8 Non-Profit KPIs you should be tracking and why

It is also important for boards to understand that resource providers monitor the organization’s ratios. Management should anticipate and be prepared to address the concerns of donors and grantor agencies regarding the organization’s financial position. Financial ratios can be useful tools for those in charge of monitoring a not-for-profit’s financial position and operations. Ratios are not a goal in themselves, however, and care should be taken in their interpretation.

The cash reserves ratio, sometimes referred to as the defensive interval ratio, measures the adequacy of an organization’s resources that are available to support its mission. The ratio compares total program expenses to total expenses in order to determine how much of the overall expense of the program was used for administration and how efficient the program was in spending its budget. You can calculate your Program Efficiency ratio easily by dividing the total program expenses by the total expenses.

1. Often, it’s watchdog organizations like Charity Navigator that use these ratios to make sure nonprofit organizations are doing their due diligence.
2. In reality, you need to look at the specifics of your organization, its needs and how best to balance its resources between program activities and administrative support (including fundraising).
3. We analyze organizations’ governance practices and financial health to help donors find transparent, efficient, and sustainable charities.
4. Then take the total revenue figure and divide it by the total expense figure.
5. The Administrative Expense Ratio (AER) measures the percentage of total expenses directly related to administrative activities.

The current ratio measures an organization’s ability to pay short-term obligations. It is calculated using the nonprofit’s current assets divided by its current liabilities. Current ratios between 0.5 and 1.0 indicate the nonprofit may have difficulty meeting its obligations. This ratio measures how effectively the NPOs could pay all expenses from program revenues alone, by dividing unrestricted program revenue by total expenses. However, restricted revenues are sometimes relied on by many NPOs which affects the outcome of this calculation.

Similar to the FER, the AER is calculated by dividing administrative expenses by total expenses. The Cost-To-Raise-A-Dollar (CRD) or Fundraising Efficiency Ratio metric measures how effectively money is raised by comparing costs with revenue. Calculating this metric for different income sources helps the organization determine the most cost-effective way to raise funds. Since a bank’s operating expenses are in the numerator and its revenue is in the denominator, a lower efficiency ratio means that a bank is operating better. One benefit of trend analysis is that it identifies deviations in the ratios, such as the unusually high liquidity values in Year 1. A 46% decline in cash from Year 1 to Year 2 would almost certainly merit investigation.

Traditional Accounting

The Debt-To-Equity (D/E) ratio measures how much debt a nonprofit has compared to its assets. Measuring this metric over time indicates how well the organization is positioned over the long term with respect to its liabilities. Among the operating ratios, the savings indicator exhibits the greatest year-to-year fluctuation. Although negative savings (deficits) are not sustainable in the long run, not-for-profits may experience occasional deficits.

What is an Efficiency Ratio?

This, in turn, shrinks the working capital funding gap or working capital cycle. After crunching the numbers, it is good to compare efficiency ratios with peer companies in the industry program efficiency ratio to get an insight into how the company performs relative to the competition. These KPIs can help measure the effectiveness of their campaigns and the impact they have on society.

By setting up and tracking KPIs, non-profits can demonstrate their impact and accountability to their stakeholders. Tracking Social Media Engagement is an essential KPI for non-profits to measure their performance in attracting more donors. Social Media Engagement refers to the degree of interaction users have with your content on social media platforms. We analyze organizations’ governance practices and financial health to help donors find transparent, efficient, and sustainable charities. If the efficiency ratio increases, it means a bank’s expenses are increasing or its revenues are decreasing.

And spending dollars on fundraising is another integral part of what you do. It’s how you motivate donors to support your cause, and it’s what keeps your organization sustainable. Overall, there is a high correlation between efficiency ratios and profitability ratios. When companies efficiently allocate their resources, they become profitable. Therefore, if the efficiency ratios have been improved over time, this could indicate that the company has become more profitable.

Board members without substantial accounting expertise are even less equipped to interpret not-for-profit financial reports. If this is the first time you’re reviewing your own nonprofit financial ratios, you can use the calculations you found here as a starting point for your organization. However, when you’re able to interpret these numbers and use them to strengthen your financial strategy, your nonprofit can become more financially healthy and leverage additional funds for faster growth. At nonprofits, however, knowing your burn rate is essential to ensure you’re not burning through your resources too quickly and depleting your reserves. As nonprofit revenue generation tends to be highly seasonal, this is an important metric to watch.

At enSYNC, we want to empower associations and nonprofits to make well-educated decisions. If you want our industry knowledge (and other free guides) sent directly to your inbox, fill out the form below. The Cost-Per-Donor Acquisition (CPDA) measures how much https://simple-accounting.org/ it costs to acquire a new donor. Revenue by source breaks down income to reveal where the highest sources of revenue come from. This can help the nonprofit allocate promotional resources to the source that provides the most value to the organization.

Can Nonprofits Charge for Services or Goods?

Total revenue measures income received from all sources, including donations, government grants, membership fees, corporate sponsorships, and merchandise sales. It is based on information and assumptions provided by you regarding your goals, expectations and financial situation. The calculations do not infer that the company assumes any fiduciary duties. The calculations provided should not be construed as financial, legal or tax advice.

The savings indicator ratio measures your nonprofit’s ability to add to its net assets. This nonprofit financial ratio allows nonprofits to see whether they’re generally putting their financial overages in their reserve fund, or if they have a tendency to spend it. Essentially, this ratio compares your organization’s assets to its liabilities. It allows you to quickly see if you have enough assets to cover your liabilities as well as extra, to expand your capacity and further address your mission. This idea plays a key role in your nonprofit’s budgeting process, ensuring you have the working capital to cover your program costs. When it comes to the financial management of a nonprofit organization, nonprofit ratios (or key performance indicators) can be a helpful tool to measure how your organization is doing.

This provides a large-scale view of the return on investment for your organization’s fundraising campaigns. The operating reserve ratio measures how long your nonprofit’s operating expenses would be covered just by the amount you have in your reserves. Nonprofit financial ratios are calculations used to measure your organization’s financial state and to determine the financial health of your organization.

While the board members should be reported on the Form 990, the members may have changed since then. The charity’s website will typically reflect the most current list of members. Nonprofits should have an online presence so that the public can easily find information about their programs, activities, and leadership.

Financial Ratios

This process indicates that the organization has a documented policy that it follows each year. The policy should indicate that an objective and independent review process of the CEO’s compensation has been conducted, including benchmarking against comparable organizations. We check to ensure that the charity has reported its process for determining the CEO’s pay on its Form 990. Our analysts check the charity’s website to see if the organization has a donor privacy policy and if its contents are sufficient to protect the donor’s information. We review the charity’s most recent Forms 990 to see if the charity has reported any diversion of assets.

Understanding how to leverage a little data can go a long way in terms of value. There are several key performance indicators (KPIs) that can tell you a lot about your organization’s efficiency and financial health. While your program efficiency ratio is one of them, it is only a partial measure of your functional expenses. To follow through on your stated mission and purpose and truly use your dollars effectively, you have to look at the best way to balance program expenses and overhead. A program efficiency ratio is calculated by dividing an organization’s program expenses by their total expenses.

In this case, the organization had undertaken a capital campaign in Year 1, resulting in high cash balances, which were expended for long-term assets in Year 2. If you explored the calculators on this page, you probably have a list of ratios now in front of you regarding your nonprofit’s financial health. However, it can be challenging to understand exactly what you should do with all of these numbers. Essentially, when this nonprofit financial ratio results in the negatives, it means the organization is actually losing money during its fundraising activities.