Key Financial Health Metrics for Nonprofits
Nonprofits have big hearts and even bigger missions, but managing their finances can be a challenge. With funding coming from multiple sources, it’s easy to lose track of whether it’s being effectively managed. To keep things on track, nonprofits need to get savvy with their metrics. By tracking the right metrics, nonprofits can get a handle on their revenue streams, understand what’s working, and keep their organization thriving.
Revenue & ROI
Nonprofit organizations heavily rely on funding from various sources such as donations and grants, which makes it important to track key metrics to measure the effectiveness and reliability of their revenue streams. Here are three areas nonprofits should track:
- Revenue Sources: Tracking the percentage of revenue from each source, the growth or decline of revenue streams over time, and the cost of obtaining revenue from each source can help nonprofits identify their most profitable sources and allocate resources effectively.
- Reliability and Retention Rates: Measuring donor retention rates, percentage of revenue from repeat donors, average gift amount from repeat donors, and frequency and timing of donations can help nonprofits identify trends, opportunities for growth, and potential risks.
- Fundraising ROI: To maximize resources and attract new donors, nonprofits should calculate the return on investment for their fundraising efforts. Tracking donor retention rates, donor acquisition costs, and average gift size can help evaluate fundraising effectiveness and adjust strategies accordingly.
Nonprofit organizations must carefully manage their expenses to ensure they are operating within their budget and using their resources efficiently. This involves monitoring operating and fundraising expenses, as well as overhead costs to ensure that the organization operates efficiently within its budget. Below are key strategies for effective nonprofit expense management.
- Operating expenses: Percentage of expenses allocated to each program or activity, ratio of actual revenue to budgeted revenue, cost of goods sold (if applicable), and average expense per unit of service or program output.
- Fundraising: Cost per lead, cost per donor acquisition, cost per dollar raised, average gift size, donor retention rate, and return on investment (ROI) for each fundraising campaign or activity.
- Overhead Costs for Program Profit/Loss: Percentage of overhead costs allocated to each program or activity, total overhead cost per unit of service or program output, ratio of overhead costs to direct costs, and percentage change in overhead costs over time.
Managing debt is critical for the financial stability and success of nonprofit organizations as it can impact the organization’s ability to access credit, make investments, and carry out its mission. Debt management involves strategies to control debt obligations and improve cash flow. Here are some important factors to consider when managing debt in nonprofit organizations.
- Debt-to-equity ratio: This metric compares the amount of debt a non-profit has to its equity, providing insight into its financial leverage. Nonprofits should aim to maintain a ratio of less than 50% for a healthy financial position.
- Days of cash on hand: This metric calculates the number of days a non-profit can cover its debt obligations with its current cash balance.
- Timeliness of debt payments: Review debt daily and manage it appropriately: Nonprofits should regularly review their debt and ensure they are making timely payments. This helps to avoid penalties and maintain a good credit score.
- Credit score: A non-profit’s credit score can impact its ability to secure favorable terms for loans and other types of debt.
Cash Flow Management
Managing cash flow in nonprofit organizations is a significant challenge due to the unpredictability of income streams from donations and grants. To effectively manage cash flow, nonprofits should:
- Monitor liquidity by tracking monthly cash inflow and outflow statements, forecasted cash flow projections, and liquidity ratios such as current and quick ratios. Specific metrics to track include the monthly cash inflow and outflow statements, forecasted cash flow projections for the next 6-12 months, and liquidity ratios such as current and quick ratios.
- Use the Statement of Cash Flows to track net cash provided by operating, investing, and financing activities, cash and cash equivalents at the beginning and end of the period, and non-cash investing and financing activities. Specific metrics to track include net cash provided by operating, investing, and financing activities, cash and cash equivalents at the beginning and end of the period, and non-cash investing and financing activities.
- Analyze historical data by tracking revenue and expense trends over the past 3-5 years, cash flow trends and patterns over the past 3-5 years, and projected revenue and expense forecasts for the next 1-3 years. Specific metrics to track include revenue and expense trends over the past 3-5 years, cash flow trends and patterns over the past 3-5 years, and projected revenue and expense forecasts for the next 1-3 years.
Fundraising For Donations
To ensure financial stability and success, nonprofit organizations need effective fundraising strategies and clear metrics. The following metrics can help in monitoring and optimizing fundraising efforts:
- Major donor giving trends: By tracking and analyzing the donation patterns of major donors, nonprofits can better understand and anticipate their revenue streams. This can help adjust fundraising strategies and maintain reliable revenue streams.
- Cost of obtaining revenue sources: Understanding the cost of obtaining revenue sources, such as the cost of acquiring new donors, can help nonprofits allocate their resources effectively. This ensures that they are not spending more on fundraising than the amount they are raising.
- Administrative and fundraising costs ratio: One of the key metrics for measuring fundraising efficiency is the ratio of fundraising and administrative expenses to the total amount of expenses. Maintaining these costs under 20% of expenses is considered a best practice as it ensures that the organization’s resources are being used in the most efficient way possible.
Nonprofits rely on engagement with clients and donors to increase support and potential donations. Here are some key metrics to track for client engagement:
- Client sign-ups for blogs, email, social media followers, or newsletters: Nonprofits can track the number of client sign-ups for their various communication channels to understand which platforms are most effective in engaging with clients and identify opportunities for growth and appeal.
- Client interaction from messages: Nonprofits can track the number of clicks, likes, and shares on their communication channels to determine which messages and content are most effective in engaging with clients. This can help reduce stagnation and keep clients interested and engaged.
- Engagement to attract potential donations: By tracking client engagement metrics, nonprofits can identify opportunities to increase engagement and attract potential donations. For example, if a particular type of content or communication channel is highly effective in engaging with clients, the nonprofit can focus more resources on it to increase engagement and potentially attract more donations.
Nonprofit Employee Well-being
To ensure the financial health of a nonprofit, it is crucial to not only track financial metrics but also the metrics related to employee well-being. The following metrics can help nonprofits gauge the health of their organization and prevent employee burnout:
- Employee turnover rate: A high employee turnover rate can be a sign of burnout and dissatisfaction within the organization. Monitoring this metric can help nonprofits identify issues and take action to address them.
- Average employee tenure: Tracking how long employees stay with the organization can help nonprofits identify trends in employee retention and engagement.
- Number of vacant positions: High vacancy rates can lead to increased workload and burnout for existing employees. Nonprofits should track the number of open positions to ensure that they are not understaffed.
- Workload balance: Monitoring workload balance can help nonprofits identify potential burnout risks. Nonprofits should ensure that workloads are manageable and balanced across employees.
- Employee satisfaction: Conducting regular surveys or assessments of employee satisfaction can provide insights into areas where improvements can be made to promote employee well-being and engagement.
- Professional development: Offering professional development opportunities to employees can help them feel valued and invested in the organization’s mission, reducing the likelihood of burnout.
Remember, tracking these metrics is just one piece of the puzzle. It’s important to use this data to inform decisions and adjust strategies accordingly. By staying on top of these metrics and using them to guide your nonprofit’s path forward, you’ll be well on your way to achieving your mission and making a positive impact.
Partnering with an outsourced accounting firm can also provide nonprofits with access to skilled professionals and advanced accounting tools like Sage Intacct, that provide complete visibility and transparency, allowing nonprofits to quickly see financial and operational metrics for actionable insights and smarter decisions – ensuring accurate financial reporting and informed decision-making.