Ratios can provide crucial insights.
ABC Charity was applying for the first time to a national retailer for grant funding. As Roberta, the executive director, read through the application, she stumbled: The company wanted to know her organization’s “fundraising efficiency ratio.”
This was a problem. Roberta could write at length about the organization’s fundraising efforts and successes, as well as supply facts and figures from the previous year. But she had no ratio at her fingertips to paint a picture of the nonprofit’s fundraising efficiency in the scant space provided on the application. At her organization, “benchmarking” might as well have been something athletes do at a gym.
Like ABC Charity, nonprofits that don’t benchmark their data against themselves and other organizations are at a disadvantage. They miss out on the financial insights that benchmarking can bring. What about you?
What can benchmarking accomplish?
Benchmarking is an ongoing process of measuring an organization against expectations, past experience or industry norms for productivity and profitability. The organization then can make adjustments to improve performance in relation to those metrics.
Ideally, nonprofits develop and use both internal and external benchmarks. They first help you monitor and detect trends, based on your organization’s historical results and statistics, as well as expectations. And external benchmarks let you ascertain where your nonprofit is thriving and where it lags behind, based on data from peers. In addition, benchmarking:
- Arms you with essential information for effectively developing and implementing strategic plans, and
- Helps your organization keep a watchful eye on its financial health and determine where costs can be cut and revenues increased.
Benchmarking also gives you a way to demonstrate your nonprofit’s efficiency to stakeholders, including donors and grantors.
What should you measure?
The first step is to define what your nonprofit needs to measure. Focus on the metrics that are most critical to the success of your mission and the key indicators of the organization’s financial health and operational effectiveness. There are many useful benchmarks that can help your organization keep its eye on the prize.
The program efficiency (program service expenses / total expenses) ratio identifies the amount you spend on your primary mission, as opposed to administrative and fundraising costs. It’s widely used and of utmost importance to stakeholders.
How many dollars you collect for every dollar you spend on fundraising is calculated in the fundraising efficiency (unrestricted contributions / unrestricted fundraising expenses) ratio, the metric mentioned in the example above. The higher this ratio, the more efficient your fundraising. What qualifies as a good ratio depends on the organization’s size, its types of fundraising activities, and so on.
The operating reliance (unrestricted program service revenue / total expenses) ratio is another valuable metric. It indicates whether your nonprofit could pay all of its expenses solely from program revenues.
If you want to know how liquid your organization is, calculate its organizational liquidity (expendable net assets / total expenses) ratio. It tells you how much of the organization’s total assets are considered expendable equity vs. reserves, or what portion of your annual expenses are covered by assets that can be spent. The higher the ratio, the better the liquidity.
Also consider benchmarks such as average donor contributions, expenses per member and other ratios that measure trends for revenue, operating yield, borrowing, return on assets and similar metrics. No matter which yardsticks you choose, though, you’ll need reliable processes for collecting and reporting the data.
How can you use the information?
Comparing the nonprofit’s performance to benchmarks allows you to zero in on areas with the greatest potential for improvement. Armed with this information, you may be able to beef up performance without making significant changes in your operations. Further, when comparing against external benchmarks, you might improve performance by simply adopting best practices used by your peers.
You can obtain information on other nonprofits’ metrics from websites such as GuideStar and Charity Navigator or from commercial software. Information also may be available from state government databases and trade associations. Take steps, though, to ensure you’re comparing apples to apples — that the organizations you’re stacking up against yours are truly comparable.
Benchmarking is an insightful analytical tool that can help you evaluate your organization’s effectiveness in meeting its mission. If you’re not benchmarking already, take time out from daily operations to learn the processes involved. Your CPA can guide you through the steps or point you to helpful resources.