Nonprofits that incorporate financial benchmarks into their operations are better at anticipating negative financial trends and may even see revenues climb, expenses drop and efficiencies improve. The word “benchmark” may strike some as organizational lingo, but the practice of benchmarking often proves quite valuable for nonprofits.
What is benchmarking?
Benchmarking is an ongoing process of measuring an organization against expectations, past experience or industry norms for productivity and profitability and then making adjustments to improve performance in relation to those metrics. Ideally, your nonprofit will consider both:
- Internal benchmarks — to monitor and detect trends, based on your organization’s historical results and statistics, as well as expectations, and
- External benchmarks — to ascertain where it’s thriving and where it lags behind, based on data from peers.
Benchmarking provides essential information for effectively developing and implementing strategic plans. It helps an organization keep a watchful eye on its financial health and determine where costs can be cut and revenues increased. Nonprofits can use benchmarks to demonstrate their efficiency to stakeholders such as donors and grantors.
Benchmarks for nonprofits
The first step is to define what your nonprofit needs to 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. For many nonprofits, those metrics will include:
Program efficiency (program service expenses / total expenses). This ratio identifies the amount you spend on your primary mission, as opposed to administrative and fundraising costs. This ratio is of utmost importance to stakeholders.
Fundraising efficiency (unrestricted contributions / unrestricted fundraising expenses). How many dollars do you collect for every dollar you spend on fundraising? 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 (program service revenue / total expenses). This ratio indicates whether your nonprofit could pay all of its expenses solely from program revenues.
Organizational liquidity (expendable net assets / total expenses). How much of the year’s total expenses is considered expendable equity or reserves? 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 liquidity, operating yield, revenue, borrowing, assets and similar metrics. No matter which benchmarks you choose, though, you’ll need reliable processes for collecting and reporting the data.
For comparison’s sake
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 improve 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 or from commercial software. 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 two organizations you are stacking up against each other are truly comparable.
Make it a team effort
Some organizations have found it worthwhile to include staff in the benchmarking process. Their involvement in setting aggressive but attainable benchmarks — and measuring progress — can achieve buy-in and help foster teamwork as your nonprofit moves toward and surpasses its goals. Also include your financial advisor, who can help you select the most appropriate benchmarks for your organization and provide advice on how to improve your financial and operational performance.