Financial Management in the Nonprofit Sector: A Mission-Based Approach to Ratio Analysis in Membership Organizations

Nonprofit organisations (NPOs) are melting pots combining mission, members and money. Given that the mission of a nonprofit organisation is the reason for its existence, it is appropriate to focus on financial resources in their association with mission and with the individuals who are served by that mission (Parker 2003; Wooten et al 2003; Colby and Rubin 2005). Measurement of financial performance by ratio analysis helps identify organizational strengths and weaknesses by detecting financial anomalies and focusing attention on issues of organizational importance (Glynn et al 2003). Questions have been raised that relate the performance of NPOs to their financial resources, their mission and their membership. Addressing these questions is the key to analysis and measurement of financial and operational control (Turk et al 1995) and provides an appropriate analysis for past performance which will help an organisation chart its future direction. This paper analyses financial performance by concentrating on ratio analysis in order to identify anomalies and focus attention on matters of significant concern to NPOs. It discusses the centrality of mission in the use of financial ratio analysis and extends previous financial performance models to develop one that can be applied to individual NPOs thus ensuring that financial performance analysis is not carried out in isolation from any consideration of an organization’s mission. The paper concludes by identifying the limitations of such an analysis and makes suggestions for further application of the model.