At the beginning of the COVID-19 pandemic, thousands of nonprofit organizations saw a marked decline in donations and volunteer participation. Amid the uncertainty, donations dropped by up to 17 percent in April, May, and June of 2020.
Over a $50,000 quarterly campaign, that’s a drop of $8,500. You probably had to cut back vital services, deliverables, and even staffing levels.
In today’s blog from LongSchaefer, your trusted business advisors, we outline eight vital KPIs nonprofit leaders need to track and how to calculate them.
The Need for Tracking KPIs
Thankfully, the downward trend eventually reversed. Donations from 2020 ended the year two percent above 2019 numbers. Yet the decline in the middle of the year brought to light the need for nonprofits to maintain a close eye on key performance indicators (KPIs).
Sure, businesses and for-profit entities track KPIs. But nonprofit organizations should also look at these metrics for success.
KPIs represent metrics that leaders have prioritized. Companies and nonprofits update their KPIs regularly (weekly, monthly, quarterly, and yearly), and they serve two main functions.
First, KPIs provide nonprofit leaders the opportunity to keep an eye on the health of the organization from a financial standpoint. Leaders can gauge fundraising strategies and service levels based on KPIs. Second, leaders can use KPIs to help new and existing donors decide where to contribute their finite resources for best results. Donors want to support a cause they care about, but they also want to know how nonprofit organizations utilize their donations.
The remainder of this article talks about essential KPIs to track and how to calculate them.
Track These Eight Essential KPIs
There are seemingly limitless supplies of ratios you can track when it comes to finances for your nonprofit organization. However, LongSchaefer’s business advisors believe you should focus on the following ratios because they are often indicators of a nonprofit organization’s health and financial impact.
1) Current ratio. This ratio allows your organization to see your ability to pay short-term obligations. We recommend at least a 1:1 ratio for most organizations.
- Calculation: current assets/current liabilities
2) Liquidity. Your liquidity ratio allows you to understand how flexible your nonprofit organization can be in a crisis or if a new opportunity emerges. Much like personal budgeting, experts recommend having three to six months in cash reserves for liquidity in case of an emergency.
- Calculation: cash on hand/average monthly expenses
3) Administrative expenses. Donors may want to know how much of your expenses go towards administrative expenses. The reason is that higher administrative expenses mean fewer funds go towards the people your organization attempts to help. Tracking the percent of funds for administrative costs allow you to decide if you’re spending too much on these expenses. This amount should be below 20 percent.
- Calculation: management, administrative, and general expenses/total expenses
4) Program efficiency. The opposite of administrative expenses, program efficiency lets leaders and donors know how much of their donations go toward actual charitable programs. LongSchaefer recommends staying around 75 percent of your funding to put towards program efficiency.
- Calculation: program service expenses/total expenses
5) Fundraising expenses. Fundraising, of course, is necessary to bring donations into your nonprofit organization. However, fundraising expenses should not cost more than the funds you bring in from the effort. You have two ways to report fundraising expenses.
- Fundraising costs unrelated to special fundraising events. Report this on the statement of functional expenses as fundraising expenses. This figure should stay generally less than 20 cents per contribution dollar. Calculation: Funds raised/expenses
- Fundraising costs directly related to special fundraising events. Nonprofit leaders report this as a contra-revenue. This figure is often higher than 20 percent of event revenues, depending on the nature of the event. You should perform year-over-year comparisons of event revenues to event expenses to ensure events continue to serve the organization’s needs.
- Calculation: Funds raised/expenses
6) Recurring unrestricted revenues. Knowing the total amount of recurring income lets your nonprofit organization to budget more accurately each year. Think endowments, interest earned, and obligations from donors who agree to recurring payments.
- Calculation: Total of any recurring income, not including one-time grants, gifts, and contributions, calculated annually.
7) Liabilities to assets. When used correctly, debt can be helpful. However, too much debt can eventually catch up with your nonporfit organization and cause problems. Debt should not be more than 50 percent of your assets to stay on track with your debt load.
- Calculation: Total liabilities/total assets
8) Full-cost coverage. Even nonprofits need liability insurance. If your building needs repairs or equipment requires replacing, can your nonprofit organization handle the cost? Budgeting for the depreciation of the assets for their lifespans and payment of debt principal allows organizations to have cash on hand when equipment breaks down and it needs replacing.
- 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
Tracking these KPIs for your nonprofit organization is the first part of assessing the financial health of your charity. You have to start with a benchmark to help leaders, donors, and stakeholders know they are on the right track.
Begin by monitoring against your previous years’ data. This allows you to see when you grow or need to work harder in a specific area. Next, identify three to five comparable nonprofit organizations and track your KPIs against theirs on a regular basis.
IRS Form 990 for nonprofit organizations is a matter of public record, which means you can pull their reports every year and compare your organization’s performance to theirs.
Reach Out to LongSchaefer, Your Trusted Cincinnati CPAs
Key performance indicators highlight an excellent way for leaders of your nonprofit organizations to monitor the financial health of the organization and determine what areas need more focus from the board and stakeholders. We can help your nonprofit establish, understand, and track its KPIs. Give LongSchaefer a call today at 513-245-0300 for more information!