Unlike the statement of activities and statement of cash flows, the statement of financial position shows a snapshot of your organization at a point in time, rather than over a period of time. Reviewing it will tell you about your organization’s liquidity – your ability to pay bills, payroll, debt, and other obligations.

The statement of financial position, also called the balance sheet, is often evaluated using ratios. Some common ratios to use are:

  • Current Ratio: This is your current assets divided by your current liabilities. The former are assets that can be converted into cash in the next 12 months, and the latter are liabilities that will come due in the next 12 months. Think of cash, receivables, inventory, prepaid expenses, accounts payable, accrued payroll, mortgages or bank debt due in the next year. Fixed assets are not included because they cannot be quickly turned into cash, and therefore can’t be used to pay your bills. This ratio shows your ability to pay your obligations on time. If it is under 1, that means you don’t have enough assets to meet your short-term obligations and is cause for concern.
  • Net Working Capital: This is another measure for your ability to pay your short-term obligations. It’s calculated as your current assets minus your current liabilities.
  • Months of Cash on Hand: Divide your cash and cash equivalents by your monthly expenses. This shows how long you can keep paying your bills if you stopped receiving any revenue. It’s a best practice to have 3 to 6 months of cash on hand as a rainy day fund.
  • Debt Ratio: This ratio divides total liabilities by total assets. As more of your assets are funded by debt, the more risk you have of financial stress, especially if you hit a rough patch. You want this ratio to be as low as possible.
  • Accounts Receivable Turnover Ratio: This shows how quickly you collect money that is owed to you by calculating how many times in a year you would collect your average receivables. Add up all the grants, donations, contract revenue, etc. that you book before you receive it, and divide that by your average accounts receivable (beginning balance plus ending balance, divided by 2). The higher this ratio is, the faster you collect your receivables. If the ratio is low, it takes you a long time to collect money, which could cause cash flow issues and may indicate a high level of bad debt, which will not ultimately be paid.
  • Inventory Turnover Ratio: If you sell products, you’ll want to know your inventory turnover ratio. Divide your cost of goods sold by your average inventory (beginning balance plus ending balance, divided by 2) to see how many times you sold your average inventory during the year. If your turnover ratio is low, you may be keeping too much inventory on hand, which has a negative impact on your cash flow.

When you’re evaluating your liquidity, don’t forget to factor in restrictions on your net assets. If you have an endowment, the principal portion of that can’t be used to pay your bills, so deduct it from your liquidity ratios. Any cash you have from temporarily restricted contributions can only be used for specific purposes, or for expenses you incur in a specific time frame. If too much of your cash is restricted, you’ll have a harder time paying your general operating expenses. It’s not as simple as deducting this from your ratios. Consider how much of your working capital is restricted for particular purposes, versus what portion of your expenses are incurred for the purposes being funded. Do you have enough unrestricted funding to cover your general operating expenses? If you have time-restricted gifts, how likely are you to continue receiving funding for future periods? Do you have a contingency plan if the funding doesn’t materialize?

Similar to when you’re reviewing other financial statements, compare your organization to similar organizations, based on your industry size, and location. You may benefit from information available on GuideStar and the Foundation Center’s 990 Finder.