Like for-profit organizations, nonprofit organizations can analyze their own performance relative to their industry peers. Nonprofits can measure the health of the organization and compare themselves to others by using the program efficiency ratio and the operating reliance ratio. Because a nonprofit’s information return (Form 990 or Form 990 EZ) is available to the public, data from the information returns can be used to calculate these key performance indicators for any organization. The program efficiency ratio and operating reliance ratio are two key performance indicators that can help nonprofits to better understand their operational and financial health.
Program Efficiency Ratio
All nonprofits articulate a mission to be executed by the organization’s programming. The percentage of money spent on programs relative to operating expenses (payroll, administrative costs, fundraising costs etc.) is a key indicator of how well the organization is fulfilling its mission. This is important to keep in mind when soliciting potential donors. A specific key performance indicator that can assist a nonprofit in analyzing its performance can be defined as the program efficiency ratio.
- The program efficiency ratio is calculated by taking the organization’s program expenses and dividing it by the total expenses of the organization. This will result in a percentage or ratio of an organization’s program expenses to total expenses. Ideally, this percentage will be greater than 75%. The next step is to compare this ratio to peers in the industry.
Operating Reliance Ratio
Along with program expenses are program revenues. It is important for a nonprofit’s unrestricted program revenues (funds that can be spent at the discretion of the nonprofit) to cover its total expenses. However, the organization must still determine whether expenses can be covered by program revenues alone. This key performance indicator can be defined as the operating reliance ratio.
- The operating reliance ratio is calculated by taking the organization’s unrestricted program revenues and dividing it by the total expenses of the organization. This will result in a percentage or ratio of an organization’s unrestricted program revenue to total expenses. The higher this percentage, the stronger a nonprofit can feel comfortable paying its expenses through its program revenue. Again, comparing this ratio to peers in the industry will assist the nonprofit in determining the overall health of the nonprofit.
These are just two of the many key performance indicators that can be used to help a nonprofit analyze its performance relative to its peers. Using these somewhat simple, yet key calculations can prove to be extremely helpful for nonprofits and their leaders.
Do you have questions about the financial health of your nonprofit organization? The nonprofit team at LGA would be happy to help. Give us a call today.
Written by Dan Pare