Stack up with benchmarking – Ratios can provide crucial insights
ABC Charity was applying for the first time to a national retailer for grant funding. As Roberta, the executive director, read through the application, she stumbled: The company wanted to know her organization’s “fundraising efficiency ratio.”
This was a problem. Roberta could write at length about the organization’s fundraising efforts and successes, as well as supply facts and figures from the previous year. But she had no ratio at her fingertips to paint a picture of the nonprofit’s fundraising efficiency in the scant space provided on the application. At her organization, “benchmarking” might as well have been something athletes do at a gym.
Like ABC Charity, nonprofits that don’t benchmark their data against themselves and other organizations are at a disadvantage. They miss out on the financial insights that benchmarking can bring. What about you?
What can benchmarking accomplish?
Benchmarking is an ongoing process of measuring an organization against expectations, past experience or industry norms for productivity and profitability. The organization then can make adjustments to improve performance in relation to those metrics.
Ideally, nonprofits develop and use both internal and external benchmarks. The first help you monitor and detect trends, based on your organization’s historical results and statistics, as well as expectations. And external benchmarks let you ascertain where your nonprofit is thriving and where it lags behind, based on data from peers. In addition, benchmarking:
- Arms you with essential information for effectively developing and implementing strategic plans, and
- Helps your organization keep a watchful eye on its financial health and determine where costs can be cut and revenues increased.
Benchmarking also gives you a way to demonstrate your nonprofit’s efficiency to stakeholders, including donors and grantors.
What should you measure?
Focus on the metrics that are most critical to the success of your mission and the key indicators of the organization’s financial health and operational effectiveness.
Here are a few useful examples:
- Program efficiency (program service expenses / total expenses) ratio identifies the amount you spend on your primary mission, as opposed to administrative and fundraising costs. It’s widely used and of utmost importance to stakeholders.
- Fundraising efficiency – How many dollars you collect for every dollar you spend on fundraising is calculated in the fundraising efficiency . The higher this ratio, the more efficient your fundraising. What qualifies as a good ratio depends on the organization’s size, its types of fundraising activities, and so on.
- Operating reliance – It indicates whether your nonprofit could pay all of its expenses solely from program revenues.
- Organizational liquidity– If you want to know how liquid your organization is, calculate its organizational liquidity (expendable net assets / total expenses) ratio. It tells you how much of the organization’s total assets is considered expendable equity vs. reserves, or what portion of your annual expenses are covered by assets that can be spent. The higher the ratio, the better the liquidity.
Also consider benchmarks such as average donor contributions, expenses per member and other ratios that measure trends for revenue, operating yield, borrowing, return on assets and similar metrics. No matter which yardsticks you choose, though, you’ll need reliable processes for collecting and reporting the data.
How can you use the information?
Comparing the nonprofit’s performance to benchmarks allows you to zero in on areas with the greatest potential for improvement. Armed with this information, you may be able to beef up performance without making significant changes in your operations. Further, when comparing against external benchmarks, you might improve performance by simply adopting best practices used by your peers.
You can obtain information on other nonprofits’ metrics from websites such as GuideStar and Charity Navigator. Information also may be available from state government databases and trade associations. Take steps, though, to ensure you’re comparing apples to apples — that the organizations you’re stacking up against yours are truly comparable. AAF provides clients with industry benchmarking results and clear explanations as part of our service as a trusted advisor.
AAF clients know that benchmarking is an insightful analytical tool that can help you evaluate your organization’s effectiveness in meeting its mission. As Peter Gerondeau, CFO of The Dimock Center says: “…they also compare our organization against similar organizations highlighting potential areas for review and improvement”. If you’re not benchmarking already, take the time to learn the processes involved. We can guide you through the steps and point you to helpful resources.