Nonprofit analysts and watchdogs have been using financial ratios to evaluate and compare nonprofit organizations since the 1960s. Recent technological advances have made nonprofit financial reports and electronic databases widely available to analysts, further popularizing financial comparisons. In this brief, we summarize both the advantages and dangers of such analyses. The chief advantage is that managers and donors can productively use financial comparisons for decision-making. The chief disadvantage is that analysts tend to over-rely on these measures when making judgments regarding the effectiveness or donation-worthiness of nonprofit organizations. The overhead cost project is a collaboration with the Center on Philanthropy at Indiana University.
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