Monday, June 19, 2017

Metric Mondays #17: Working Capital Ratio

For today's Metric Monday, we're diving into another financial indicator - working capital ratio!

"Working capital" refers an organization's readily available reserve of liquid assets. It acts just like an individual's savings account - it provides a cushion against unexpected expenses or shortfalls that may come a charity's way. An organization with low working capital may be faced to choose between reducing programs or staff, amassing debt, or dissolving entirely. On the other hand, organizations that practice good working capital management may save capital when giving booms, providing future stability.

Our metric is called "Working Capital Ratio" because we express working capital in terms of the number of years an organizations liquid assets would sustain the organization, should it receive $0 in revenue. This is not meant to suggest that such a situation could actually happen, but it provides a useful normalization to the metric, as different organizations require vastly different amounts of working capital.

We calculate the charity's working capital for the rated year and its average total expenses over its three most recent fiscal years. Working capital includes unrestricted and temporarily restricted net assets, and excludes permanently restricted net assets. We then calculate the ratio between working capital and average total expenses and assign a score using the corresponding conversion scales listed in our Financial Score Conversions and Tables.

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