Increase transparency for donors with 12 financial KPIs for not-for-profits

Donors demand full transparency and accountability before committing funds to a cause. Not-for-profit finance leaders are responsible for ensuring good stewardship of donor dollars to make the biggest impact possible. Leaders need to make sure the greatest percentage of resources goes towards the mission and not operational expenses.

Now more than ever, it is important to find ways to continuously monitor the financial health of your not-for-profit organization. An analysis of not-for-profit financial health in 2018 conducted by Oliver Wyman, SeaChange Capital Partners, and GuideStar by Candid concluded that among U.S. not-for-profits:

• 7-8% are technically insolvent with liabilities exceeding assets
• 30% face potential liquidity issues with minimal cash reserves and/or short-term assets less than short-term liabilities
• 30% have lost money over the last three years
• Approximately 50% have less than one month of operating reserves

Keep in mind that this analysis was performed before the extreme financial challenges of the COVID-19 pandemic. A more recent survey of not-for-profits from July 2020 revealed that 41% of respondents had significant concerns about declining revenue.

How donors assess stewardship using performance metrics

Today, funders demand higher levels of and accountability than ever before. Donors and funders want to contribute to not-for-profits that can deliver on their missions. They don’t want to see their donations being wasted or used in less impactful ways. Not-for-profit finance leaders must monitor the financial health of their organizations and demonstrate proper stewardship and sustainability to funders.

Online analysis tools from Charity Navigator and GuideStar help donors asses the soundness of not-for-profit organizations and offer free financial reports and/or charity ratings to help explore not-for-profits before giving.

Not-for-profits need to proactively contribute information to their online profiles. Leverage your financial data for better insights to have a complete and transparent profile. This will help establish the credibility of your organization. Your organization can also earn a high Charity Navigator Encompass Rating as well as the GuideStar Gold or Platinum Seals of Transparency by showing good financial stewardship and high mission impact.

Let’s explore the information available to donors through each organization:

12 key metrics to help keep a watchful eye on not-for-profit health

Stakeholders will want to monitor financial health and understand the organization. They want to keep an eye on the organization’s cash flow/sustainability, funding model/revenue, expenses/efficiency, and debt management. Here are 12 key metrics to monitor the financial health of your not-for-profit:

Cash flow and sustainability

• Cash flow from operations: A positive cash flow from operations shows an organization can cover their costs of unrestricted operations and programming
• Liquidity: cash on hand divided by average monthly expenses
• Working Capital ratio/reserve ratio: expendable net assets divided by daily total expenses

On average, not-for-profit organizations should aim for a liquidity or reserve ratio of three to six months. These metrics help you assess how well you can pay the bills and how long your organization could sustain its services if revenue were to decline.

Funding model and revenue

• Revenue composition: What sources of revenue has your organization secured and how much is unrestricted/available for use?
• Revenue reliability: Can you count on the revenue recurring? Does your organization have a good trend of bringing in a certain amount of revenue? You can study historical trends to find out.

Expenses and efficiency

• Percentage spent on programs: program service expenses divided by total expenses
• Program expense growth: compares program expenses over time. Organizations that consistently grow program expenses (and the revenue to support them) reassure donors that they have a greater impact on their missions
• Administrative expense percentage: administrative expenses divided by total expenses
• Fundraising expense percentage: fundraising expenses divided by total expenses
• Percentage spent on fundraising: total fundraising expenses divided by contributions

Most donors prefer giving to charities that can keep administrative and fundraising expenses low, allowing for most donations to be allocated towards programs. The standard benchmark set for fundraising and administrative expenses is 35%.

Debt management

• Liabilities as a percent of total assets: Organizations with 50% or more on this score have trouble managing debt.
• Liability composition: What types of debt has your organization incurred and how is it structured?

Executives and board members from your organization should always be aware of these key financial metrics. Your chief financial leader should be reviewing these daily, and ideally in an easy-to-visualize dashboard that can be quickly shared if the trend demands action.

Monitor your metrics

The pandemic has caused needs to be high and resources have become more limited. In turn, donors are paying closer attention to stewardship, in order to make difficult funding decisions. At the same time, greater pressure on service delivery combined with declining or possibly flat contributions mean that not-for-profit finance leaders must track financial indicators closely. Visually presented key metrics that are powered by real-time data can help key stakeholders monitor the financial health of their not-for-profit and prove measures of stewardship to their donors.

The increasing demand for transparency and accountability from donors is compelling today’s not-for-profits to seek ways to both produce and demonstrate successful outcomes.