Knowledgebase

How financial ratios for the nonprofit sector and major subsectors are calculated

There are three possible ways to calculate the "average" ratio for a group of organizations:

• Calculate the median value:  Half of the values fall below and half above this middle point.  (If you had, say, 5 organizations with ratios of 1, 2, 3, 4, and 5, then 3 is the middle value or median.  It wouldn't matter if the last value in the list was 5 or 500, the median would remain the same since 3 is still the middle value.
• Calculate the average of each organization's ratio.  Using the example above, the average of the values 1-5 would be 3 but if the fifth value was changed to 500, the average would jump to 102!  Note that each organization's ratio is given equal weight even if the first ratio belonged to a giant organization like a large hospital and the last one belonged to a small community theater with revenues only a fraction of the size of the hospital's. 
• Calculate the total denominator and the total numerator for each group and take the ratio.  This is the approach that we are using on this page.  This means that -- continuing with our example -- if the first organization (the hospital) had a total surplus of $10 million and total revenue of $100 million while the other organizations had surpluses of $1,000 each and revenue of $100,000 each, we would take the sum of the numerators ($10 mil + $1,000 + $1,000 + $1,000  + $1,000 = $10,004,000 and divide that by the sum of the denominators ($100 mil + $1m.+$1m. +$1m + $1m= $104 mil.).  The resulting surplus ratio is very close to the ratio of the large hospital since its numbers dominate the category. 

Each approach has its value.  For evaluating finances of the "typical," the median is often used. if there's a great deal of meaningful variation among organizations, the second approach that captures the values of the large outlying values is sometimes most useful.  If, however, getting a picture of an industry or sector as a whole is the goal, the third approach best captures the aggregate financial position of the organizations.