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Calculation of Ratios:

Ratio 2003 2004


Current Ratio = Current Asset Current 0.87 0.90
Liability
Long-Term solvency Ratio = Total Asset / 1.38 2.06
Total Liability
Contribution Ratio = Largest Revenue 0.51 0.49
Source/ Total Revenue
Management Expense Ratio = 0.282 0.226
Management Expense/Total Expense
Program Expense Ratio = Program 0.718 0.774
Expense/Total Expense
Revenue Expense Ratio = Total 0.945 0.111
Revenue/Total Expense

(Calculation is attached as Excel Sheet. Calculation is done in work sheet “Ratios”)

Importance of Ratios:

Current Ratio: Current ratio measures the capability of the company in paying current liability.

Higher the current ratio, better the liquidity position of the company. Generally, a current ratio of

2:1 is considered as good.

Current Ratio = Total Current Asset / Total Current Liability

Current ratio of XYZ organization is improving from 0.75 in year 2002 to 0.90 in year 2004. It

indicates that organization is having good liquidity and capable of paying current liability. XYZ

has actually improved its liquidity position.

Long-Term solvency Ratio: Long-term solvency ration measure a company's ability to meet

interest and principal payments on long-term debt and similar obligations. It is the best indicator

for assessing long-term solvency risk is a firm’s ability to generate earnings over a period of

years.

Long-Term solvency Ratio = Total Asset / Total Liability


Long-Term solvency ratio has improved from 1.26 in year 2002 to 2.06 in year 2004. It means

that XYZ has improved its ability to meet log-term debt obligations and its log-term solvency is

intact.

Contribution Ratio: Contribution ratio is defined as a ratio of largest revenue from a source and

total revenue. This ratio tells how much a particular source of revenue contributes to gross

margin of the company. It also indicates the dependence of generating profit of a company on a

single source.

Contribution Ratio = Largest Revenue Source/ Total Revenue

Contribution ratio of XYZ is very near to 0.5, which means single source is contributing about

half of the gross margin. XYZ should decrease the dependence on single source.

Management Expense Ratio: Management expenses includes marketing, administrative costs,

sales cost. It is not operating expense. High Management expense ratio is not considered good.

Any company will try to reduce its management expenses to control cost.

Management expense ratio is defined as the management expense as a percentage of total cost.

Management Expense Ratio = Management Expense/Total Expense

Management Expense ratio has decreased from 29.6% in year 2002 to 22..6% in year 2004. It is

a good indication and shown that XYZ has been able to control its management expenses.

Program Expense Ratio: Program Expense ratio is very important for Non-profit organizations.

It indicates how much of the total expenses of a non-profit organization is program related. High

program expense ratio indicates that non-profit organization is more efficient and it helps the
organization in fund raising. Generally Program expense ratio more than 75% is considered as

good.

Program Expense Ratio = Program Expense/Total Expense

Program expense ratio has improved from 70.4% in year 2002 to 77.4% in year 2004. It means

XYZ is improving its efficiency and it will help it to raise fund in future.

Revenue Expense Ratio: Revenue expense ratio tells what is company’s revenue for each dollar

spent by the company. High revenue expense ratio is considered as good and indicates that

company is efficient. Generally, for a commercial firm, Revenue expense ratio is greater than but

for a non-profit organization Revenue Expense ratio may be below 1.

Revenue Expense Ratio = Total Revenue/Total Expense

In year 2002, XYZ was having Revenue-Expense ratio below 1. By year 2003, XYZ has

achieved Revenue expense ratio of 1.11 and became profit making. This may be the result of

improving efficiency and controlling cost.

Overall, XYZ Organization is in good financial health. Its has enough liquidity and capability to

meet short term as well as long term debt obligations. Organization is improving its financial

health and efficiency.

Calculation of fixed cost, variable costs, and break-even point:

(Calculation done in excel sheet. Worksheet “Costs”)


Purpose, advantages, disadvantages, and type of feedback provided by a

line item, performance, and program budget:

Line Item Budget: In Line item budget, the individual financial statement items are grouped

together by cost centre or departments. It helps in comparing past financial data with current one.

