BenchmarkingIf your not-for-profit sets performance goals — and most organizations should — then you need benchmarks to measure your performance. Staffers and your board may not enthusiastically embrace benchmarking at first. But if you can show its value and make the process easy, you should be able to get everyone on board.

Mission-Focused Work

Employees and board members may think benchmarking is more appropriate for profit-driven organizations than for mission-focused work. They might argue that mere numbers can’t capture the true impact of a program or an organization or that every nonprofit is unique, making useful comparisons impossible.

However, funders increasingly rely on benchmarks to assess effectiveness when making financial decisions. Moreover, benchmarking provides critical information when developing and executing strategic plans. It can help you identify strengths, weaknesses and opportunities. And benchmarking allows you to monitor your financial health.

Metrics That Matter

For benchmarking to be effective, you have to choose the right metrics — those vital to meeting your mission. They could relate to a variety of areas, from fundraising (for example, dollars raised or average gift amount) to online presence (number of followers or retweets).
Many nonprofits, though, begin by focusing on these financial metrics:

Program efficiency (program expenses / total expenses). Program efficiency measures the amount you spend on your mission vs. administrative expenses. The ideal ratio is 1:1, but because this is so unlikely, you should benchmark your score against those of your peers.
Organizational liquidity (expendable net assets / total expenses). This metric considers the percentage of your annual expenses that can be covered by your expendable equity, as opposed to reserves or restricted assets. Higher scores indicate greater liquidity.

Operating reliance (unrestricted program revenue / total expenses). This shows whether you could pay all your expenses solely from your program revenues. A figure close to 1:1 is very strong. But, again, comparing it with your peers’ ratios will tell you if you’re on solid ground.

Final Step

There’s no point benchmarking if your nonprofit isn’t going to take the final step of leveraging its newfound knowledge to bolster performance. Conduct a root-cause analysis of the areas with the lowest scores to get to the bottom of the problems. Then develop short- and long-term solutions.
Also consider arranging interviews or less formal discussions with representatives from peer or other organizations that boast high scores in areas where you fall short. You can use these to pick their brain for advice, short cuts or best practices that your organization can adopt (and adapt, if needed).

We Can Help

If your nonprofit is struggling to achieve its mission, contact us. We can help you and your staffers isolate critical objectives and find appropriate benchmarks that will enable you to evaluate performance.

© 2023

 

Helen Weeber, CPA

Helen Weeber, CPA
Director, HW Nonprofit Advisors
helen.weeber@hwco.cpa

 

Enjoy this article? Here are others you may like:
Nonprofits: 4 Ratios Worth Watching
Put an Advisory Board to Work on Your Nonprofit’s Challenges
Commit to Continually Improve Your Nonprofit’s Accounting Processes