Viability Ratio: Why is it Important?

Analyzing the key ratios of your nonprofits financial statements can be very useful in gaining insight on how the organization is performing financially. Ratios are usually used by financial experts to analyze trends over a period of time, and plan for the future, along with measuring the current financial health of the organization.

What is Viability Ratio?

One way to measure financial performance is to see whether or not an organization has the capability to pay off its debts and obligations. This is where you bring in the viability ratio. Nonprofit organizations will naturally have some obligations – towards owners, or perhaps financial institutions – that need to be paid off, and the viability ratio measures the total amount of assets available that can cover this debt.

You can measure it by dividing your expendable net asset value by the value of your long-term debt.

Experts recommend that the ratio should lie within the 1.25-2 range. However, the ‘right’ ratio is subjective, and depends on the organization, its activities and debt policies. When calculating the viability ratio for a nonprofit, you should exclude long-term debt that is to be paid by future rate reimbursements.

Why is it Important for Nonprofits?

Because copy and websites are usually biased, many people tend to judge any organization’s impact through financials. Financial statements are available to the public for multiple reasons – reassurance that their money is going to the right place, to quantify impact, auditing, etc. Many people assume that the net income of an organization is a good measure of their success, though this is untrue.

For a nonprofit, the reassurance that the organization is not overridden by debt, and can continue to work towards their purpose in the future, is an important factor to consider. For donors, this information is important. The money being used for the nonprofits activities comes from them, so they would naturally want to know if it’s being used in a sustainable way.

If your nonprofit is laden with debt, then any income they generate would first be required to pay off their obligations. Naturally, this would not sit well with any donor, because the purpose of their donation is for charity.

Additionally, viability is not just about mere survival. It gives your donors comfort in knowing that it will take more than just one lost grant or missed monthly donation to bring an organization down.

Viability is important because to try out a new program, test out different fundraising techniques or expand to new communities require investment, and if your nonprofit is already struggling to keep its current position, this would not be possible.

A stable viability ratio allows your donors the comfort of knowing that their efforts are not in vain, that the organization is working effectively and that financial struggles are not a problem they are facing anytime in the near future.