Reading nonprofit financials: revenue, expenses, net assets and the program expense ratio

A nonprofit's financial statements use the same building blocks as a business's, with different labels and different expectations. A surplus is not the goal, and a low overhead figure is not a proof of quality. This guide defines each number shown on the organization pages, explains the formulas used for the ratios, and lists the cases where a ratio points the wrong way.

Revenue

Total revenue on Form 990 (Part VIII, line 12) is everything the organization received during the fiscal year from all sources. The components shown on the pages are:

• Contributions and grants – gifts from individuals, foundations, corporations and government grants that are not payment for a service.
• Program service revenue – fees the organization earns for its mission activity: tuition, patient charges, admission tickets, contracts for services.
• Investment income – interest and dividends.
• Other revenue – rents, sales, gains and special events, reported net of the direct costs where the form says so.

Revenue mixes are the first way to sort organizations. A university hospital earns most of its revenue from patient services, a food pantry mostly from donations, a foundation mostly from investments. The "where the revenue came from" table on each page shows the split for the latest year. Two organizations with the same total can have very different funding risks.

Expenses

Total expenses (Part IX) cover everything spent to run the organization, including salaries, occupancy, grants made, and depreciation, which is a non-cash charge. Part IX divides them into three functional categories:

• Program services – spending on the mission activity itself.
• Management and general – administration, finance, governance, and other overhead not tied to a program.
• Fundraising – the cost of soliciting gifts.

The split is the organization's own allocation. Rules exist for how to allocate shared costs, but two similar organizations can reasonably report different splits, and the return is not audited line by line.

Net assets

Net assets (Part X) are assets minus liabilities at year end, the nonprofit equivalent of equity. The change in net assets over a year equals revenue minus expenses plus other adjustments such as investment gains that the form reports separately. Net assets include restricted funds: money that donors have limited to a purpose or a period. A large net asset balance does not mean the organization can spend it freely. It can also include buildings, equipment and endowments that cannot be used for operating costs.

The ratios on this site

Program expense ratio

Program services expenses divided by total functional expenses in the same year. The figure comes from Part IX in the Form 990 e-file data, so it appears only for organizations that filed the full Form 990 electronically and only for the latest year. An organization with $900,000 of program expenses out of $1,000,000 shows 90 percent.

Months of reserves

Net assets at year end divided by average monthly expenses, that is, total expenses divided by twelve. A result of 6 means net assets equal six months of spending. The measure counts all net assets, including restricted and fixed assets, so it overstates the cash a board could draw on. It is useful for comparing organizations of the same type and for following one organization over time.

Fundraising cost per dollar raised

Direct expenses of fundraising events and activities divided by the gross income they produced, where the Statistics of Income extract reports both. It is shown only when the organization reports fundraising income, and it leaves out the general cost of a development office.

Percentile position

The share of comparable organizations, in the same NTEE major group and state, whose value is lower. A revenue percentile of 87 means the organization's revenue is higher than 87 percent of the others in the group. Where a state has fewer than 20 comparable organizations, the group is the same NTEE major group nationwide, and the page says so. A percentile is a position in a distribution, and no score or rating is attached to it.

Where the ratios mislead

• Low overhead is not a quality measure. Organizations that underspend on management and fundraising can look efficient while their systems weaken. A very high program ratio can also result from generous allocation of shared costs to programs.
• Timing. A large grant received late in the year lifts revenue and net assets in one year and not in the next. The trend section of each page, when it has enough years, gives more context than a single year.
• Special cases. Hospitals, universities, insurance-related entities and foundations follow different economics. Revenue for a foundation includes investment gains, which move with markets.
• Negative numbers. A deficit in one year is common and can be planned; a net asset balance below zero is worth a closer look at the return's notes.
• Small organizations. For an organization with a few employees, a single event can change every ratio. Percentile positions in small groups move quickly.

A short reading routine

1. Start with the revenue and expense table across years. Look for direction and volatility.
2. Check the revenue mix: what share depends on donations, what on fees.
3. Read the months of reserves next to the expense level, not alone.
4. Use the percentile sentence as a comparison to peers, then open the organization's own description of its programs in the About block.
5. For a large decision, read Part III and Schedule O of the return itself. The Form 990 lookup guide shows how to get it.

The exact sources and steps behind each figure are on the methodology page.

Figures are as reported by the organizations. This is not a charity rating and not tax advice.