Using KPIs to Become a Trusted NPO Business Advisor
Key Performance Indicators, while frequently discussed in the for-profit sector, can be an essential aspect of a non-profit organization’s financial health and performance. KPIs are quantifiable measurements of an organization’s health or success. Determining what KPIs are important for a particular organization can be difficult, especially if that organization isn’t a franchise in a larger collection of organizations. As a CPA, you can identify KPIs for your NPO clients, explaining how they can use these indicators to their advantage. When understood, KPIs can allow NPOs to benchmark their progress against peer organizations for context about healthy and not healthy positions to be in.
Important principles to remember when helping your nonprofit clients select and identify KPIs:
- Stick to one definition or calculation for a KPI. For your client’s longitudinal analysis to be of value, they need to compare X today to X tomorrow and isolate other variables. If their “average cost per service provided” includes the related overhead costs when you calculate it today, be sure to include the same costs when you calculate it in the future.
- Set a target for the year. Back solve to determine what your client’s KPI must be month after month to hit that annual target. For example, if your client’s target “number of new memberships” is 500 for the year, remind them that they should be shooting for at least 42 new signups per month to successfully hit that goal.
- Use industry benchmarks. KPIs should be context-specific, so it is important to review how similar organizations are performing on each selected KPI. Success is not guaranteed by your client matching or exceeding others, but keeping pace with their sector will lend more credibility to their organization in the eyes of stakeholders. Work with your client to find reliable and timely benchmarking data for their nonprofit sector. At the very least, your client can always find the public copies of similar NPOs’ Form 990s and find the averages among them.
Liz Marenakos, director of product management at Blackbaud, recommends that KPIs be related to the overall mission and goal of the individual organization. Therefore, when you’re identifying KPIs for your NPO clients, keep their end goal in mind, and work with them on how to best quantify their overall mission.
Here are three basic benchmark ratios that you can recommend to your nonprofit clients, in terms of what KPIs to initially consider: program efficiency ratio, operating reliance ratio and fundraising efficiency ratio.
- Program Efficiency Ratio. This ratio is calculated as program service expenses (or money directly spent to further the nonprofit mission of the organization) divided by the NPO’s total expenses. This information is significant to donors, board members and managers because it quantifies how much the NPO is spending on its primary mission rather than administrative costs. How many cents of every dollar spent are dedicated to the NPOs goal or programs? Ideally, this ratio would be equal to one, but such success is unrealistic for most non-profit models.
- Operating Reliance Ratio. This ratio is calculated as unrestricted program revenue (or inflows from operations that can be spent at the discretion of the NPO) divided by total expenses. Calculating this number will enable managers to gauge whether or not the non-profit could pay all expenses from program revenues alone. A good outcome for this measure is one, and in some cases more than one, but most NPOs must also rely on temporarily or permanently restricted revenues.
- Fundraising Efficiency Ratio. This final ratio is calculated as unrestricted contributions (or incomes from donors who do not specify where it must be used) divided by unrestricted fundraising expenses (or how much money was spent by the NPO to collect those contributions). An important takeaway from this ratio is how many dollars the NPO can collect for every one dollar of fundraising expense—how efficient the organization is at raising money. The higher the ratio, the more efficient the fundraising efforts.
Identify these three metrics—program efficiency ratio, operating reliance ratio and fundraising efficiency ratio—as a starting point to select KPIs more specific to your client’s sector and organization. You might also recommend KPIs specific to individual campaigns within your client’s organization, so they can compare roughly how one campaign performs over another. With your help in identifying KPIs, your NPO clients will make better decisions regarding resource management, and you will reinforce your position as a trusted business advisor.
Michael McNeilly, Vice President, Accounting and Financial Institutions Markets, Sageworks Inc.
Key Performance Indicator image via Shutterstock.