Increasingly, nonprofit organizations are adapting a new financial tool from the nonprofit world. Experts call these “financial dashboards,” and they are intended to track your company’s progress towards achieving its goals. Dashboards can also be used to take stock of your nonprofit’s current situation in a certain area. Essentially, dashboards are a tool to help corporate stakeholders visualize a particular set of metrics, often called “key performance indicators” or KPIs. However, for a dashboard to be effective in guiding decision making it must include the right KPIs.
Deciding which KPIs to use
For nonprofits, managers generally choose KPIs related to revenue, expenses, budget and strategic planning. They may also want to include preparation for nonprofit audit services at required intervals. In order to find the best metrics, determine what drives your organization’s business and get feedback from those who will use the dashboard.
Another consideration is which factors can make your revenue streams more or less reliable, and which ones create variations in expenses. Each of these can be used to develop a KPI. Consider how much your organization should track each KPI, and how they should be monitored. This includes individual and program monitoring, or monitoring based on the entire company.
Let’s see how this works
Perhaps a board is running a nonprofit dedicated to the performing arts, and is concerned about the stability of your finances. Especially when times are hard, there’s often less liquidity as people stay home. At this nonprofit, the main business objectives are pricing tickets properly and getting as many people as possible to attend. For a company of this type, the dashboard might have KPIs that include an increase or decrease in operating results, the level of liquid unrestricted net assets, current debt ratio (total liabilities / total assets), and progress toward a desired number of months’ cash on hand (cash on hand + current unrestricted investments / average monthly expenses). At the same time, other KPIs should track the attendance numbers and revenue at each performance.
These KPIs will likely change over time, however. As the economic and public health conditions change, the focus will also change. A performing arts organization might have to redefine success along with its survival strategies and programs. World events have recently proven just how quickly the definition of “key” performance can change, and adaptability is more critical than ever.
Common KPIs for nonprofits
Many nonprofits choose common KPIs for their organizations. These include:
- Current ratio. What is your nonprofit’s ability to pay any debt due this year? To find out, divide current assets by current liabilities. A ratio of “1” or more generally means you can pay off those debts as they come due.
- Projected year-end cash. Can your nonprofit make good on upcoming commitments? The answer involves taking into account existing cash, plus expected revenue over the course of your fiscal year. From this, you can predict overall liquidity.
- Year-to-date revenue and expense. This KPI measures actual results compared to your budgeted results. It’ll also tell you if revenue and expenses compare favorably with both reasonable assumptions and board expectations.
- Program efficiency ratio. Is your organizational mission efficient enough? With this ratio, you’ll answer the question in terms of how much funding goes to programs as opposed to being spent on administration and overhead. This is calculated by dividing a program’s expenses by its overall expenses.
KPIs help explain organizational performance to your audience by providing easy to understand targets. These can include budgets, trends, and other benchmarks. As your nonprofit audit specialists, at Ernst Wintter and Associates we are committed to helping you share organizational success with stakeholders.