Trend analysis

If trouble is coming, you want as much warning as possible; more than that, you'd like some indication of what kind of trouble it is and what you should do about it. For this purpose, a balance sheet or a financial statement is too blunt. To get a more precise diagnosis we turn to specific probes.

One such tool is ratio analysis. A ratio is the proportion of one important number to another important number. You look at the ratios as well as the raw figures to find out how things are shifting within the total picture.

When you've worked out these ratios, you first look to see if they're in the danger zone already. You then look for the way the ratio is changing over time. Compared with last quarter, or last year, are they getting better or worse?

One set of ratios looks at your bottom line and asks how close you are to going out backwards.

• Assets to liabilities
  If at the bottom of the page your equity turns out to be negative and your liabilities significantly outweigh your assets, there are obviously questions about your college's financial viability. If you're not yet in the danger zone, but if your ratio is trending down - if your current assets to current liabilities ratio has slipped, for example, from 5:1 to 4:1 - you've still got cause for concern.
• Debt to equity
  This measures how much you've leveraged your assets. Australian not-for-profit organisations tend not to borrow heavily, and debt-to-equity ratios are seldom a major problem.

Another set of ratios looks at how you're employing your money and resources in relation to your goals.

• Beneficiaries surplus to income
  What's the ratio of overheads to actual product? What proportion of the money is spent up the pointy end, and what goes on admin and marketing and PR? There's no absolute right figure, but you need to know where you stand, and, again, how you're trending.
• Net surplus margin
  The net surplus is total income less total expenditure, and it's the money you have to carry over to the next year (or the deficit that you'll need to fill from the reserves). It's money you have to spend on adding to your services or building up your reserves in case of a bad year.
• Funding streams
  If you're dependent on one income stream, then you can be in trouble if it falls off or cuts out. Work out what proportion of your income comes from each source, work out how much of your income is under your own control, and keep an eye on your vulnerability to sudden changes.

Ratio analysis doesn't just help you with keeping an eye on your organisation's money, it can also be used to show you how efficient you are at performing your mission.

• Income per unit of output
  You need to look at what it costs you to turn out your 'product', however you measure that. By itself, that doesn't tell you much. By comparing it with previous years, however, you get more information. You have some basic facts to structure your understanding.
• Overhead per unit of output
  As you're a not-for-profit organisation, people are also interested in how efficiently you're employing the funds - what proportion of the money you raise goes to the people you're trying to educate.
• Income to assets
  Bringing in numbers from two of the tables, how does your college's annual income compare to your total assets?
• Employee costs
  How much of your budget goes on staff (employee costs to income)? What's the average staff member cost you (employee costs per employee)? There's no one right answer, but you need to keep an eye on it.