Nonprofits: Hit Your Targets With Benchmarking
How committed is your not-for-profit organization to benchmarking? Perhaps you think it makes sense in the for-profit sphere, but not as much for charities and other nonprofits. If so, you’re probably missing out on benefits — including long-term sustainability. Here’s how to overcome reluctance and learn to love benchmarking.
Even if your staff and board believe benchmarking fails to capture the true impact of your programs, consider what other stakeholders think. Funders, in particular, increasingly rely on benchmarks to assess effectiveness when making funding decisions.
Benchmarking also provides critical information when developing and executing strategic plans. It can help you identify strengths, weaknesses and opportunities. And benchmarking allows not-for-profits to keep a steady eye on financial health.
Choose the Right Metrics
When you’re ready to move ahead with benchmarking, it’s critical that you select the right metrics. They could relate to a variety of areas, from fundraising (for example, dollars raised or average gift amount) to online presence (number of followers or retweets).
Many nonprofits, though, begin by focusing on:
Program efficiency (program expenses / total expenses). This is a popular metric with funders. It measures the amount you spend on your mission vs. administrative expenses. The ideal ratio is 1:1, but because this is unlikely, benchmarking your score against your peers’ is necessary to evaluate your efficiency.
Organizational liquidity (expendable net assets / total expenses). This measure considers the percentage of annual expenses that can be covered by expendable equity (as opposed to reserves or restricted assets). Higher scores mean greater liquidity.
Operating reliance (unrestricted program revenue / total expenses). This calculation shows whether you could pay all your expenses solely from program revenues. A figure close to 1:1 is very strong. But, again, comparing it with your peers’ ratios will tell you if you’re on solid ground.
You must be able to gather the requisite data, whichever metrics you end up using. That’s where nonprofit rating sites such as Charity Navigator and GuideStar are useful. The sites calculate scores for some of the most common metrics and provide data on other, comparable organizations. You also might tap trade association and government databases (for example, the IRS’s Tax-Exempt Organization Search) for information, including audited financial statements.
Start benchmarking by conducting a root-cause analysis of the areas with the lowest scores to get to the bottom of the problems. Then develop short- and long-term solutions. Contact us with your questions and for help choosing the right benchmarks, collecting data and developing improvement plans.