12 key metrics to monitor the financial health of your non-profit
Non-profit finance leaders are responsible for ensuring good stewardship of donor dollars, so the greatest possible percentage of resources can go toward achieving your mission and not operational expenses.
Non-profit leaders want to make the biggest impact possible, and donors also demand full transparency and accountability before committing their money to a cause.
Right now, it’s never been more important to find ways to continuously monitor the financial health of your nonprofit organisation.
How donors use financial performance metrics to assess stewardship
Donors and funders want to contribute to non-profit organisations that can deliver on their missions. They don’t want their donations to be wasted or used in ways that generate less than the maximum desired impact.
Today, funders demand higher levels of financial transparency and accountability than ever before.
Non-profit finance leaders must be prepared to monitor the financial health of their non-profit organisations and demonstrate sustainability and stewardship to funders.
Many donors and funders use online analysis tools to assess the soundness of non-profit organisations.
Not only are these organisations experts on non-profit financial health, but each offers free financial reports and/or charity ratings to help donors explore non-profits before deciding to give.
12 key metrics to monitor the financial health of your non-profit
To monitor non-profit financial health, stakeholders will want to understand an organisation’s funding model/revenue, cash flow/sustainability, expenses/efficiency, and debt management.
Accounting software for non-profits can play a crucial role in streamlining these aspects for enhanced transparency and informed decision-making.
Your organisation’s executives and board should be kept aware of these key financial metrics routinely. Your chief finance leader should probably review daily, preferably in an easy-to-visualise format like a dashboard that can be shared quickly if trends demand action.
Here are 12 key metrics than can help organisations keep a watchful eye on financial health trends
Funding model and revenue
1. Revenue composition
What sources of revenue has your organisation secured? How much is unrestricted and available for use?
2. Revenue reliability
Can you count on revenue recurring? Does your organisation have a good track record of bringing in a certain amount of revenue?
This can be studied through historical trends.
Cash flow and sustainability
These metrics help you assess how well you can pay the bills for your programme and how long your organisation could sustain services if revenue suddenly declined.
Most non-profit organisations should strive for liquidity or reserve ratio of three to six months.
3. Cash flow from operations
From the statement of cash flows, a positive cash flow from operations shows an organisation can cover their costs of unrestricted operations and programming.
4. Liquidity
Cash on hand divided by average monthly expenses.
5. Working capital ratio/reserve ratio
Expendable net assets (unrestricted and temporarily restricted net assets less net investment in property and equipment and less any nonexpendable components) divided by daily total expenses.
Expenses and efficiency
Donors and funders prefer to give to charities that can keep administrative and fundraising expenses low, thereby allocating most donations toward programme expenses.
6. Percentage spent on programmes
Programme service expenses divided by total expenses.
7. Programme expense growth
Compares programme expenses over time. Organisations that consistently grow programme expenses (and the revenue to support them) reassure donors of a greater impact on their missions.
8. Administrative expense percentage
Administrative expenses divided by total expenses.
9. Fundraising expense percentage
Fundraising expenses divided by total expenses.
10. Percentage spent on fundraising
Total fundraising expenses divided by contributions.
Debt management
11. Liabilities as a percent of total assets
Organisations with 50% or more on this score may have trouble managing debt.
12. Liability composition
What types of debt has your organisation incurred and how is that debt structured?
Final thoughts
When a non-profit’s needs are high and resources are limited, donors pay extremely close attention to stewardship in order to make difficult funding decisions.
At the same time, greater pressure on service delivery combined with possibly flat or declining contributions mean that non-profit finance leaders have to track financial indicators closely for their organisations.
Key metrics, presented visually and powered with real-time data, can help key stakeholders monitor the financial health of their non-profit organisations and present proven measures of stewardship to donors.
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