In the second part of our review of the ACNC Data on Charities which submitted financial reports for the 2014 year, we took a look at financial ratios**. *(The Australian Charities and Not-for-Profit Commission is mandated to regulate and collect information on Australian charities and non-profits, and also encourage transparency about the sector. Accounting for Good has been reviewing ACNC data available from the government website data.gov.au.)*

Financial ratios are used to give an indication of financial viability and organisational 'health'. While each ratio on its own is 'an interesting number', viewing a collection of ratios together, and then tracking them over time, can be a powerful way to assess long-term robustness.

We looked at the 46,519 charities which submitted Annual Statements to the ACNC for the 2014 year, and calculated ratio results as follows.

### Working Capital Ratio

Working Capital is a measure of an organisation's efficiency and its short-term financial health. The Working Capital Ratio gives an indication of how well an organisation is placed to pay debts as they fall due; that is, whether there are sufficient short term assets to cover short term debt. The ratio is calculated as Current Assets/Current Liabilities. A ratio of more than 2 means that an organisation has $2 of accessible assets to cover every $1 of debt. A ratio of less than 1 is concerning.

Setting aside one charity with $203bn of Current Assets, which we assume is an error, there are 76 charities with more than $100m of Current Assets, 878 with more than $10m, and 4870 with more than $1m. There are 34,139 charities with zero Current Assets (73.3%).

In terms of Current Liabilities, there are 81 charities with more than $100m of Current Liabilities, 2810 with more than $1m, and 34,844 that have recorded no Current Liabilities.

Of the 11,675 (26.7%) charities which report having both Current Assets and Current Liabilities, the ratios are wildly varied. For example the Good2Give Community Fund has a ratio of 264,866:1 having Current Assets of over $4m and Current Liabilities of $16. The Education Heritage Foundation Limited has Current Assets of $35m and Current Liabilities of $1080 giving it a Working Capital Ratio of 32,649:1. There are 536 charities with ratios greater than 100:1, and 6584 charities with a ratio greater than 2:1, 3260 between 2:1 and 1:1, and 1802 with ratios less than 1. The vast majority of charities with large Working Capital ratios are trusts and foundations.f

Of significant note is that there are 34,118 that have recorded neither Current Assets nor Current Liabilities (73.3%)!

### Reserves to Expenditure Ratio

Reserves to Expenditure Ratio gives an indication of how large an organisation’s financial buffer is. The greater the buffer, the better chance of weathering unexpected financial stress and a ratio greater than 18% is considered in the "healthy range".

The formula for this ratio is Equity/Annual Expenditure x100.

There were 10,704 charities that recorded neither Expenditure nor Net Assets (Equity) in 2014. That is 23% of charities which submitted statements were effectively inert. Of the remainder, 24 reported negative equity, including Imam Ali Mosque And Islamic Centre Of South Australia with negative net assets of $18.5m. Of the charities with both expenditure and equity, the range was huge. The 20 charities with the highest Reserves to Expenditure Ratio are below:

From this table, it is apparent that while certain charities report substantial net assets, they report little if any expenditure.

Of the charities with Expenditure and reserves, 5,848 record a ratio of over 1000%, 10,930 reported ratios between 100% and 1000%, and 11,822 from 1000% to 10%. 765 charities reported a negative ratio, ranging from -1% to -8m%.

This last group was marked by substantial amounts of negative equity.

### Cash Reserves

The third ratio to consider is the Cash Reserve, being the number of weeks an organisation could operate if all income was ceased immediately. It is a measure of precariousness or alternatively 'robustness'. Cash reserves of greater than 10 weeks are considered healthy. There is insufficient data ("Grants in Advance") in the ACNC reports to calculate this ratio, as it is formulated as follows:

### Do your own Health Check

To assess an organisation on these ratios, visit the Financial Health Check calculator on our Resources page.

(**NB The figures in this blog are drawn from the ACNC data at data.gov.au. The author is not liable for any errors or omissions made by the charities in their reports, or the way the data is reported at the website.)