Building a Strong Foundation with KPIs for Nonprofits

by Kyle Evans, CPA

Tracking, managing, and communicating a few telling metrics are a powerful way to help nonprofits thrive.

But how do you find the ideal Key Performance Indicators (KPIs) in a tidal wave of data? Good news: Everything you need is in your toolbox.

Set your compass

Wherever your nonprofit wants to go, KPIs can point the way by:

• Promoting strategic alignment across the board, management, and staff.
• Simplifying compliance through systemized data collection.
• Evaluating fundraising success through cost-to-revenue analysis.
• Providing concrete proof of impact to donors and the community.
• Supporting fact-based decisions to optimize limited resources.
• Enhancing transparency and accountability by keeping goals front and center.

KPIs are quantifiable indicators of progress toward a defined result. They help track performance and measure movement toward improvement goals. Setting goals along a spectrum — from minimum expectations to ambitious targets — lets organizations gauge performance throughout the year.

Getting started

Nonprofits new to KPIs should start small — focus on three or four essential metrics and expand as they become familiar with them.

One widely used KPI is the average program expense ratio, which shows how much you spend on programming versus operations. Charity Navigator, for example, sets a standard of 70 percent for programming and 30 percent for operations.

However, this KPI becomes more meaningful when expenses are broken down by specific programs. For instance, split a $40,000 salary among three programs to better understand how staff spend their time. Do the same for benefits, fundraising, rent, and other costs.

Time studies can help assess payroll allocations, while estimates — perhaps developed with an accountant — can clarify other costs. This level of detail helps nonprofit leaders better manage resources and gives donors insight into how their contributions support different programs.

Another critical KPI is operating reserves, which are unrestricted financial resources available for use at the organization's discretion. This figure is calculated by dividing total resources by total expenses, excluding noncash expenses.

Operating reserves provide a cushion for unexpected opportunities or challenges. A best practice is maintaining reserves covering three to six months of expenses tailored to your nonprofit’s specific risks and cash flow needs.

Other helpful KPIs include:

• Fundraising efficiency
• Budget-to-actual spending
• Current ratio (assets vs. liabilities)
• Revenue dependency (helps prepare for the loss of major funding)

Track each KPI using both unrestricted and restricted funds to ensure a clear picture of financial health.

When you adopt KPIs and choose the ones that help you achieve strategic goals, remember that you already have the data you need. To get the most out of it, you must create benchmarks, set targets, and work to get everyone on the same page.

About the Author

Kyle Evans, CPA, is a director at Boyer & Ritter LLC and a member of the firm’s Nonprofit Practice Group. He provides audit and financial reporting insights to help nonprofits strengthen cash flow, budgeting, and long-term planning. Contact Kyle at 717-761-7210 or kevans@cpabr.com.