Do you want to control costs and improve delivery of your nonprofit’s programs and services? It may not be as difficult as you think. Several simple initiatives can make a big difference in how efficiently your organization operates. Here are three:
1. Monitor measures that matter
First, know how much of your nonprofit’s expenditures are being used to fund the organization’s programs, as opposed to administrative and fundraising costs. Key ratios can help your organization measure and monitor program efficiency.
For example, the percentage spent on program activities offers insight into how much of your total budget is used to provide direct services. To calculate this measure, divide your total program service expenses by total expenses. Many watchdog groups are satisfied with 65%.
Also look at the percentage spent on fundraising. To calculate this number, divide total fundraising expenses by contributions. The standard benchmark for fundraising and admin expenses is 35%.
Your nonprofit’s current ratio represents its ability to pay its bills. This measure is worth monitoring because it provides a snapshot of financial conditions at any given time. To calculate, divide current assets by current liabilities. Generally, this ratio shouldn’t be less than 1:1.
Finally, reserve ratio indicates your ability to sustain programs and services during temporary revenue and expense fluctuations. The key is having sufficient expendable net assets and related cash or short-term securities. To calculate, divide expendable net assets (unrestricted and temporarily restricted net assets less net investment in property and equipment and less any nonexpendable components) by one day’s expenses (total annual expenses divided by 365).
For most nonprofits, this number should be between three and six months. Base your target on the nature of your operations, your program commitments and the predictability of funding sources.
2. Orient your organization toward outcomes
Unlike output measures, which quantify the number of products or services delivered, outcomes focus on results that relate directly to your mission. Examples of outcome measures might include changes experienced by program participants, such as increased knowledge or improved skills.
To shift your focus to outcomes, review your mission statement and consider the goals you have for your programs and services. Say, for example, that your mission is to raise awareness about asthma and support a community health center that treats the disease. Outcome-based measures might include the number of patients treated or the decline of asthma rates in the community over time.
3. Engage entrepreneurial experts
Your nonprofit can hire a consultant to help you improve program delivery. But if you don’t have the budget, you might be able to achieve a similar result through a social entrepreneurship program. For example, you may be able to form an alliance with a for-profit company that offers an executive’s services on a short-term advisory basis.
“Loaned” professionals can bring innovative business ideas (such as how to streamline processes) and a fresh perspective to your organization. The result: less time and money spent on inefficient practices and more on delivering services. Although an executive may not have time to join your nonprofit’s board of directors, consider asking him or her to serve on an ad hoc board for a special project.
Building on success
These tips are just a start. Once you begin to see positive results, build on your success by adopting new initiatives. For more information, contact your MCM professional or Senior Tax Manager Bob Moreland, CPA via e-mail or phone (502.882.4658).
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