Using Analytics For Internal Benchmarking
by Gregory S. Dowell
Those that live in the world of nonprofits know that they are different financial animals. The yardsticks by which nonprofits measure their performance are, by definition, different than the yardsticks that for-profits use to measure performance. It is also important to realize that the yardsticks that the public uses to measure performance are often not in line with how the nonprofits self-analyze.
In a course titled Analytical Procedures for Nonprofit Organizations, the AICPA has identified the following analytical procedures that can help nonprofits gain some insight into their performance. These, as well as other measurements, can help nonprofits develop meaningful metrics to measure and track their performance.
The Defensive Interval Ratio
The Defensive Interval Ratio (DI) measures the adequacy of the resources of the not-for-profit to support the mission. The formula is
|Cash + Marketable Securities + Receivables|
|Average Monthly Expenses|
This will determine the number of months expenses that the organization can cover if there are no additional inflows of “quick” current assets (identified as cash, marketable securities, and receivables). The ratio measures liquidity and is similar to the current ratio sometimes used by for-profit businesses. However, the DI measures the liquidity in terms of time (number of months) as opposed to the dollar amount excess of the current assets over the current liabilities. The DI may be most appropriate for charities that are dependent upon contributions from the general public.
Liquid Funds Indicator
The liquid funds indicator (LFI), measures how many months the organization can continue before it exhausts its liquid assets, assuming that no additional cash flows into the organization. The LFI is more conservative than the DI because it excludes those marketable securities upon which the not-for-profit organization depends for current income.
|Net Assets – Restricted Endowment-Fixed Assets – Prepaid Expenses|
|Average Monthly Expenses|
Using average monthly expenses as a denominator, this approach, like that of the DI, produces a result in terms of a time period.
Net Temporarily Restricted Asset Ratio
This ratio (call it the NTRA) indicates if the not-for-profit organization is borrowing from the future.Contribution are income in the accounting period in which there is evidence of a promise to give and the promise of the gift is not conditional.
The formula for this operating ratio is
|Temporarily Restricted Net Assets + Deferred Revenue|
|Cash + Cash Equivalents|
Revenue Dependency Ratios
Comparing to peer groups is one effective way of measuring performance. Peer group data can often be uncovered through examination of the form 990s that are filed, which are public information. With that in mind, a nonprofit that depends on a specific type of revenue can track the metrics accordingly. For instance, a nonprofit that relies on general public contributions or that relies on grants could track those sources of revenue as a percentage of the total revenue received.
Any organization can develop a set of metrics and begin the process of introducing financial measurements and discipline to their organization. The use of these metrics can help to identify changes that are taking place, alert to troubles ahead, and help with strategic planning. All of this is critical to keeping management, as well as board members, informed.