As we near the two-year mark of the first COVID-19 lockdowns and stay-at-home orders, some nonprofits still are struggling with financial sustainability. This can mean that your board of directors is taking a greater interest in your organization’s financial performance. Key performance indicators (KPIs) can help focus your board’s attention on important metrics.
Although organizations will see quite a bit of overlap, a nonprofit’s KPIs will depend largely on the organization’s specific characteristics. That includes its revenue streams, key expense factors, and budget and strategic goals. Put another way, you need to identify your organization’s “business-drivers.”
Determine which factors affect the reliability of your revenue streams — and which factors influence whether your expenses rise or drop. Then create KPIs that monitor those factors. Consider the level at which you want to track selected KPIs. You could monitor them by individual program or function, or at the organizational level.
Over time, you’ll likely need to adjust your KPIs as your strategies, priorities or programs change. What’s “key” today won’t necessarily be key in five years. For each KPI, you should develop a target, which may be based on your current budget or part of your strategic plan.
Seven financial KPIs have emerged as must-haves for nonprofits, including:
1. Current ratio. This KPI reflects your financial standing, specifically your organization’s ability to satisfy debts coming due within the coming year. Divide current assets by current liabilities. A ratio of “1” or more generally means you can meet those obligations.
2. Projected year-end cash. Based on the current cash position plus budgeted cash flows through the end of the fiscal year, this projects liquidity and ability to satisfy upcoming commitments.
3. Year-to-date revenue and expense. These KPIs measure your actual results against your budget and let you know separately if revenues and expenses are in line with expectations or within a reasonable range — say 10%.
4. Reliance ratios. To determine your organization’s reliance on a specific type of funding (for example, government grants or individual donations), divide the amount of that funding by total income.
5. Cost per dollar raised. This measure shows your return on investment in fundraising costs. Divide the total funds raised by the total fundraising expenses. You want a figure greater than “1.”
6. Cost per unit of service. Divide program expenses by the number of units of service (for example, meals served) provided in a period to shed light on that program’s financial efficiency.
7. Program efficiency ratio. The ratio assesses an organization’s mission efficiency by showing the amount of funding that goes to programs (vs. administrative or other expenses). Compute it by dividing a program’s expenses by its overall expenses. The goal is often over 75%, but this is dependent on the organization type. Note: There is debate about the accuracy of this ratio.
Don’t stop with just financial KPIs. Nonprofits can use KPIs in non-financial areas of the organization such as: Risk management and governance. Track Form 990 filing compliance (completeness and timeliness), on-time completion of board and employee training, board engagement, and board composition (constituents and skill sets).
Program and service delivery. This delves into the number of clients served, staff utilization rates, client satisfaction and volunteer hours.
Outreach and advocacy. This KPI covers the number of public events, number of volunteers, response time to inquiries and advocacy presentations/events.
Marketing and communications. Here you’ll track the number of unique website visitors, social media followers, social media engagement and your net promoter score.
Human resources. This looks at employee retention, the time it takes to fill vacancies, the timeliness of evaluations, and salaries and benefits compared to a compensation study.
Technology. This KPI studies the economic value added by technology, the total cost of ownership, and timely data entry.
Just tracking numbers won’t be meaningful for your board members. Solicit input from them. Although they might not name specific indicators, their priorities can create appropriate KPIs you can use to facilitate informed, timely decisions.
And, remember, Sechler Morgan CPAs is always here to assist you. Just reach out with your questions!