Not surprisingly, many nonprofit board members do not fully understand financial statements—despite the fact that understanding those statements is key to good governance. Many organizations today use executive summaries and dashboards to help explain the organization’s financial picture more effectively. These can also be particularly useful tools for a non-financial person. With an executive summary, you are explaining the financial statements in words; whereas a dashboard provides a visual explanation of the financial statements with pictures and graphs. While the concept behind dashboards and executive summaries is not exactly new, an increasingly popular approach is to include key financial ratios or key performance indicators (KPIs). KPIs will not only help board members and management understand where the organization is, but will also provide information that will help an organization achieve a desired goal. These indicators should be agreed to in advance and should be used to monitor progress toward achieving those goals.
A common item for a dashboard may be to show a graph depicting trend lines for the amount of cash an organization typically has each month. But what if you expanded this to show the ratio of cash to total expenses?
This will not only help management to understand how they are able to cover expenses, but can also help them to set goals as to what they might want that ratio to be. Do you want to have 30 days or maybe 60 days of cash on hand? Another option would be to incorporate a graph that compares the organization's ratio to that of industry standards so that the organization understands how it compares to its peers.
Just as every organization uses different types of graphs in their dashboard, the KPIs that you use will vary widely as well. KPIs used for a foundation may differ greatly from those used by a trade association. A foundation may want to measure average dollars per donor, whereas a trade association may want to measure retention rates for its members. The key is to ensure that KPIs reflect the organization’s goals and are meaningful and quantifiable.
Some common reporting performance ratios include the following:
Average $ per donor
Total Donations Number of Donors
Collection Rate
Total Payments Received Gross Charges
Collection time
Accounts Receivables/Net Charges x 30
Program efficiency ratio
Program Services Total Expenses
Operating reliance ratio
Unrestricted Program Revenue Total Expenses
Fundraising efficiency ratio
Total Contributions Fundraising Expense
Cash Flow Liquidity
Cash + Marketable Securities + Cash Flow from perations Total Current Liabilities
Unrestricted Net Asset ratio
Unrestricted Net Assets Annual Expenses
When establishing your KPIs, you should remember the following:
The KPIs used should be meaningful to the organization
They should be based on the organization's strategic plan
They should be comparable to industry standards/benchmarks
The KPIs should be used by the organization to set targets
The basis for the KPIs should be consistent from year to year
KPIs can not only be used to help the organization reach its goals, but can also be used as an employee incentive. By monitoring this information on a regular basis, staff hopefully will be motivated to take action earlier and correct any “red flags.”
Bottom line is the picture that you portray should not only include financial information that comes directly from the financial statements, but also key performance information that will help guide the organization to meet its goals and strategic plan.
Jackie Bryant is a partner in Tate & Tryon's Outsourced Services practice and can be reached at jbryant@tatetryon.com.
Jackie serves on the Board of Governors for the Greater Washington Society of CPAs (GWSCPA). In addition, she is also a member of the GWSCPA’s Nonprofit Financial Accountability Task Force which recently launched the Nonprofit Accounting Basics website which is a resource intended to help small nonprofit organizations produce accurate records and reports, encourage and measure accountability, and successfully manage their organizations (www.nonprofitaccountingbasics.org).
Tate & Tryon - public accounting and consulting firm that focuses exclusively on providing outsourcing, audit, tax and advisory services to nonprofit organizations.
