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Demonstrating Impact with Nonprofit Financial KPIs Featured

Demonstrating Impact with Nonprofit Financial KPIs William Warby

A recent report found the nonprofit sector’s recovery lagged behind broader economic improvement trends in the first quarter of 2022. The labor market is tight everywhere, but nonprofits have a harder time competing for scarce skills, and donations didn’t keep pace with economic growth. The uneven recovery is adding pressure to a sector that was already strained due to the pandemic, which accelerated staff turnover and revealed a lack of technology resources.

Managing nonprofit finances was already a challenge before COVID-19. Finance leaders at nonprofits deal with the same fiscal issues their for-profit business counterparts handle, but they also have to monitor a “double bottom line” — accounting for financials and the organization’s mission. In addition to that, nonprofit leaders often have to balance the competing agendas of internal stakeholders and manage donor expectations simultaneously.

Since there are dozens of nonprofit verticals — from Global Human Service Organizations to Independent Research Institutes — it’s not always clear how to demonstrate impact. There’s no one-size-fits-all set of key performance indicators (KPIs) that every nonprofit can monitor to ensure financial health. But there are actions finance leaders at any nonprofit can take to improve financial decision-making and better protect their organization’s mission. Here are some starting points to consider:

  • Consolidate data to drive better decision-making. The nonprofit sector’s technology capabilities still lag behind that of business counterparts by as much as 3-5 years. The majority of nonprofit managers realize limited technology capabilities are a problem and are looking to close the gap, according to the Nonprofit Standards Benchmarking Survey from BDO. That study found that 60% of respondents surveyed in 2021 planned to accelerate technology investments due to the ongoing effects of the pandemic.

Budget considerations may explain part of the technology gap, but not all. Some nonprofits with long-established manual processes just didn’t prioritize technology before the pandemic. But the inability to work remotely created donor relations and compliance challenges. As nonprofit leaders look at upgrades now, it’s critical to adopt solutions that enable consolidation of data from across the organization for a complete picture that drives better decision-making.  

  • Align KPIs with the organization’s mission and vertical. The nonprofit sector encompasses a vast array of verticals and a diverse range of operating models. Some nonprofits operate like a business, selling goods through thrift stores, selling tickets to cultural events, and providing training programs to generate funds that are critical to support the organization. Others rely primarily on grants and donors to fund operations.

Because of this, each nonprofit vertical will have different ways to measure performance. But it’s imperative to make sure that each KPI the finance leader identifies drives the mission. If it doesn’t, it’s not a critical indicator.

  • Use KPIs to understand mission impact in revenue terms. In this period of economic uncertainty, we’re seeing trends in the for-profit business world mirrored in the nonprofit space, like organizational consolidations and greater demand for data that demonstrates impact. Donors are more sophisticated and ask more in-depth questions. Grants are getting more competitive. That’s why it’s so important to be able to show mission impact in financial terms.

To use a simplified case as an example of how this can work, an organization that receives $100 million in grants might identify the following high-level KPIs:

  • Raise more money
  • Make better decisions
  • Deliver more impact
  • Improve compliance and accountability

With holistic data that provides an accurate view of the organization’s performance, the finance leader could post KPI metrics in terms of percentages:

  • 2% increase in grant award income recovered
  • 2% reduction in project overspend
  • 10% increase in frontline productivity
  • 15% increase in back office productivity

The performance in terms of dollars can be expressed as follows:

  • $1.7M increase in grant award income recovered
  • $1.48M reduction in project overspend
  • $1.5M increase in frontline productivity
  • $0.3M increase in back office productivity

In this example, net present value (NPV) = $6.6M. Again, this is a simplified, high-level example, but it shows how identifying and monitoring KPIs can demonstrate impact. And that’s critical in an environment that’s getting more competitive daily.

In any nonprofit vertical, having access to data from across the organization is the key to accurately monitoring KPIs. Research suggests many nonprofit organizations are still struggling to create a digital strategy, but in the current environment, there’s no time to lose. Just as the use of data and technology has allowed for-profit businesses to operate more efficiently and change course quickly when business conditions evolve, nonprofits that digitize can do more with less and remain agile.

Finance leaders can lead the charge by adopting more modern approaches to data management, aligning KPIs with the mission and vertical, and creating reports and dashboards that more accurately and compellingly demonstrate the impact of the organization. In this way, nonprofit finance leaders can help their organizations navigate uncertain times — and ensure that the nonprofit remains able to fulfill its vital mission.


 

Michael Murphy, Vice President of Sales - Public Sector/Education/Nonprofit - North America, Unit4

 

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