Numerous factors can influence a nonprofit organization’s financial position, but some are especially indicative of inner financial health and stability.
Nonprofit sector leaders should grasp the significance of the financial metrics, turn them into key performance indicators. Afterwards, they make them a focal point to maximize them will be better positioned to withstand criticism from funders, board members, and other interested parties and set a road for long-term success.
In this article, we will explore the financial metrics that will make your organization maintain its financial health, so you can easily focus on what directly impacts your nonprofit component.
Key performance indicators (KPIs) are quantitative variables that determine how effectively a company achieves a goal. KPIs are used by organizations to assist individuals at all levels to concentrate their efforts toward a common goal.
KPIs also assist nonprofits in determining if they are allocating their time, cash, and talent to the correct strategies, projects, and tools to achieve their objectives.
The financial KPIs of a nonprofit will be heavily influenced by aspects such as its revenue streams, significant spending elements, budget, and strategic goals. Identify your organization’s “business” drivers and request feedback from your audience to include the most meaningful KPIs.
This nonprofit’s KPIs would most likely need to be adjusted over time when plans, goals, or initiatives changed. What was “important” last year isn’t necessarily key in today’s fast-paced environment.
Here are some of the financial metrics you should keep an eye on if you are operating in the nonprofit sector:
The ability of an organization to respond to new possibilities and adapt to unforeseen financial restrictions is directly affected by its financial nonprofit liquidity.
The amount of months of expenses that can be covered with unrestricted cash on hand is used to determine nonprofit liquidity. Nowadays, approximately 60% of organizations are only able to cover costs for less than three months.
The appropriate level of nonprofit liquidity for an organization is determined by factors such as fund volatility, facility requirements, the economic environment, and cash management practices. However, to ensure operational efficiency, your organization should be able to cover the expenses of the following three up to six months with the available unrestricted cash,
To maintain the financial health of the organization, your nonprofit accountant should always have a close look at the cash flow of the company.
After being aware of the nonprofit liquidity, there is one more indicator that you can quickly compute: the current ratio.
The current ratio is a financial ratio that measures a nonprofit’s ability to pay short-term or one-year obligations. It illustrates to donors and analysts how an organization might utilize current assets to pay down current debt and other payables.
To make it more clear from a numerical standpoint, nonprofit organizations with a current ratio of less than 1.00 do not have enough available cash to meet their short-term obligations in case no more funding appears in the short run. On the other hand, a current ratio greater than 1.00 proves that the organization has the financial resources to stay solvent in the short term.
The expense to revenue ratio is the most important indicator for any nonprofit or for-profit organization. To generate revenue is not the only essential factor when it comes to nonprofit financial performance.
It makes no difference how many grants you receive or how much money your fundraising pulls in if you exceed your budget. It was formerly deemed admirable for nonprofits to end the year in the red zone—which implies that expenses are valuing more than the overall revenues. However, this is poor management and raises the likelihood of insolvency, unemployment, or program delays.
Your nonprofit organization should aim to achieve a positive net profit margin to ensure the good functioning of the activity.
Fundraising efficiency ratio is a cordial financial metrics for those operating in the nonprofit sector.
This ratio is frequently used by nonprofits to assess their fundraising efficiency. It is computed by dividing unrestricted contributions by fundraising expenses, which are funds spent by non-profit organizations to raise unlimited contributions.
The better the outcome, the more effective the group is at raising funds. By tracking this ratio, nonprofits can determine whether their fundraising efforts are growing more or less efficiently and re-evaluate as needed.
Another metric that can be useful in understanding your organization’s financial performance is the overall amount of unrestricted funding.
A nonprofit’s yearly budgeting process should begin with recognizing the regular unrestricted revenues received each year. Even though recurrent revenues may not always emerge from the same origins, the ability to plan for a predictable amount of money shows income reliability and aids the business in budgeting for routine costs.
Nonprofits should avoid balancing budgets with one-time donations or contributions, as well as other uncertain revenue streams.
An organization’s board members’ donations have to be a reliable source of ongoing, unrestricted income that is received each year. Organizations should aim for a board involvement rate of 100% in donations. However, organizations should be cautious not to impose contribution minimums on board members. Board members, on the other hand, should make a donation to the organization that is meaningful to them.
The program efficiency ratio is obtained by dividing an organization’s program service costs (amounts paid specifically to carry out the nonprofit organization’s mission) by all of its costs. It assesses how much an organization spends on its principal objective as opposed to administrative costs.
However, because it would be impractical to expect an organization’s entire budget to be spent directly on its purpose, predicted outcomes should be comparable to those of other non-profits with similar missions and business structures.
Understanding these financial metrics is a good beginning point for choosing standards that are more particular to your industry and organization. However, ratios aren’t the be-all and end-all, and they don’t always provide a whole picture of an NPO’s efficiency. Multiple techniques and financial studies should be utilized in tandem to create a more comprehensive picture of the financial health of nonprofit organizations.
This is where Zivo can step in: we can alleviate your workload and provide you with the resources, assistance, and real-time financial data you require to make better decisions and improve the financial performance of your organization.
Book a free consultation with Zivo if you need a Canadian professional to look over your financial metrics!