Financial KPIs: What Every Nonprofit Needs to Know
I hope I’m not the first person to break this to you, but there’s a chance your nonprofit organization could fail. The odds aren’t as bleak as some people claim, and the survival rate isn’t as bad as it is in the for-profit world, but nonprofits do go under. It happens. And when it happens, people in need go unserved, worthy causes go unsupported, and missions go unrealized.
Why do nonprofits fail? It isn’t necessarily related to the power of their visions or the efforts of their teams. Research conducted by Concord Leadership Group reveals that approximately half of all nonprofits lack a formal strategic plan.
In other words, for every organization meaningfully setting goals and tracking performance, there’s another simply hoping for the best.
If your organization falls into that latter category, there’s a better way to manage its resources, keep track of its outcomes, and ensure its longevity. On the other hand, if you already have a detailed strategic plan in place, you still need to continually optimize your operations and maximize your impact. How? The answer lies in key performance indicators (KPIs).
What Are KPIs?
KPIs are exactly what they sound like: essential signals of your nonprofit’s success. Any data point that indicates whether your organization is meeting its mission can be a KPI.
Common examples of KPIs nonprofits monitor include…
- number of individuals or families served
- number of volunteers or members
- number of items or services (e.g. beds, meals, classrooms, volunteer hours, etc.) provided in a given time period
- dollars raised in a given time period (e.g. per month, quarter, or year)
- total number of donors
- number of annual donors
- percentage of recurring donations
KPIs are particularly important for monitoring an organization’s financial health. Data such as cash flow, donor retention rate, donor growth rate, program efficiency, and program ROI tell you not only how you’re doing now, but whether your organization is well-positioned for the future or in need of a shift in direction.
Which Financial KPIs Should You Track?
The list above contains some valuable nonprofit KPIs, but it isn’t exhaustive. Depending on your organization’s size, structure, history, location, leadership, and other factors, you may need to track only a few data points or many, many more than the examples enumerated here.
Whatever form they take, your KPIs should provide managers, senior management, and your board with the insight they need to successfully run the organization. That means you need to track the right KPIs and present the data in a format that resonates with all stakeholders.
When choosing KPIs to track, identify metrics that align with your organization’s mission and strategic plan. Keep in mind that KPIs need to show both a) how your efforts (i.e. your programs or services) meet your goals, and b) how deviations from these metrics impact your organization’s financial performance.
KPIs should, in order of importance, allow your organization to…
- remain financially viable,
- enhance its ability to achieve goals necessary to the overall mission,
- better benefit the community or members it serves.
With these objectives in mind, here are a few of our recommended KPIs for nonprofit financial managers:
- budget variance—consolidated for the organization as a whole, and for each program and/or grant)
- cash basis summaries (in trend graph form)—for cash balances in the bank, and cash balances by contract, grant, program, etc.
- accounts payable balances
- accounts receivable balances
How to Capture KPIs Effectively
To accurately capture and analyze this data, your organization needs to institute the right practices and procedures. When you do capture KPIs effectively, you can use those findings to show your board (and understand for yourself) how to best operate and perform according to what is and isn’t working in your organization.
Visibility into operations requires complete knowledge of your bookkeeping and accounting processes. When looking at receivables, for instance, it’s important to consider aging: Is money hitting the bank when it’s supposed to? Are the grant dollars coming in every month, on time?
Some KPIs entail more analysis than others. You’ll need to think of all possible dimensions to your data, as well as the confounding factors. You’ll also need to measure assumptions against real performance, such as by comparing trend lines to actual numbers. If your trend line shows dips and spikes of cash, for example, can you explain why each spike or dip occurred?
If this all sounds like a lot of work, that’s because it can be. Remember, 50% of nonprofits simply don’t do it—they’re underequipped, overwhelmed, or stretched too thin. Fortunately, you don’t have to choose between spending time on KPIs and furthering your organization’s mission. An experienced nonprofit bookkeeping and accounting partner can help you sufficiently and cost-effectively establish, track, and report on KPIs.