Armanino recently hosted a roundtable “Key Reporting and Benchmarking Best Practices for Nonprofits” for top-tier CFOs from the Bay Area’s larger nonprofit organizations. One of the key takeaways from our discussion centered around the fact that nonprofits that aren’t benchmarking their data against themselves and their peer organizations are at a disadvantage, because they’re missing out on the financial insights that benchmarking can bring. As a result, we wanted to share some basic guidelines to get your nonprofit thinking about the value benchmarking could bring to your organization.

What Can Benchmarking Accomplish?
Benchmarking is an ongoing process of measuring an organization against expectations, past experience or industry norms for productivity and profitability. The organization then can make adjustments to improve performance in relation to those metrics.

Ideally, nonprofits develop and use both internal and external benchmarks. The first help you monitor and detect trends, based on your organization’s historical results and statistics, as well as expectations. External benchmarks let you see where your nonprofit is thriving and where it lags behind, based on data from peers. In addition, benchmarking:

• Provides you with key information to effectively develop and implement strategic plans

• Helps you keep a watchful eye on your organization’s financial health, and determine where costs can be decreased and revenues increased

• Gives you a way to demonstrate your nonprofit’s efficiency to stakeholders, including donors, grantors and importantly, your board

What Should You Measure?
If you’re just starting to think about benchmarking, 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 performance indicators (KPIs) of your organization’s financial health and operational effectiveness. Some common nonprofit benchmarks include:

• Program efficiency: The program efficiency (program service expenses/total expenses) ratio identifies the amount you spend on your primary mission, as opposed to administrative and fundraising costs. It’s widely used and of utmost importance to stakeholders.
• Fundraising efficiency: How many dollars you collect for every dollar you spend on fundraising is calculated in the fundraising efficiency (unrestricted contributions/unrestricted fundraising expenses) ratio, the metric mentioned in the example above. 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 more.
• Operating reliance: The operating reliance (unrestricted program service revenue/total expenses) ratio is another valuable metric. It indicates whether your nonprofit could pay all of its expenses solely from program revenues.
• Organizational liquidity: If you want to know how liquid your organization is, calculate its organizational liquidity (expendable net assets/total expenses) ratio. It tells you how much of your nonprofit’s total assets are considered expendable equity versus reserves, or what portion of your annual expenses are covered by assets that can be spent. The higher the ratio, the better your liquidity.

Nonprofits should consider benchmarks such as average donor contributions, expenses per member and other ratios that measure trends for revenue, operating yield, borrowing and return on assets. Although, no matter which yardsticks you choose, you’ll need reliable processes for collecting and reporting the data.

How Can You Use The Information?
Comparing the nonprofit’s performance to benchmarks allows you to focus on areas with the greatest potential for improvement. Armed with this information, you may be able to achieve more for your mission without making significant changes in your operations. Also, 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, Charity Navigator or other commercial software. Information also may be available from state government databases, trade associations or your top advisors. For example, Armanino developed Rapid Performance Management, a benchmarking tool designed specifically to help our private school clients benchmark themselves against industry standards and their peers. Bottom line, when benchmarking, you need to make sure that the organizations you’re stacking up against are truly comparable, peer nonprofits.

Take Action
Benchmarking is an insightful and analytical tool that can help you evaluate your nonprofit’s effectiveness in meeting its mission. If you’re not taking the time to benchmark already, take time out from daily operations to learn the processes involved.

January 10, 2018