Nonprofit Accounting Basics

Program Costs to Earned Revenue Ratio

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.

This ratio calculates the portion of program expenses that is covered by related program revenue. It indicates the level of subsidy from contributions and other non-program earned revenue such as interest and investment income that is required to fully support programs after applying related-earned revenues. The basic formula for this ratio is:

               Program Revenue ÷ Program Expenses

Signal:  There is no explicit desirable ratio. This is rather a data point that can be used to communicate need, e.g., ticket sales cover only 60% of the cost of producing the play at the desired quality and accessibility to diverse audiences. However, if all program costs were more than covered by direct program revenue, one may wonder why the organization is operating as a non-profit.

Calculation:  It would be most conservative to include among program expenses the program’s appropriate share of vital infrastructure and management costs, without which programs cannot happen. This is the “true” cost.

Caveat:  This ratio would be an indicator to watch in trend and to benchmark to comparable peer organizations. Pure service organizations, with little or no earned revenue, may not find this ratio useful.