Financial benchmarks are essential for every organization. They help to determine the health of the organization, guide setting goals and identify areas of opportunity and risk. As you can imagine, each organization and its industry are unique, and nonprofit entities are no exception. It’s important to re-evaluate the benchmarks you’ve set for your school each year to make sure they still make sense. Here are a few benchmarks beyond your typical liquidity and solvency ratios that you may want to prioritize depending on your situation. Once you understand the analytic and calculate yours, consider if you need to create a relevant KPI to work towards to improve your organization's financial health.
1. Fundraising Expenditures to Total Contributions Ratio
Fundraising is incredibly important to every non-profit, but it’s important to keep an eye on how much the fundraising revenues actually cost your organization. Generally, the majority of funding comes from tuition, maybe some grants, and then contributions. There are costs associated with obtaining these funds. Reporting requirements make it so that nonprofits are required to report expenditures by both function and nature. This makes calculating this ratio a bit easier. Using the fundraising functional reporting, you can quickly grab total related expenditures and compare them to the total funds generated from fundraising activities. Discuss this ratio and the desired KPI with your Development Officer, Parent Association, and the Fundraising Committee.
Fundraising Expenses/Total Contributions
2. Program Expenditures to Total Expenditures Ratio
For this one, take a look at it over time. How is it trending? Up? Down? Think about why this might be happening. If the management and general expenses are increasing and programs decreasing, is the organization out of balance? Do you need to re-evaluate how some expenses are being classified or how some individuals share their time across the different functions? Bring this to the attention of executive leadership and your Head of School if trending downward and get a handle on things before administrative expenses get too high.
Programs (total)/Total Expenditures
3. The Budget Growth Ratio - The Endowment’s Role
This ratio measures financial sustainability. Sustainability being an ever-important key to any organization maintaining an endowment. Using the growth of an endowment to cover your operating budget’s growth is a great way to measure for long-term sustainability. An operating budget that grows at a slower rate than the endowment may be a great way to ensure that endowment funds last long term. Note this is related to the “operating” budget, not the capex budget. Capex should be considered separately and should be funded before taking on new projects.
Endowment Growth (Consider: Rate of return (ROR) - Payouts + Additions)/ Growth Rate of Operating Budget ≥ 1
Basic premise: don’t spend more than you can earn in a single year. In coordination with your executive team, consider what you want your targets to be here. Most years, the budget considers raises to staff, do you want your staff raises to match or be lower than your endowment growth rate? Be strategic.
Fun fact: Some well-known universities maintain endowments that are 11x their operating budgets. Wow! Imagine that! It makes these uncertain times feel far less uncertain.
Why L.A. Financial Management?
At L.A. Financial Management, we specialize in education, healthcare, and non-profit clients. We understand that you need a different type of support than most organizations. We not only understand how unique your organization is, but we also have the experience and expertise to help leverage opportunities available to you. We are here to help you navigate daily challenges and to help you build confidence and ultimately, organizations that last and prosper. If you haven’t found the right financial partner for your business, we’d love to help. L.A. Financial Management offers outsourced full-service accounting, controller, and CFO services. To schedule a complimentary consultation with us, email us at lara.azoy@la-financialmanagement.com.