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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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Do You Need a Nonprofit CFO?

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What do many successful nonprofits have in common? Good financial management.

In nonprofits, managing your finances effectively is essential to running a sustainable organization. Not only does good financial management help keep your organization running, but it also helps bolster trust in your nonprofit.

A Chief Financial Officer (CFO) is a C-suite financial manager for your organization. But is your organization ready to bring on a CFO? Do you need one? 

In this article, we’ll look at how to determine if you need a CFO and the benefits of hiring one.

nonprofit cfo

What is the Role of a Nonprofit CFO?

The role of a CFO is all about financial management. Depending on the organization, a CFO may have many different responsibilities, including:

  • Financial planning and budgeting
  • Cash flow management
  • Regulatory compliance
  • Financial reporting to stakeholders
  • Financial analysis and strategic direction
  • Bookkeeping

Overall, a CFO provides strategic financial planning and management. This management is vital for efficient resource allocation and the long-term sustainability of a nonprofit. In addition, a CFO aligns financial decisions with the organization’s mission to help maximize the nonprofit’s impact.

Signs Your Nonprofit Needs a CFO

When does a nonprofit need a CFO? Although every nonprofit is unique, there are some tell-tale signs your nonprofit might be ready for a CFO. In most cases, you can be sure you need a CFO if you’re finding it difficult to keep up with accurate bookkeeping or your nonprofit accounting is a mess.

Here are five signs your nonprofit is ready for a CFO:

  • You’re experiencing rapid growth and financial complexity.
  • Your current system has inadequate financial reporting and analysis.
  • Your organization faces challenges in budgeting and forecasting.
  • You have regulatory compliance concerns.
  • There’s a disconnect between financial strategy and organizational goals.

Benefits of a Nonprofit CFO

A nonprofit CFO can offer a wide range of benefits to your organizaiton–from streamlining financial reporting to increasing donor trust. Most nonprofits will benefit from a CFO, especially if they’re experiencing financial challenges or sudden growth.

Five of the top benefits of hiring a nonprofit CFO include:

  • Financial Oversight and Control: A CFO reduces the amount of people involved in financial processes and provides clear, thorough financial oversight.
  • Improved Financial Decision-making: Nonprofit CFOs are financial experts with the experience to analyze your organization’s finances and make data-driven decisions.
  • Strategic Financial Planning: CFOs provide financial planning and advice that helps your organization maximize revenue while reducing expenses.
  • Risk Management and Compliance: A CFO can help your nonprofit identify risks and stay in compliance with complicated tax and financial regulations.
  • Increased Credibility: Accurate reporting, strategic financial planning, and expanded financial oversight all help your organization improve trust and credibility with stakeholders, donors, and the public.

Should You Outsource Your Nonprofit CFO?

Hiring a full-time, in-house CFO isn’t an option for every nonprofit organization. Adding another C-level employee can be expensive, especially if you need to offer a high salary and comprehensive employee benefits to attract top talent.

Luckily, there’s an easy way to get the CFO services you need without bringing on another full-time employee: fractional CFO services.

Outsourcing your CFO needs has plenty of benefits, such as:

  • Cost-effectiveness: Outsourcing your CFO allows you to access high-level financial expertise without the expense of hiring a full-time employee.
  • Access to specialized skills: Fractional nonprofit CFOs often possess specialized skills and experience in the nonprofit accounting sector, letting you tap into a pool of seasoned professionals who understand your unique challenges.
  • Flexibility and scalability: Outsourced CFO services offer flexibility and the chance to scale your services to fit your needs, such as increasing service time if you experience rapid growth.
  • Objective perspective: A third-party CFO brings a fresh perspective to your organization and lets you make financial decisions without internal biases or conflicts of interest.

nonprofit CFO

Ready to Hire a CFO?

Whether you hire in-house or outsource CFO services, bringing on a CFO can provide essential financial management and advice. Hiring a CFO can also improve financial transparency, improving the trust between your organization and donors, stakeholders, and the public. Additionally, a CFO helps your nonprofit stay compliant with the strict legal and tax regulations facing nonprofits.

One of the easiest ways to access a CFO is by outsourcing your financial management needs. Working with a fractional CFO gives you the benefits of a CFO without the added cost of hiring another full-time employee, including paying a salary and providing employee benefits. 

Companies like The Charity CFO make it easy to get the financial expertise you need without the cost of hiring in-house.

The Charity CFO provides fractional CFO and other financial management services to help your nonprofit run smoothly without the added expense of a full-time employee. We work exclusively with nonprofits so you can be sure our team of experts understands the unique financial needs of nonprofit organizations.

Schedule a call today to learn more about CFO services from the Charity CFO!

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