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METRICS FOR EVALUATING NON-PROFIT PERFORMANCE

Metrics for Evaluating Non-Profit Performance

Non-profit organizations serve an important role in our society, providing services that for- profit organizations are either not interested in providing or can’t provide profitably. These non-profit organizations are extremely diverse, ranging from charitable socially-focused organizations to member- based groups.

Increasingly, non-profits are developing performance measurement systems that allow them to evaluate their progress toward achieving their missions. Metrics focused on how organizational activities are fulfilling the non-profit’s mission combined with financial performance indicators allow entities to understand how effectively they are serving their communities. The way these organizations execute their mission is very different from the execution of for-profit entities, but there are common approaches to performance measurement that can help organizations to manage their operations and to sustain their ability to serve. Here are three areas of focus for measuring non-profit execution.

Activity Effectiveness

Efficiently operating a non-profit is essential. Just as in any business, efficient operations generate additional cash flow for the organization, but in a non-profit it also demonstrates effectiveness to potential non-profit “investors” (donors, grantors and/or members) which can result in increased funding. Operational efficiency measurements vary for different types of organizations, but the metrics should measure progress toward the mission and the effectiveness of programs implemented. Activities to be measured should include a measure of productivity (mission-related outputs such as constituents served divided by inputs such as staff or dollars). Other appropriate measures of performance for organizations may include staff effectiveness, the hiring and retention of skilled staff, increased donations from current donors, or increased donor loyalty and retention.

To determine organizational financial efficiency, non-profits should analyze several standard performance categories including:

• Program Efficiency (program expenses divided by total operational expenses)
• Administrative Efficiency (administrative expenses divided by total operating expenses)
• Operational Sustainability (operating revenue as a percentage of costs – which measures the
net dollars the non-profit spends providing aid and support to the community)
• Fundraising Efficiency (fundraising expenses divided by total operating expenses)

The general consensus is that non-profits should spend at least 65% of their total expenses on program activities. Many believe that organizations spending less than a third of their budget on program expenses are ineffective. “Best of Class” organizations often spend 75% or more on program activities. Typically, efficient non-profits are expected to spend 15% or less on administrative expenses and 10% or less on fundraising expenses. These standards can change depending on the non-profit’s business segment. For instance, museums typically have above- average administration costs as compared to other types of charities because of the costs to maintain their facilities and collections.

Utilizing and Expanding Capacity

Effective non-profits are successful at mobilizing their resources. Organizations should measure their capacity utilization and their ability to grow capacity. Depending on their cause, that may require measuring efforts to increase donations from current donors, expand the current donor base, pursue funding from public sector agencies and government, increase market share, grow the number of volunteers, or recruit high-impact board members.

From a financial measurement perspective, non-profits should track their revenue growth compared to similar organizations, program expense growth compared to others in their industry segment, and their working capital to expense ratio. Comparing revenue and expense growth to others in a non- profit’s industry segment allows the performance metrics to be adjusted for economic trends. The working capital to expense ratio is important in determining how long (in years) a non-profit can sustain its level of spending using only its net unrestricted assets.

When growing capacity, it is important that the non-profit convince donors to fund infrastructure instead of only program services. Fundraising is critical to capacity expansion, and infrastructure is needed to support that capacity.

Fundraising Effectiveness (fundraising expenses divided by the total funds the organization receives as a result of that effort) is an important financial measure. “Best of Class” non-profits typically have fundraising expenses that are less than 35% of related funds raised. Although the expected ratio differs significantly by industry segment, generally non-profits should work to maintain a working capital to expense ratio greater than 1. Donor Dependency (operational surplus subtracted from donations, divided by donations) is another common financial capacity measure.

Long-term Objectives and Planning

As opposed to for-profit organizations where profitability and increasing owner value are the goals, non-profits are measured by their ability to fulfill their mission. Fulfilling the organization’s mission may require incurring financial deficits while providing more services to constituents in recessionary times. Surpluses may be managed in other economic situations. As a result, the long-term focus of a non-profit should be on sustainability.

