A CFO’s Favorite KPIs for Nonprofits
No time to read this article now? Download it for later.
[button link=”https://go.thecharitycfo.com/l/995872/2024-09-03/537cq” color=”orange” newwindow=”yes”] Download the Article[/button]
An organization’s Key Performance Indicators (KPIs) provide a clear measure of how well the nonprofit is maintaining financial health while working toward its mission. Many nonprofits must balance their goals with limited resources or strict compliance regulations. To achieve this balance, you need to track metrics that give you a clear view of your current financial health to make informed financial decisions.
Unsure of which KPIs you should be tracking for your nonprofit?
This article highlights five essential financial KPIs every nonprofit should monitor to ensure they’re effectively managing resources, staying accountable to stakeholders, and driving their mission forward.
The Best Nonprofit KPIs
When defining your nonprofit KPIs, you’ll need to consider what information is most important to your organization. The right KPIs can aid in data-based decision-making and lead to a more thorough picture of the health and stability of your nonprofit.
There are five nonprofit KPIs every nonprofit organization should be tracking, including:
- Days of Cash on Hand
- How Much of Your Revenue is Unrestricted
- Operating Reserve
- Diversification of Revenue
- Current Ratio
Days of Cash on Hand
Formula: unrestricted cash on hand / budgeted annual expenses) x 365
Days of cash on hand is a key financial metric that you can use to gauge your organization’s ability to continue operations with existing cash balances.
This KPI tells you the number of days your organization can continue to pay its operating expenses with the current amount of cash available.
Days of cash on hand is an important metric for measuring your organization’s liquidity and financial stability. A higher number of days suggests a stronger financial position. With a strong financial position, your organization has the flexibility to:
- Navigate unforeseen challenges
- Reach nonprofit goals
- Ensure the continuity of its mission-driven work
Pro Tip: We advise our clients to have at least 30 days of cash on hand. Closer to 90 is ideal.
How Much of Your Revenue is Unrestricted
Formula: 1 – (restricted revenue + reimbursement grant revenue) / total revenue
Having access to unrestricted revenue is especially important when you need to cover unexpected expenses or immediate needs of the organization. Tracking your nonprofit’s unrestricted revenue can give you a clearer image of the ratio of your restricted to unrestricted funds.
To calculate this KPI, you’ll divide unrestricted revenue by your total revenue. For example, your unrestricted revenue is $60,000 and your total revenue is $100,000. This means 60% of your revenue is unrestricted.
Why should you use this KPI? With more unrestricted funds, your nonprofit can more easily:
- Cover operational costs
- Invest in new projects
- Adapt to unexpected circumstances
By tracking your percentage of unrestricted funds, you get a better idea of your organization’s financial flexibility.
Pro Tip: We recommend that at least 50% of an organization’s total revenue come from unrestricted sources.
Operating Reserve
Formula: (total net assets – restricted net assets – designated net assets – fixed assets + debt on fixed assets) / budgeted annual expenses
The operating reserve KPI lets you track your organization’s funds set aside to cover unexpected expenses or revenue shortfalls. Knowing your operating reserve makes it easier to ensure your organization can continue functioning even in challenging times of low revenue or reduced donations.
Operating reserves help nonprofits maintain financial stability, especially in times of uncertainty. Tracking your reserves gives you insights into whether or not your organization is saving enough in reserve for unexpected expenses or low revenue.
By having a cushion to fall back on, your organization can manage cash flow disruptions, respond to emergencies, and sustain operations without compromising its mission.
Pro Tip: We recommend that an organization maintain at least 25% of its annual budget in operating reserves.
Diversification of Revenue
Formula: Revenue from Each Source / Total Revenue
Revenue diversification refers to the variety of income sources that your nonprofit relies on. Drawing from multiple revenue streams–including donations, grants, service fees, and investments–helps your organization build a more balanced and sustainable financial foundation.
Tracking your revenue diversification can help you see whether or not your nonprofit is relying too heavily on one revenue stream. For example, an organization that relies mostly on donations may want to make changes to reduce its dependency on that single revenue stream to mitigate financial risk.
Pro Tip: We recommend that no more than 20% of an organization’s revenue come from the same funder or customer.
Current Ratio
Formula: Current Assets / Current Liabilities
Your organization’s current ratio is a financial metric that measures its ability to meet short-term obligations using short-term assets. This ratio compares assets that can be quickly converted to cash, such as cash itself, receivables, and short-term investments, against liabilities that are due within a year. A higher ratio indicates your organization has more than enough assets to cover immediate financial responsibilities.
You can use this measure to assess your nonprofit’s short-term financial health and liquidity. If you find you consistently have a lower current ratio, you may need to assess your current expenses and tweak your budget to better cover short-term liabilities.
Pro Tip: We recommend that an organization maintain a current ratio of at least 1, indicating that it can cover its short-term obligations with its most liquid assets.
Track the Right Nonprofit KPIs for the Best Results!
These five KPIs are some of the most important for tracking your organization’s financial health. Using these key indicators can help your leadership team make more informed decisions regarding budgeting, spending, and fundraising for a more financially well-rounded organization.
To get the most out of KPI tracking, however, you need to put systems in place to help you track and analyze your results. Using technology, for example, can make it easy to track metrics and spot trends in your financial data.
You can also work with a trusted nonprofit accounting team like the Charity CFO for in-depth financial analysis. We provide financial support and guidance to nonprofit leaders like you to help you make more informed, data-driven decisions.
Get in touch today to learn how we can help you improve your organization’s financial health!
No time to read this article now? Download it for later.
[button link=”https://go.thecharitycfo.com/l/995872/2024-09-03/537cq” color=”orange” newwindow=”yes”] Download the Article[/button]
