Financial dashboards: The drive for success

With financial sustainability a growing concern for many nonprofits, your board of directors may be taking a greater interest than ever in your organization’s financial performance. For all their genuine interest, though, not every board member has the acumen or desire to wade through dense financial statements.

That’s why nonprofits are increasingly turning to so-called dashboards to help boards and other constituents visualize important metrics, or key performance indicators (KPIs). A dashboard is a summary for your board (or staff) of your nonprofit’s progress toward a specific goal over time. Or it can present a snapshot of your current situation.

Reserve greater detail for your audit or finance committee.

Choosing the right KPIs

Which KPIs should you include to facilitate informed, timely decisions? Although organizations will see quite a bit of overlap, a nonprofit’s financial KPIs will depend largely on its specific characteristics. That includes its revenue streams, key expense factors, and budget and strategic goals. Put another way, identify your organization’s “business-drivers.”

You also want to solicit input from your audience. They might not name specific indicators, but their priorities can steer you toward appropriate KPIs.

Additionally, determine which factors affect the reliability of your revenue streams — and which factors influence whether your expenses rise or drop. Then create KPIs that monitor those factors. Think, too, about the level at which you want to track the KPIs you select. You could monitor them by individual program or function, or at the organizational level.

Here’s one way a KPI could be useful: Say your performing arts organization’s board is concerned about financial stability and liquidity. Its primary business drivers are proper pricing and maximum attendance. Your dashboard might include KPIs such as an increase or decrease in operating results, the level of liquid unrestricted net assets, your current debt ratio (total liabilities / total assets), and progress toward a desired number of months’ cash on hand (cash on hand + current unrestricted investments / average monthly expenses). You’d also want to monitor the number of tickets sold and the average revenue per performance.

Over time, you’ll likely need to adjust your KPIs as your strategies, priorities or programs change. What’s “key” today won’t necessarily be key in five years. For each KPI, you should develop a target, which may be your current budget or part of your strategic plan.

Whatever you choose to include on your dashboard, keep the graphic as streamlined and relevant as possible.

KPIs to consider

As nonprofits have increasingly adopted dashboards, certain KPIs have emerged as must-haves, including:

Current ratio. This KPI reflects your financial standing, specifically your organization’s ability to satisfy debts coming due within the coming year. Divide current assets by current liabilities. A ratio of “1” or more generally means you can meet those obligations.

Projected year-end cash. Based upon the current cash position plus budgeted cash flows through the end of the fiscal year, this projects liquidity and ability to satisfy upcoming commitments.

Year-to-date revenue and expense. These KPIs measure your actual results against your budget and let you know separately if revenues and expenses are in line with expectations or within a reasonable range — say 10%.

Reliance ratios. To determine your organization’s reliance on a specific type of funding (for instance, government grants or individual donations), divide the amount of that funding by total income.

Cost per dollar raised. This measure shows your return on investment in fundraising costs. Divide the total funds raised by the total fundraising expenses. You want a figure greater than “1.”

Cost per unit of service. Divide program expenses by the number of units of service (for example, meals served) provided in a period to shed light on that program’s financial efficiency.

Program efficiency ratio. The ratio assesses an organization’s mission efficiency by showing the amount of funding that goes to programs (vs. administrative or other expenses). Compute it by dividing a program’s expenses by its overall expenses. The goal is often over 75%, but this is dependent on the organization type. Note: There is debate about the accuracy of this and the overhead ratio.

Context is everything

Remember that stark numbers usually don’t tell a story on their own. By providing a target such as budgeted amounts, chronological trends or external benchmarks, you’ll make the metrics more meaningful for your audiences.