Measuring progress toward the mission and the non-profit’s long-term objectives should drive high- level organizational focus. As a result, it is especially important that non-profits maintain strategic plans typically for three-year intervals. Cultivating a “sustainability” culture among board members, staff, donors and grantors is essential so that the organization can be a reliable service provider when recession comes. A common metric in measuring compliance with the non-profit’s strategic plan is to track the percentage of operating priorities that align with the organization’s mission.

From a financial perspective, three-year financial models and their related annual budgets are very important to long-term objectives and planning. Plans that include deficits are acceptable, but non- profits should not outspend their means. When an organization runs a combined deficit over time, its sustainability is suspect and it runs the risk of not fulfilling its mission. As a result, financial models should include combined surpluses over time and the establishment of cash and investment reserves for lean stretches. The working capital to total expense ratio discussed above is an important measure of long-term performance. Additionally, a common metric for successful non-profits is the ratio of the organization’s net unrestricted assets to annual expenses. It should be about three times the larger of the prior year’s expenses or next year’s budgeted expenses. It is important, however, to avoid accumulating assets beyond that point and tying up funds that could be used for current program activities.

Non-profits play an essential role in our society. In order to fulfill their vital assignment, it is important that they sustain their existence by performing at the appropriate level. Managing to key performance indicators like those discussed above will significantly help non-profits to achieve their mission.

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Kevin Winkle

Welcome Kevin Winkle

Welcome to the FocusCFO Team!

Kevin Winkle is a Financial executive with over 30 years’ experience. Kevin is versed in financial management, new business development, and leading cross functional teams. He has a proven track record of helping businesses identify risks and opportunities and successfully executing plans to address them. Kevin is proficient in forecasting, P&L management budgeting, and cash flow management. He is a licensed CPA in Ohio.

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Kim Cooper Welcome

Welcome Kim Cooper

Welcome to the Team!

Kim Cooper has over 40 years of accounting and management experience with small and medium size companies and family owned businesses in the construction, coal and real estate industries. Over his career, Kim has developed strong leadership and communication skills dealing with owners and clients, other professionals, and management, support and operations staff.

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Business Ownership Was My Dream

Business Ownership
Was My Dream
But it Feels More Like……

by Darren Cherry | FocusCFO

When you started your business, you probably dreamed of the opportunity to be your own boss and even earn a living on your own terms. You may have had thoughts of building the business into a nest egg that you could either form the basis of your retirement or pass along to your family.

Fast forward to today and there appears to be some unexpected challenges that are both overwhelming and represent a threat to realizing your dream.

Hours Worked

We all anticipated long hours to get the business up and running, but after 10-years you don’t really see any end in sight. You don’t feel that the business can continue to operate without your 70-90 hours a week.

Stress 

In the early stages stress was like adrenaline, the highs and lows were a critical ingredient to keep you focused and executing. Now the stress just seems to be stuck in high gear and while admission may be difficult, it’s likely to have reached the counterproductive stage.

So, What Does That Mean to Us? 

Over time the income from the business has grown to a level that fits well with your lifestyle. Therefore, from that perspective, you justify that the pain is worth the gain. On the other hand, you have come to realize that the value of your business, to put it mildly, is well short of the amount you need to retire. 

If none of these obstacles fit your business, then congratulations! You are officially part of the 20% of business owners. However, if any of the above resonate with you, then you are, by far, not alone!

Now more than ever, is a perfect time to work “on your business”. The one thing I’ve learned after enduring several crises is to “Never Let A Crisis Go to Waste”. Instead use the crisis as a lightning rod to focus on converting your business into your dream.

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Changes to Business Banking

Get Ready for a Change
in Business Banking

by Greg Gens

I know it is hard to digest all the uncertainty that we must deal with in our personal lives and at our workplace. But small and medium sized business (SME) owners are going to get another “surprise” soon. More than likely their bank’s credit process and credit outlook are going to be changing, and not favorably.

First and Second Waves

In a rapid economic downturn, bad news comes at SMEs in three waves. The First Wave is the direct impact on your business. With COVID this could mean that you or your team become ill or the state deems that your business is “non-essential” and shuts down your office, restaurant, hotel, or hair salon. Next comes the Second Wave, which is the impact on your customers and vendors and their supply chain. The Pandemic may have left you be but, if your main customer is in office building maintenance you might have to change your business plan. If you cannot get raw materials because of international sourcing, you can not make the sale. We have already experienced these issues. They are painfully obvious to many business owners right now. If you are a business owner, hopefully you have weathered these storms and figured out how to make money under current conditions. Or maybe a PPP Loan or other government program has given you the liquidity to dodge the bullet up to now.