Another advantage to line-item budgets is that they are clear and simple to read. Sometimes

line-item budget provides little information on the overall use of fund and so, it is hard to justify

the amount allocated to a particular line item.

Program budget : In Program Budget, expenditures are based primarily on programs of work

and secondarily on character. Proposed expenditure in the budget is set by analyzing functions .

It allows top management to focus on objectives for which funds are allocated. It is easy to find

for which function fund is used. However, program budget does not properly evaluates

performance.

Performance Budget: Performance budget is compilation of programs and activities of

different departments. It focuses on objectives and goals of different departments. There are

three major elements to it.:

1. Final Outcome

2. Various ways to achieve the outcome

3. Actual action to achieve the outcome

Advantage of performance budget is, it is easy to segregate good activities from those which are

not expected to give desired result. It outlines the achievements viz.-a-viz. financial outlay set
and goals set for each activity. However, using performance budget is not easy. It is very

detailed and lengthy.

Approaches to fund development

All non-profit organizations need money .Traditionally this is known as fund raising. Fund

development is creating a constituency which supports the organization because it deserves it

and it is developing a membership that participates through giving (both as volunteers and

financially). Fund development is more than fund raising. In fund raising, you appeal to the heart

of the contributor which forces the contributor to donate to for charity. In fund development you

appeal not just to the heart, but also to the head in an effort to build a continuing effort and solid

base for the future.

The most common and traditional type of fund development is through fundraising. The most

popular way of fund raising is from local donors. Local support can be acquired through creating

awareness among the local people. Make them understand the work Non-profit organization is

doing. A sponsored community walk may be helpful. Another way of fund raising is through

Silent Auction. A large base of donors can be acquired by advertising, using word of mouth,

having members spread over large geographical area. For a popular organization which is

involved in a program which is rated high by local people, there may be plenty of donors who

can contribute money, goods as well as services.

Second traditional way of fund development is through the contribution of members which can

be membership fee or annual obligatory donation. A member of the non-profit organization is

aware of the needs of the organization. The success of the organization means individual success
of the member. So, members may be asked to pay an annual membership fee which can be

utilized for funding programs. This method is followed by many churches. This is also a main

source of fund of Rotary International where members are asked to contribute for charity and

social programs. The organization may try to increase the membership base to raise more fund.

More members do not only contribute in terms of money but in terms of loyalty, popularity, faith

and service also. An organizations having more members is able to raise more fund from local

contributors as well. They also help the organization in conducting more number of programs

covering more geographical area giving access to more potential donors.

A non-traditional way of fund development is entrepreneurial way. As fund development is not

just fund raising but having alliances for future also, the entrepreneurial way contracts high net

worth individuals, other organizations as well as government. They become a key stakeholder.

As a key stakeholder, they may ask to be a part of management also. In return, they provide

financial stability to the organization. This kind of joint venture is beneficial for the

organization as well as the other party. For example for government, government has the access

to the resources, reach and expertise of the non-profit organization which can be utilized for

social development. In return, government takes care of the financial needs of the organization

through grants and other means.

Another non-traditional way of fund development is through campaign and promotion.

promotion and campaign increases the visibility of the organization. It generates awareness in

market about the work the organization is doing and how that work is beneficial for the society.

The non-profit organization tries to convince the people that organization is involved in doing

good work and the fund raised by the organization will be put into good use. This helps the
organization in acquiring more potential clients and users. Well devised marketing strategy will

allow the organization in communicating with the potential contributors and targeting the

individuals who are ready to donate. This type of fund development has long term advantage.

The organization builds reputation, base and reach in society which will help the organization in

future as well.

Reference:

Drucker, Peter F. (1990) Managing the Non-Profit Organization, HarperBusiness

K.Gayithri (2006) Better Program Delivery through Budgetary Reforms -A Program


Performance Budget Approach

Roth, Stephanie (2001) “Creating a Culture of Fundraising in your Organization” Grassroots


Fundraising Journal Vol. 20, No. 9 Chardon Press