When it comes to measuring performance, for-profit companies have it easy: They know they’re on track when they make money for their shareholders.
Your not-for-profit isn’t designed to make money, and it doesn’t have shareholders. It does, however, have plenty of stakeholders — the individuals and communities you serve, donors, members, volunteers, grantmakers, directors, staff, and, increasingly, charity watchdogs. And although these disparate groups often have different ways of evaluating your organization’s effectiveness, they all expect you to make an impact.
So your not-for-profit needs to ensure that it’s operating efficiently and meeting stakeholders’ expectations.
Why measure, why now?
In the past, many not-for-profits found financial support simply by identifying a problem and explaining how they intended to solve it. Those days are long gone. Greater competition for fewer funds means that major donors and grantmakers such as government agencies and foundations require evidence that your operations are efficient and your programs are effective.
Unfortunately, there’s no one measure of not-for-profit success — and different groups often request different data and performance numbers. A 2012 survey of charities conducted by the Center for Effective Philanthropy found that, while most respondents wanted to better understand and communicate their organization’s performance, they didn’t know how to do so. And only about a third of their funders helped them assess performance. In this environment, small not-for-profits that can’t afford expensive research and tracking software appear to have the most to lose.
Choosing your targets
The good news is that performance initiatives don’t have to be complicated — or pricey. Start by identifying and setting performance targets based on your not-for-profit’s mission, scope, constituents and other specific factors.
In recent years, watchdog groups and funders have made overhead costs — or the percentage of funds charities devote to nonprogram expenses — a particular concern. But while low overhead remains a popular target by which to measure operational efficiency, the latest performance buzzword is outcomes.
Robert M. Penna, author of The Nonprofit Outcomes Toolbox: A Complete Guide to Program Effectiveness, Performance Measurement, and Results, explains that an outcomes approach helps not-for-profits determine which of their efforts work — and how well. He expects that, within only a few years, outcomes will be the primary standard by which not-for-profits are judged.
Your performance targets might relate to financial metrics (such as overhead ratios), fundraising goals, event attendance, total membership, social impact (such as reduced crime) or any combination of these. Try, however, to limit the number of targets — at least in the beginning — so that you can devote sufficient energy to finding appropriate benchmarks and tracking performance.
Setting benchmarks
After determining your performance targets, you’re ready to choose benchmarks that represent your end goals as well as your interim progress. Benchmarks can be internal or external.
One of the most basic internal benchmarks is your organization’s budget, which you probably already use to track actual vs. anticipated results. When you analyze how targets were exceeded, that information can be used to redirect future efforts — and improve future performance. Audited financial statements are another good source of internal benchmarks, particularly if you want to conduct ratio analysis. (See the sidebar “Playing with numbers: Ratio analysis.”)
Among the most common external benchmarks are peer organizations. Because all exempt organizations must file Form 990 with the IRS, it’s relatively easy to find not-for-profits with similar missions, operations, annual revenue budgets and staff sizes using sites such as Charity Navigator and GuideStar.
For social service organizations, better performance benchmarks might come from government or academic data (for example, crime, education or health statistics). Even if you don’t have the budget to follow a control group of subjects who don’t participate in your programs, you’ll need to establish a baseline — possibly using data on the same subjects before your program started or on a similar population in another city.
Communicating results
The final step in successful performance measurement is communicating your results. Even if funders request data you don’t track, they’re likely to be impressed with the performance results you can offer as long as your targets are appropriate, your benchmarks are well chosen and the results have been carefully documented.
Fortunately, not-for-profit (as opposed to for-profit) success can still be measured in myriad ways. Your staff’s hard work and continual improvement efforts matter to stakeholders even if performance measurements aren’t perfect.
Playing with numbers: Ratio analysis
One way to assess your nonprofit’s financial performance is with ratio analysis. Taking data from your financial statements, you can calculate ratios appropriate for your organization. Then you can benchmark those ratios against past performance, strategic objectives or peer organizations.
Depending on your organization’s priorities, ratio analysis can highlight liquidity, reserves, fundraising efficiency and many other measures. For best results, such calculations should be made on a regular — monthly, quarterly or yearly — basis.
For more information, please contact Ann Knerr at [email protected].
