Is your not-for-profit organization committed to benchmarking, or do you think it makes more sense for businesses? Experts in California nonprofit audit services warn that if you don’t benchmark, you’re missing out on the benefits it provides charities and other nonprofits, such as attracting funders for obtaining long-term sustainability.
Here’s how benchmarking can help your not-for-profit organization, and how you can start:
The true impact of benchmarking
Your not-for-profit organization has stakeholders beyond your staff and board. They might not think benchmarking captures the true impact of your programs, but other stakeholders think otherwise. For example, funders use benchmarks to access the effectiveness of their funding decisions.
Benchmarking helps your organization keep an eye on its financial health by identifying strengths, weaknesses, and opportunities. This is critical information for developing and executing strategic plans to expand your outreach and increase funding.
Choosing the right benchmark metrics
When you’re ready to begin benchmarking, it’s critical to select the right metrics for your organization. They could cover a variety of areas, from fundraising (e.g. dollars raised or average gift amount) to online presence (e.g. number of followers or retweets) to volunteering (e.g. number of corporate volunteers).
Many nonprofits begin benchmarking by focusing on:
Program Efficiency (program expenses / total expenses)
This is a popular metric among funders. It measures the amount you spend on your mission vs. what you spend on administrative expenses. The ideal ratio is 1:1, but because this is unlikely, benchmarking your score against similar not-for-profit organizations is necessary to evaluate your efficiency. You might find that your organization is far less efficient, which tells funders that their money will have more of an impact with another organization.
Organizational Liquidity (expendable net assets / total expenses)
This metric shows the percentage of annual expenses that can be covered by expendable equity (as opposed to reserves or restricted assets). Higher scores mean greater liquidity.
Operating Reliance (unrestricted program revenue / total expenses)
This metric shows whether you could cover all your expenses only with program revenues. A ratio of 1:1 is strong, but comparing it with peer ratios is the true measure of financial stability.
Whichever metrics you use, you must have access to the necessary data. Nonprofit rating sites such as Charity Navigator and GuideStar can calculate scores for some of the most common metrics and provide data on other, comparable organizations. You might also look into trade association and government databases (e.g. the IRS’s Tax-Exempt Organization Search) for information, including audited financial statements.
Get started with an analysis
Start benchmarking by analyzing your organization’s areas with the lowest metric scores to get to the root of the problems. Then develop short- and long-term solutions to get your metrics into favorable positions.
If you have questions or would like expert help, contact us at Ernst Wintter & Associates LLP for California nonprofit audit services. We’ll help you choose the right benchmarks, collect the right data, and develop improvement plans.