Nonprofit 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. Nonprofit 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 organization. A 2018 analysis of nonprofit financial health conducted by Oliver Wyman, SeaChange Capital Partners, and GuideStar by Candid concluded that among U.S. nonprofits:
- 7-8% are technically insolvent with liabilities exceeding assets
- 30% face potential liquidity issues with minimal cash reserves and/or short-term assets less than short-term liabilities
- 30% have lost money over the last three years
- ~50% have less than one month of operating reserves
Keep in mind the above financial analysis was performed before the extreme financial challenges of the COVID-19 pandemic. A survey of nonprofits conducted in July 2020 revealed that 41% of respondents had significant concern about declining earned revenue related to programs.
How donors use financial performance metrics to assess stewardship
Donors and funders want to contribute to nonprofit organizations 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. Nonprofit finance leaders must be prepared to monitor the financial health of their nonprofit organizations and demonstrate sustainability and stewardship to funders.
Many donors and funders use online analysis tools from GuideStar and Charity Navigator to assess the soundness of nonprofit organizations. Not only are these organizations experts on nonprofit financial health, but each offers free financial reports and/or charity ratings to help donors explore nonprofits before deciding to give.
Nonprofit organizations need to proactively contribute information to the online profiles developed by GuideStar and Charity Navigator. The better insights you can leverage from your financial data, the more complete and transparent these critical online profiles can become. Having a complete financial profile and being able to demonstrate impact and results can establish the credibility of your organization. Good financial stewardship and high mission impact can also earn your organization a high Charity Navigator Encompass Rating as well as the GuideStar Gold or Platinum Seals of Transparency.
Let’s examine the information available to donors through both organizations:
12 key metrics to monitor the financial health of your nonprofit
To monitor nonprofit financial health, stakeholders will want to understand an organization’s funding model/revenue, cash flow/sustainability, expenses/efficiency, and debt management. Here are 12 key metrics than can help organizations keep a watchful eye on financial health trends:
Funding model and revenue
- Revenue composition: What sources of revenue has your organization secured? How much is unrestricted and available for use?
- Revenue reliability: Can you count on revenue recurring? Does your organization have a good track record of bringing in a certain amount of revenue? This can be studied through historical trends.
Cash flow and sustainability
- Cash flow from operations: From the Statement of Cash Flows, a positive cash flow from operations shows an organization can cover their costs of unrestricted operations and programming.
- Liquidity: Cash on hand divided by average monthly expenses.
- 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.
These metrics help you assess how well you can pay the bills for your program and how long your organization could sustain services if revenue suddenly declined. Most nonprofit organizations should strive for liquidity or reserve ratio of three to six months.
Expenses and efficiency
- Percentage spent on programs: Program service expenses divided by total expenses
- Program expense growth: Compares program expenses over time. Organizations that consistently grow program expenses (and the revenue to support them) reassure donors of a greater impact on their missions.
- Administrative expense percentage: Administrative expenses divided by total expenses
- Fundraising expense percentage: Fundraising expenses divided by total expenses
- Percentage spent on fundraising: Total fundraising expenses divided by contributions
Donors and funders prefer to give to charities that can keep administrative and fundraising expenses low, thereby allocating most donations toward program expenses. The standard benchmark for fundraising and administrative expenses is 35%.
- Liabilities as a percent of total assets: Organizations with 50% or more on this score may have trouble managing debt.
- Liability composition: What types of debt has your organization incurred and how is that debt structured?
Your organization’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-visualize format like a dashboard that can be shared quickly if trends demand action.
“Four of the seven financial performance metrics that we analyze are about efficiency: program expense percentage, administrative expense percentage, fundraising expense percentage, and fundraising efficiency. Three of the seven financial performance metrics that we analyze are about a charity’s financial capacity: program expenses growth, working capital ratio, and liabilities to assets ratio.”GuideStar by Candid, “How Do We Rate Charities’ Financial Health?”
Nonprofit Digital Board Book makes it easier to monitor the financial health of your nonprofit
The Sage Intacct Nonprofit Digital Board Book provides pre-built dashboards based on nonprofit finance best practice metrics to deliver real-time insights into an organization’s mission impact. By automating the tracking and management of industry-wide best practice metrics, nonprofit organizations can more easily benchmark their own financial health and sustainability.
The Nonprofit Digital Board Book dashboards deliver a holistic view of financial health that encompasses revenue composition, funding restrictions, liquidity, assets, liabilities, major expenses, and more. Report data and dashboards are seamlessly calculated using real-time balance sheet, revenue, and expense data from Sage Intacct, and through additional operational sources from within the organization, including its donor management systems, budgeting and planning software, payroll, and more.
Key metric visualizations help nonprofit leaders easily track trend lines and stay on top of any potential concerns to guide the organization around financial challenges. At a glance, nonprofit executives, board members, and finance leaders can gain insights they can leverage for better decision-making.
Increased visibility can help key stakeholders strengthen funding stability and guide planning and strategy. The ability to instantly view reserves allows organizations to sustain any short-term gaps and expand funding diversity.
Both the Balance Sheet and Income Statement Dashboards include “Questions to Consider,” based on industry best practices. Leaders can use these topics to guide discussions among key stakeholders, analyze trends, and fine-tune priorities to better align with mission success.
“Non-profit leaders have struggled for years to provide funders more meaningful metrics than just administrative percentage. Straight out of the box, the Sage Intacct Nonprofit Digital Board Book has provided nonprofit executives with access to metrics that are actionable. By using industry best practice metrics, they’ve given immediate credibility to our communications with the board and external funders. The graphical display means the financial results are much more accessible to the full board, regardless of background. This is just the latest example of Sage Intacct delivering on their promise to be not just a vendor, but a partner in our success and growth.”Curtis Ruder, Chief Financial Officer, Meals on Wheels San Antonio
When a nonprofit’s needs are high and resources are limited — as has been the case this year with the pandemic — 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 nonprofit finance leaders have to track financial indicators closely for their organizations. Key metrics, presented visually and powered with real-time data, can help key stakeholders monitor the financial health of their nonprofit organizations and present proven measures of stewardship to donors.
For an in-depth look at how real-time financial and statistical performance data can strengthen stewardship, download our eBook, Achieving Real-Time Visibility with Nonprofit Financial Reporting and Dashboards.
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