One of the key responsibilities of the management team and the board of directors of a not-for-profit organization (“NPO”) is to regularly monitor if the NPO is in good financial shape and able to meet its long-term goals. The best way to monitor the financial health of your NPO is to use key performance indicators (“KPIs”).
KPIs are quantifiable measures that evaluate the success of an organization in achieving its key business objectives. In other words, they help you determine if you are on track to meeting your goals. Good KPIs have the following attributes:
- Clear - simple, easily defined and calculated.
- Quantifiable - clear and concise attributes that make measurement possible.
- Actionable - the information is used to adapt and ensure the goals are met.
- Timely - measured at the right frequency for good decision making.
We will focus on financial KPIs and how they can be used to monitor the financial health of your NPO. Because each NPO is unique and will have different funding sources, programs, and objectives, you should carefully consider which KPIs to use for your organization.
Below, we discuss 5 financial KPIs that are commonly used by NPOs to track their financial health.
KPI #1 - Gross receipts period over period
In order for an NPO to effectively deliver its programs, it needs to continuously take in donations.
To calculate this KPI, divide the gross receipts from the current period by the gross receipts from the prior period and multiply by 100. You can further refine the calculation by changing the length of the periods (i.e. one year or one month) or breaking down the gross receipts into the different sources.
This KPI is important because it allows you to see patterns in the amount and timing of your donations. The information can then be used to determine when the NPO must focus on certain fundraising activities to ensure it maintains enough donations.
You will generally want to see this percentage as high as possible as that shows an increase in donations which helps your NPO deliver more of its programs.
KPI #2 - Donor retention
Getting new donors can be more difficult than cultivating existing relationships. Recurring donations are very valuable to an NPO because they are more consistent and predictable.
To calculate this KPI, divide the number of donors in the current period who made contributions in the prior period by the total number of donors in the prior period and multiply by 100. To effectively use this KPI you’ll need to check that your NPO is able to track its donations by the donor.
This KPI is important because fundraising from existing donors is normally more effective than trying to acquire new donors. You already have relationships with these donors and they have shown that they believe in the NPO’s goals. You can use this KPI to check how effectively you are fundraising from your regular donors.
You will want to see a donor retention rate as close to 100% as possible. This shows the NPO is effective at fundraising from its existing donors and maintaining those relationships.
KPI #3 - Cash runway
Your cash runway is an estimate of how much time your money will last if you didn’t take in any new donations and your spending did not change.
We will keep it simple by assuming all of your donations are unrestricted. If you have restricted donations, the calculation becomes a bit more complicated. For our example of unrestricted donations, you can calculate this KPI by dividing your current liquid net assets by the average monthly spending of the NPO. The result will be the number of months your organization’s money will last with its current cash reserve.
This KPI is important because it will let you see how long your NPO can continue operations with its current cash reserve. This is important for NPOs that do not receive consistent funding throughout the year.
The right number of months will depend on the objectives and operations of your NPO. Having too much cash is just as bad as not having enough cash because it means that the cash is just sitting there and not being used to fund the NPO’s programs. Generally, you will want to ensure the current cash can cover your operations until the next major fundraising cycle plus a buffer of 3 to 6 months.
KPI #4 - Program efficiency
While donors realize that a reasonable amount of administration is required they generally want as much as possible of their contribution to go towards the NPO’s programs.
To calculate this KPI, divide the dollar value of program expenditures to the dollar value of total expenditures and multiply by 100.
This KPI is important because the primary goal of any NPO is to effectively deliver its programs. To do this the NPO must use as much of the donations received as possible to fund the program activity instead of funding administrative costs.
Finding the right percentage for your NPO is not easy. There are many different factors that can influence the NPO’s program efficiency. Having the lowest number possible is not always the best because it can be expensive to find the right people, implement good processes and controls, and produce good reporting for stakeholders. All of these are considered administrative costs but are vital to effectively deliver your NPO’s programs. Generally, you’ll want to make sure your program efficiency percentage is at least 65%.
KPI #5 - Budget variance
Every year an NPO should be preparing an annual budget. Careful thought goes into this budget to ensure that the funds are allocated to the right places. This budget is the financial plan for the year.
To calculate this KPI, divide the actual revenue or expense by the budgeted revenue or expense and multiply by 100. You should do this for each major section of your budget.
This KPI is important because it helps identify which areas the NPO is over or under budget. By tracking it regularly during the year you can quickly see where problems may arise and then focus on those areas. For example, if you are going over budget on your administrative costs at the end of Q2 you can look into what is happening and then adjust that for the second half of the year so there are no surprises at year end.
You will want to be as close to the budgeted number as possible because that means you have delivered on the financial plan for the year. Therefore, you will want the budget variance to be as close to zero as possible.
Using technology to better manage your KPIs
NPOs that regularly measure and use their KPIs are able to make better decisions. The first step to having collecting good data is by having a robust bookkeeping process and using a customer relationship management software like Keela.
NPOs that regularly measure and use their KPIs are able to make better decisions. The first step to collecting good data for your KPI is having a robust bookkeeping process. One way that you can use technology to help your bookkeeping process is by using cloud-based accounting software. This allows for better integration between applications that can automatically calculate and report on your KPIs.
An example is Microsoft’s Power BI tool, which can integrate with cloud-based accounting software to automatically calculate and display KPIs on a daily basis. The reporting is flexible and allows you to drill into data as needed. Another benefit of using cloud-based systems is convenience - especially if your management team or the board of directors are remotely located during meetings. The cloud-based system makes it easy to share information and access it from anywhere with an internet connection. This allows everyone to see and understand the KPIs, and make better decisions.
The above KPIs are only a small sample of the potential KPIs that an NPO may find useful to track its financial health. Make sure to keep your KPIs focused and simple so you don’t get bogged down in complex or time-consuming calculations. Where possible, use technology such as cloud-based systems to reduce the time and effort needed to calculate and report on your KPIs. No matter what you decide on, remember that the best KPIs are ones that you will actually use to help monitor and improve the financial health of your NPO.
Having a robust bookkeeping process is the first step to having useful KPIs that your organization can use for decision making. At Enkel, we help not-for-profit organizations streamline their bookkeeping process, and provide them with accurate financial data. Contact us for a free 30-minute consultation to see how we can help you with your organization’s bookkeeping process and more!