Do you want to control costs and improve delivery of your not-for-profit’s programs and services? It may not be as difficult as you think.
First, you need to know how much of your not-for-profit’s expenditures go toward programs, as opposed to administrative and fundraising costs. Then you must determine how much you need to fund your budget and weather temporary cash crunches.
Four Key Numbers
These key ratios can help your organization measure and monitor efficiency:
Percentage spent on program activities. This ratio offers insights into how much of your total budget is used to provide direct services. To calculate this measure, divide your total program service expenses by total expenses. Many watchdog groups are satisfied with 65%.
Percentage spent on fundraising. To calculate this number, divide total fundraising expenses by contributions. The standard benchmark for fundraising and admin expenses is 35%.
Current ratio. This measure represents your not-for-profit’s ability to pay its bills. It’s worth monitoring because it provides a snapshot of financial conditions at any given time. To calculate, divide current assets by current liabilities. Generally, this ratio shouldn’t be less than 1:1.
Reserve ratio. Is your organization able to sustain programs and services during temporary revenue and expense fluctuations? The key is having sufficient expendable net assets and related cash or short-term securities.
To calculate the reserve ratio, divide expendable net assets (unrestricted and temporarily restricted net assets less net investment in property and equipment and less any nonexpendable components) by one day’s expenses (total annual expenses divided by 365). For most not-for-profits, this number should be between three and six months. Base your target on the nature of your operations, your program commitments and the predictability of funding sources.
Orient Toward Outcomes
Looking at the right numbers is only the start. To ensure you’re achieving your mission cost-effectively, make sure everyone in your organization is “outcome” focused. This means that you focus on results that relate directly to your mission. Contact your trusted advisor for help calculating financial ratios and using them to evaluate outcomes.