Nonprofits increasingly are adopting a corporate world tool: financial dashboards. A dashboard is a summary of an organization’s progress toward a specific goal over time — or a snapshot of its current situation. Dashboards are designed to help boards and other constituents visualize important metrics, or key performance indicators (KPIs). But to facilitate informed timely decisions, it’s critical to select the right KPIs.
Choosing the right KPIs
A nonprofit’s financial KPIs will depend largely on factors such as its revenue streams, key expense factors, budget and strategic goals. To include the most useful metrics, identify your organization’s “business” drivers and solicit input from your audience.
Additionally, determine which factors affect the reliability of your revenue streams — and which influence expense levels. Then create KPIs that monitor those factors. Think, too, about the level at which you want to track your KPIs. You could monitor them by individual program or function, or at the organizational level.
Looking at an example
Say that a performing arts organization’s board is concerned about financial stability and liquidity. The nonprofit’s primary business drivers are proper pricing and maximum attendance. Its dashboard might include KPIs such as an increase or decrease in operating results, the level of liquid unrestricted net assets, current debt ratio (total liabilities / total assets), and progress toward a desired number of months’ cash on hand (cash on hand + current unrestricted investments / average monthly expenses). The organization also would want to monitor the number of tickets sold and average revenue per performance.
Over time, this nonprofit likely would need to adjust its KPIs as its strategies, priorities or programs change. As many organizations have learned recently, what was “key” last year isn’t necessarily key in today’s challenging environment.
Considering popular KPIs
Certain KPIs are popular among nonprofits. These include:
Current ratio. This reflects your organization’s ability to satisfy debts coming due within the year. Divide current assets by current liabilities. A ratio of “1” or more generally means you can meet those obligations.
Projected year-end cash. Based on the current cash position plus budgeted cash flows through the end of the fiscal year, this projects liquidity and ability to satisfy upcoming commitments.
Year-to-date revenue and expense. This KPI measures actual results against a budget and lets you know separately if revenues and expenses are in line with expectations or within a reasonable range.
Program efficiency ratio. The ratio assesses an organization’s mission efficiency by showing the amount of funding that goes to programs vs. administrative or other expenses. Calculate it by dividing a program’s expenses by its overall expenses.
By providing a target such as budgeted amounts, chronological trends or external benchmarks, you’ll make the metrics more meaningful for your audiences. Contact us for help creating a dashboard with appropriate KPIs.