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Comparative Benchmarks and Performance Measures ???
I am an MBA focusing on assisting nonprofit organizations in making positive impacts by operating as efficiently as possible.
I would appreciate any user-friendly resources or references outlining best practices for benchmarks (e.g., the ratio between total income and the amount allocated to program expenses) or procedures for performing due diligence on nonprofit financials before considering donating. Any guidance you are willing to recommend would be indispensable in providing me with fundamental knowledge relevant to this nonprofit sector.
Your guidance on setting nonprofit performance targets and evaluation standards is of utmost importance to me. I’m eager to learn how to interpret and apply these standards when analyzing nonprofit financials. Your insights would be invaluable in setting benchmarks for analysis and interpretation and/or self-auditing nonprofit financials.Thank you!
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9 Replies
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Jeffrey: Back when we did the ratios webinar, I pointed to https://www.cpajournal.com/2019/06/05/using-ratio-analysis-to-manage-not-for-profit-organizations/ because I think it’s a nice overview of measures.
Your Google Scholar search will show you the 30 or so articles from the last couple decades that have gotten down this road, more critical than not on use of ratios than not. Many of those researchers will be at the ARNOVA conference in DC next month, should that get on your radar screen. ARNOVA has a section on Nonprofit Finance and Financial Management… the listserv isn’t terribly active, but your question would be welcome there. I’ll bet we could sneak you in without paying dues.
cpajournal.com
Using Ratio Analysis to Manage Not-for-Profit Organizations - The CPA Journal
Thousands of CPAs work in the not-for-profit sector, and thousands more volunteer as members of the governing boards of not-for-profit organizations.
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Thank you, Mr. Hager! I am eagerly awaiting this weekend when I can sit down and read and learn from the journal article you provided!
I would also love to learn more about joining ARNOVA, especially after reviewing their website and being amazed at how many resources are offered. I attempted to subscribe to ARNOVA-L by following the directions on the website, but I am now awaiting approval. Thank you again!
Respectfully,
Jeffrey
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Jeffrey,
Some time ago, I figured out that nonprofits were a lot like dogs. There are giant great danes like hospitals and universities. There are small yippy dogs like the two or three person advocacy nonprofits. There are working dogs like human service groups and there are poodles like some of the arts group.
This realization came to me while watching the Westminister Dog Show. First dogs are judged on the Best of Breed. The Best of Breed competes for Best of Show. The Best of Show is not the prettiest dog or the smartest dog or the fastest dog. The Best of Show is the dog that represents his/her breed better than his competitors. If the beagle wins, it means it is a better beagle than the runner-up corgi is a corgi.
When using ratios, you need the compare the same breed of nonprofit. Factors that determine breed similarity are size, age, mission, and funding. I use LUNA a lot which is Liquid Unrestricted Net Assets. A new nonprofit is not going to immediately accumulate net assets. A nonprofit largely funded by reimburseable government contracts will find it difficult to build sizeable net assets. Museums with a mission of preserving treasures need those net assets. Organizations dealing with am immediate crisis need to be spending now and not accumulating wealth.
This is a link to a piece, I wrote fifteen years ago. My thinking has not changed.
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I love this analogy!
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Great analogy!
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Thank you, Nancy! Posting your insightful comments and providing the article was very generous. I added it to my reading list for this weekend. I am not familiar with calculating Liquid Unrestricted Net Assets (LUNA) or how to interpret it, but I am eager to learn.
Based on my research and some previous general advice, I have attempted to conduct a retrospective study using publicly available US IRS Form 990 data. However, I was stymied with analyzing and interpreting the data. For instance, I have been trying to decide whether a single-case or group design would be appropriate for examining longitudinal changes for a specific nonprofit or comparing it with a similar nonprofit. Can you provide me with any references or guidance to help with this? Along which dimensions would a comparison nonprofit be identified?
I would greatly appreciate your advice on alternative nonprofit data sources or metrics. I’m unsure whether IRS Form 990 data is the most effective method for assessing a nonprofit organization’s performance during due diligence. Your suggestions would be invaluable in analyzing and interpreting impact, activity, or capacity measures.
Thank you for your time and willingness to share your expertise. Your support in furthering my nonprofit finance education is invaluable and greatly appreciated.
Respectfully,
Jeffrey
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Liquid Unrestricted Net Assets (LUNA) or sometimes called Expendable Unrestricted Net Assets is a calculation that takes the net balance sheet value of buildings/equipment out of the Unrestricted Net Assets number. There are several reasons for this – first the balance sheet value of property may bear little resemblance to the fair market value of the building. The balance sheet value is based on the cost – in some cases the appraised property valueis significantly more and in other cases it may be substanially less. The second reason is that it takes time to turn property into cash hence the terms Liquid and Expendable.
I do a lot of analysis using this measure as well as others pulling the data from the 990s. Here are some examples –
When training a group of Grantmakers, I did a chart of of a dozen local nonprofits all doing $5 million in revenue but all with different missions, funding streams, and ages. This way I was able to show that trying to set specific ratios didn’t work because of the breed differences.
I often do salary studies. When doing one for a local mental health provider, I was able to identify ten or so nonprofits of a similar size. The nonprofits have a similar funding structure and age. This made it possible to determine that while my nonprofit was not the best in breed it was a close runner up and that the ED was under-paid.
For a number of years, I worked for the state association of nonprofits. Every year I woul compare our state’s financials, number of members with the other state associations. I would also factor in the total number of nonprofits by state and the total population. It is worth a pat on the back when to find that our state had the highest percentage membership of existing nonprofits.
These are some examples of how this data can be used.
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I would encourage you to get involved directly with a variety of nonprofits either as a staff member or volunteer. This real-world experience will help give important context to your research. Knowing the work firsthand is the best way to ensure that your recommendations are relevant and helpful. I know this doesn’t help you in the moment while you’re still in school, but it’s some encouragement for the future if you’d like to continue developing tools that might be helpful to the social sector.
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