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A CFO’s Favorite KPIs for Nonprofits

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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? 

KPIs for nonprofits

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.

KPIs for nonprofits

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!

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Defining Your Nonprofit KPIs

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A key performance indicator (KPI) is a data metric you can use to gauge the overall success of your nonprofit organization. You can use KPI data to track your organization’s performance in various areas, such as finance or operations. As you collect KPI data, you’ll get a better picture of how your organization is performing now so you can make strategic decisions to improve it.

Without KPIs, your organization may be blind to trends or issues holding you back from making a bigger impact. Let’s explore how you can define your nonprofit KPIs and some examples of common metrics.

kpi

Factors to Consider When Choosing Nonprofit KPIs

The goal of KPIs is to track your organization’s performance, so it’s important to choose ones that make sense for your nonprofit. This, of course, is what makes defining nonprofit KPIs complicated.

How do you ensure you’re choosing the right KPIs for your organization?

Luckily, there are some factors to consider that can make it easier, such as choosing KPIs that:

  • Align with your mission and strategic nonprofit goals.
  • Are relevant to stakeholders, donors, board members, and grantors.
  • Have measurable data readily available.
  • Give you the ability to make data-driven decisions.

How to Define Your Nonprofit’s KPIs

There are four steps to follow when defining nonprofit KPIs:

  • Identify the core objectives of your organization
  • Perform a KPI audit
  • Consider data sources for potential KPIs
  • Create baselines and targets for your KPIs

Identify Core Objectives

Before you can define KPIs, you need to define what you hope to achieve with your nonprofit. This goes further than a mission statement or long-term impacts. Rather, think about your specific nonprofit goals.

Make a list of the most important objectives of your organization. This list will be the starting point for your KPIs, since you’ll want to choose metrics that help you reach these goals.

Complete a KPI Audit

A needs assessment and KPI audit can help you determine the most important KPIs for your organization. To perform an audit, you’ll need to consider your current data sets.

Specifically, how are you measuring nonprofit goals?

That’s the question you need to answer to find KPIs for your organization. There’s a good chance you’re already tracking some metrics, even if they’re not defined KPIs yet.

Ask yourself what information or data you need to track to see if you’re reaching your goals. This data becomes your potential KPIs.

For example, you might have a goal to increase revenue from program fees year over year. You’ll need to track revenue growth to know if you’re successful, making it a perfect KPI.

Evaluate Potential KPIs Based on Available Data

Your KPIs are only as good as the data you have access to. Without quality data to track, your KPI metrics will be unreliable.

As you consider your list of potential KPIs, look at the data you have available to measure them. Additionally, you can look at what data you don’t have and would need to measure a KPI properly.

If you have ample, usable data available to track a KPI, there’s a good chance you can use it for your organization.

Establish Baselines and Targets

Establishing your KPI baselines involves analyzing historical data to determine the starting point for your metrics.

For instance, if you’re measuring your program expense ratio, you first need to figure out what it is currently. Your current or historic ratio would then become the baseline for your new KPI.

Once you know your baseline, you can set targets for your KPI. A KPI target is simply the goal you wish to reach with the metric. You might set a target of lowering your expense ratio by a certain percentage, for example. Be sure to also set a specific timeframe for your KPI targets, which helps keep you on track.

Common Nonprofit KPIs

Your organization will likely want to track a variety of KPIs to measure–and improve–performance. Some of the most common KPI categories for nonprofits include financial, program-related, and operational metrics.

Financial KPIs

Financial KPIs are often some of the most important indicators of the health of an organization. Consider financial KPIs such as:

  • Total Revenue Growth Rate: This metric tracks the percentage increase or decrease of your total revenues over a specified timeframe.
  • Program Expense Ratio: This KPI tracks the efficiency of your programs and services by measuring the proportion of total expenses spent on programs.
  • Donor Retention Rate: A donor retention rate measures the percentage of donors who continue to support your organization over time and can be used to track donor relations and satisfaction.

Program KPIs

How can you tell if your programs and services are making an impact in your community using data? By implementing program KPIs like:

  • Number of Beneficiaries Served: This straightforward KPI quantifies your organization’s reach by measuring the total number of individuals benefiting from programs.
  • Client Satisfaction Rate: This metric measures the level of satisfaction among program participants or clients using the services your organization provides.

Operational KPIs

Operational KPIs help you determine the efficiency and effectiveness of your day-to-day operations. These KPIs are especially good tools for tracking employee and volunteer satisfaction.

  • Volunteer Retention Rate: The KPI tracks the percentage of volunteers who continue to engage with your organization over time, helping you see if your volunteer management programs retain volunteers.
  • Employee Turnover Rate: Your employee turnover rate measures the rate at which employees leave your organization. A high turnover rate could indicate unhappy employees.

kpi

Choose Your Nonprofit KPIs

Defining your nonprofit KPIs is an essential step to making strategic, data-driven decisions. You’ll want to choose KPIs that reflect your mission, are relevant to stakeholders, and have measurable data you can use to track them.

Financial KPIs, in particular, are some of the most important tracking metrics for any organization. The team at The Charity CFO can help you analyze your financial data and find usable metrics for KPIs. As financial professionals specializing in nonprofit accounting, we know nonprofits’ unique financial challenges.

Contact us today to learn more.

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