). A
return of -27%.
Endowment Ratio Measures the total
endowment relative to the
operating budget/costs of
the institution.
Endowment per Student Measures the size of the
endowment per full-time
equivalent student. It
normalizes wealth
comparisons between
institutions based on
number of students or
clients.
Quasi Endowment Ratio This ratio is a measure of
to Total Endowment the financial flexibility of
your endowment. Often, a
non-profit prefers
unrestricted or quasi
endowment to permanently
restricted endowments
because the use of the funds
is much more flexible.
Educational Expenses per Measures the amount of Instruction and research /
Student programmatic support and 2,850 students
mission-driven expenditures
being spent on clients. $55,924 / 2,850 students =
$19,620 per student
Allows organizations to
compare how much they are
spending on direct client
services – hospitals,
schools, social service
5
Total Endowment/Total
Operating Expenses
$592,807 (Long-term
investment asset on Balance
Sheet / $150,868 (Operating
Expenses on Statement of
Activities) = 3.93 An
endowment that is 3-4 times
your operating budget is a
very wealthy institution.
An endowment that equals
the operating budget is
modestly endowed.
Total endowment / number
of full-time equivalent
students.
$592,807 / 2,850 students =
$208,000 per student.
Quasi or Unrestricted
Endowment / Total
Endowment
The footnotes on p. 12 of
the Financial Statements
show Quasi endowment of
$282,645 and total
endowment of $550,499 for
a ratio of 51%.
 agencies, etc.

Ratio Name Description Calculation

Deferred Maintenance This ratio is used to One needs to identify
Ratio measure the condition of deferred maintenance costs.
your fixed assets such as Colgate does not report this
buildings. figure in its financial
statements, but many
Here, it is useful to see how institutions do. Divide total
much depreciation expense deferred maintenance figure
the organization has each by Total Land, Buildings,
year. This is found on P. 5 and Equipment (net of
on the Statement of Cash depreciation). On the
Flows and is $14,022. Colgate Financial
Statements, this figure is on
If Colgate wants to avoid an p. 9 $324,222.
increase in deferred
maintenance, it should be Let’s assume deferred
funding $14 million in maintenance totals $30
capital improvements each million, or a deferred
year to keep its buildings in maintenance ratio of 9%.
good repair.
The useful life of a building
You can look at this as a is typically 30 years, so an
range of the $9,726 million institution should be
in the column to the right or reserving or spending about
$14 million above. 3% of its total building
assets each year on repairs
and improvements

(3%*$324,222 = $9,726)

Debt Burden or Debt This represents how much
Service Ratio debt service is as a
percentage of total
operating expenses.
If the ratio is above 10%,
the amount of debt service
payments can be a real
burden for the institution.
Annual Debt Service
(Interest expense +
Principal Payments) / Total
Unrestricted Operating
Expenses
Debt service is comprised of
interest payments and
principal payments.

Debt service is a fixed cost Interest expense payments

that must always be paid are found in the “Cash Flow
regardless of whether your from Financing Activities”,
revenues rise or fall during “payments on long-term

6
 a given year.
Debt service reduces
financial flexibility.
Debt Coverage Ratio This measures the amount
of income available to pay
debt service in a given year.
A higher ratio is better –
hopefully at least 125% or
1.25 or in the 2.0 range.
A ratio below 1.0 means the
institution cannot pay its
debt service from current
operating funds and may
need to rely on reserves.
7
debt” on the Cash Flow
Statement (p.5), $2,341.
The principal payments are
found in the footnotes, p.
16, and we will use the
$3,131 that is reported for
FY 2010.
($2,341 + $3,131) /
$150,868 = 4%
Operating Surplus + Interest
Expense / Annual Debt
Service
Operating Surplus is on the
Statement of Activities (p.3)
and is the Increase in net
assets from operating
activities ($158) + Interest
expense or payments on
long-term debt from
Statement of Cash Flows
($2,341) / Debt Service
($2,341 + $3,131) = 46%.
Colgate experienced poor
financial results in FY 2009
causing its debt coverage
ratio to fall below 100% or
1.0.
Ratio Name Description
Leverage Ratio This ratio indicates how
many assets the institution
has in relation to its total
debt outstanding. If the
institution went out of
business today, does it have
enough assets to payoff its
entire debt to bondholders.
This ratio should definitely
be above 1.0. If it falls
below 1.0, there is a real
concern that if the
institution had a drop in
enrollment, if the
endowment return declined,
or some other bad financial
event occurred, they would
not be able to pay off their
debt. A ratio of 2.0 or
more is preferable.
Debt to Endowment Ratio A common measure of an
organization’s indebtedness
is the ratio of Total
Outstanding Debt to Total
Endowment.
Calculation
The numerator includes
total unrestricted and
temporarily restricted net
assets from the Statement of
Financial Position
($436,052 + $60,441) /
Total Debt Outstanding
($161,882) Found on P. 16
in the Footnotes under “debt
arrangements” = 3.07.
Total outstanding debt is in
the footnotes on p. 16
($161,882) / Endowment or
Long-Term Investments
($592,807) (p. 2 Statement
of Financial Position) =
27%.