Third Wave 

So now we come to the Third Wave of economic impact. If you are a business in debt (or in need of it), that money is not going to be as easy to find as it has been for the last 11 years. Why? Banks are risk adverse, (no news there) and they should be. US banks lend out money at some of the lowest rates in the world. To do that successfully they have to be fairly certain they are going to get paid back, so they keep careful track of their portfolio of loans. And even if they were inclined to take more risk, there are bank regulations that keep them from stretching too far.

Bank Risk 

The bank is basically looking at two different kinds of risk – the specific risks attached to your company and the general risk inherent in the composition of their loan portfolio. The specific risk of your company’s financial health is straight forward. If your business has a bad financial event, say a large customer goes bankrupt, when the economy and (presumably) the bank’s loan portfolio are good – they have flexibility on how to work with you. They can look at the strength of the continuing business and consider your plan to get back on your feet over time. You probably failed some loan covenants, but the bank will consider waiving them, because the rest of their overall portfolio is not significantly impacted by your bankrupt customer.

When the issue is a broad general risk to the economy, the bank is in a much weaker position and therefore less likely to be able to help. Their entire loan portfolio is in question. This general risk can be summed up in one word – Uncertainty. Uncertainty in their loan portfolio, forces a cautious banker to look twice before taking any risk. And ANY new loan or loan renewal has risk. Additionally, the current economic facts are not good. Also, to make things seem worse we have just finished an exceptionally good 11-year economic run where the growing economy hid any issues that optimistic credit might allow. Getting loans from banks was easier than average. 

Timing is Everything 

It has been eight months since we started dealing with COVID, what has changed that would make the banks start tightening this November? The answer is the timing of typical bank information requests. Many banks require their clients with loans to send in financial information and in some cases meet certain requirements or “covenants” on a quarterly basis. For companies with a 12/31 calendar year end the last such quarterly deadline was 9/30/20. The banks typically give their customers 30 to 45 days to get their quarterly information in for review.

For the third calendar quarter that deadline is occurring over the next few weeks. This third quarter is the first quarter in the pandemic where there was not a significant government bailout. If these reports bring bad news, as many believe, the banks will be faced with a deteriorating loan portfolio, increasing their risk, forcing them to shore up their required cash reserves and reducing their ability to loan money. The very uncertain nature of the COVID pandemic on the economy makes it worse. We have never experienced this before, so there is no road map to look at to see what happened last time. 

So, What Does That Mean to Us? 

It means that your next loan renewal is probably not going to be rubber stamped. The bank is probably going to be asking a lot more questions about things they have not pursued in years. If they have issues in their portfolio surrounding an industry, they might not be interested in renewing any business in that industry regardless of how well the company is performing. Some banks will back off offering loans to new customers until “things shake out”. Obviously, this makes it harder to find a new bank if your current bank does not renew your loan. It is lining up to look like a tough time to be looking for a business loan. 

So, What Can a Business Owner do About It? 

First, let me say that every bank is different and your relationship with the bank might be fine. What I am emphasizing is that you should not assume everything is OK because of the past. The rules may have changed at your bank, get in front of any issues you might have.

  • Talk to your bank and ask where they stand in general and in your industry.
  • Read your loan documents and see where you sit with any covenants that you are required to make. These documents are the “rules” and you should understand them.
  • Come up with a plan for your “new normal” and put it into a projection. If it does not work on paper – it probably will not work at all. Make sure that plan shows the bank that you care about paying them back. Communicate your plan to the bank. Reducing the specific risk around your business helps the bank reduce its uncertainty.
  • Do not assume that you can continue to take money out of the business for distributions, high salaries, or new assets in excess of what the plan shows you need. Cash is king when things are tight and your bank will not look kindly upon use of loan proceeds for things they were not intended for as stated in the loan documents.
  • If you need help, seek out a trusted financial professional familiar with lending.

As always, if you are proactive and have a plan you are more likely to be successful. Understand that the general economy may have a big impact on your bank relationship. So, control what can.

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