By Jeffrey A. Kowalczyk, CPA, CFE, CGAP
Key performance indicators nonprofit leaders should track
At the beginning of the pandemic, many nonprofit organizations saw a sharp decline in donations and participation. Amidst the uncertainty, donations dropped by up to 17 percent in April, May, and June. While the downward trend eventually reversed, and donations ended the year two percent above 2019 numbers, the decline brought to light the need for nonprofits to maintain a close eye on key performance indicators (KPIs).
KPIs are metrics leaders have prioritized, are updated regularly, and serve two functions. First, they provide nonprofit leaders the opportunity to keep an eye on the health of the organization. Second, they can be used to help new and existing donors decide where their finite resources are best contributed. Donors want to support a cause they care about, but they also want to know how their funds are being used.
This article will explore which KPIs are essential to track and how to calculate them.
Track these KPI’s
There is a seemingly limitless supply of ratios you can track when it comes to finances; however, the following ratios are often indicators of nonprofit organization health and financial impact.
- Current ratio: This ratio allows organizations to see their ability to pay short-term organizations. Experts recommend this is at least 1:1 for most organizations.
- Calculation: current assets/current liabilities
- Liquidity: Your liquidity ratio allows leaders to understand how flexible they can be in a crisis or if a new opportunity emerges. Much like personal budgeting, experts recommend having 3-6 months in cash reserves.
- Calculation: cash on hand/average monthly expenses
- Administrative expenses: Tracking the percent of funds that go towards administrative costs will allow you to decide if you’re spending too much on administrative costs. This should be below 20 percent.
- Calculation: management, administrative, and general expenses/total expenses
- Program efficiency: On the other side of administrative expenses, program efficiency lets leaders and donors know how much of their donation is going toward actual charitable programs. Experts recommend staying around 75 percent.
- Calculation: program service expenses/total expenses
- Fundraising expenses: Fundraising is necessary to bring donations into a nonprofit, but it should not cost more than the funds you bring in. There are two ways nonprofits generally report fundraising expenses:
- 1. Fundraising costs unrelated to special fundraising events. This is reported on the statement of functional expenses as fundraising expenses. This figure is generally less than 20 cents per contribution dollar.
- 2. Fundraising costs directly related to special fundraising events. This is reported as a contra-revenue and will often be higher than 20 percent of event revenues, depending on the nature of the event. Organizations should perform year-over-year comparisons of event revenues to event expenses to ensure events continue to serve the organization’s needs.
- Recurring unrestricted revenues: Knowing the total amount of recurring income allows a nonprofit organization to better budget each year.
- Total of any recurring income, not including one-time grants, gifts, and contributions.
- Liabilities to assets: When used correctly, debt can be helpful. However, too much debt can eventually catch up with an organization and cause problems. Debt should not be more than 50 percent of your assets.
- Calculation: total liabilities/total assets
- Full-cost coverage: If the building your organization owns needs repairs or if any equipment needed replacing, is your organization prepared for the cost? Budgeting for the depreciation of the assets and payment of debt principal allows organizations to have cash on hand when equipment needs replaced.
- Calculation: add in the cost of depreciation, payments to debt principal, and a surplus when calculating annual budgets.
Knowing you are on the right track
In addition to tracking the KPI’s for your nonprofit organization, having a benchmark can help leaders know they are on the right track. Start by monitoring against your previous years’ data. This will allow you to see when you are growing or need to work harder in a specific area. Second, identify three to five comparable nonprofit organizations and track your KPI’s against theirs regularly. Form 990 for nonprofit organizations is public record, which means you can pull their reports every year and compare your organization’s performance to theirs.
Key performance indicators are an excellent way for business leaders of all kinds, especially nonprofit organizations, to monitor the health of their organization and determine what areas need more focus. We can help your nonprofit establish, understand, and track its KPIs. Give us a call today!
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