Nonprofit Ratios: Debt to Net Assets

Decisions about debt can be very daunting. In fact, they can actually sink a nonprofit in a very short period of time. So today, let's take a look at the debt to net asset ratio, which is a very important metric to consider when evaluating the strength of your financial position. 

What is Your Nonprofit’s Debt to Net Asset Ratio?

     The debt to net asset ratio is a ratio that measures the amount of debt that an organization has in relationships to its total net assets. To calculate this ratio,  divide your debt by your total net assets. 

For example:

Debt totaling $100,000 divided by net assets of of $400,000 = .25 (or a ratio of 25%)

     Ideally, a nonprofit’s debt to net asset ratio should be less than 30%. This ratio gives a good indication of the organization's sustainability and capacity to operate based on its current level of debt.  This ratio is also a helpful tool to use in proforma borrowing situations as you evaluate potential financial impact on your organization. 

What Your Debt to Net Asset Ratio Says About Your Nonprofit

     If your nonprofit has a higher than 30% ratio, it's an indication that your organization has taken on too much debt and is at a higher risk. This is concerning because in the event of an economic downturn or reduced revenue situation, your debt can end up devouring your mission. Therefore, you’ll want to be careful to keep this ratio in check, so you don’t end up compromising your ability to operate due to excessive debt.

     On the other hand, a lower debt to net asset ratio, (significantly less than 30%) is an indication of  financial stability.  Likewise, an extremely low debt to net asset ratio (0-10%) indicates available capacity to expand your mission. For example, if you’re considering a facility expansion, and you are currently operating with a debt to net asset ratio of 5%, then you may have some capacity there to fund your growth. 

Are There Exceptions to the 30% Rule? 

     As with most recommendations, a nonprofit's debt to net asset ratio is going to vary significantly from one nonprofit to another, which is why we have a benchmark of 30% or less. It serves as a general rule of thumb. Of course, in situations where you take on capital campaigns or expansions, you're going to inevitably see your ratio swell toward 30%. I strongly discourage exceedng this 30% benchmark, but there may be very temporary exceptions, in which case, you would proforma the impact of your borrowing and evaluate your options before you put your nonprofit into a stressful debt situation that could interrupt your mission. 

     I hope this has been helpful to you. This month I am focusing on  several different nonprofit ratios, so if you don't want to miss one, click HERE to subscribe to my weekly email tips. I'll deliver them to your inbox to ensure that you don't miss one and also have the content to go back and refer to later. 

In addition, if you're making a strategic decision about borrowing and you'd like to just spend some time talking through that decision with someone with my level of nonprofit CFO experience, I’d be honored and happy to do that. You can book a strategic consult with me by clicking HERE. I'd love to help you look at your ratios and evaluate your financial picture to see what a borrowing decision could look like for your specific organization.