Benchmarking is widely used by for-profit companies but sometimes is overlooked by charities and other nonprofits. A not-for-profit organization should be committed to benchmarking because it offers many benefits, including long-term sustainability. Here are some tips on how to overcome reluctance and learn to love benchmarking.
Even if your staff and board believe benchmarking fails to capture your programs’ true impact, consider what other stakeholders think. Funders, in particular, increasingly rely on benchmarks to assess effectiveness when making funding decisions.
Benchmarking also provides critical information when developing and executing strategic plans. It can help you identify strengths, weaknesses, and opportunities. And benchmarking allows not-for-profits to keep a steady eye on financial health.
Choose the right metrics
When you’re ready to move ahead with benchmarking, you must select the right metrics. They could relate to various areas, from fundraising (for example, dollars raised or average gift amount) to online presence (number of followers or retweets).
Many nonprofits, though, begin by focusing on:
Program efficiency (program expenses / total expenses). This is a popular metric with funders. It measures the amount you spend on your mission vs. administrative expenses. The ideal ratio is 1:1, but benchmarking your score against your peers is necessary to evaluate your efficiency because this is unlikely.
Organizational liquidity (expendable net assets / total expenses). This measure considers the percentage of annual expenses covered by expendable equity (as opposed to reserves or restricted assets). Higher scores mean greater liquidity.
Operating reliance (unrestricted program revenue / total expenses). This calculation shows whether you could pay all your expenses solely from program revenues. A figure close to 1:1 is very strong. But, again, comparing it with your peers’ ratios will tell you if you’re on solid ground.
You must be able to gather the requisite data, whichever metrics you end up using. That’s where nonprofit rating sites such as Charity Navigator and GuideStar are useful. The sites calculate scores for some of the most common metrics and provide data on other, comparable organizations. You also might tap trade association and government databases (for example, the IRS’s Tax-Exempt Organization Search) for information, including audited financial statements.
Start benchmarking by conducting a root-cause analysis of the areas with the lowest scores. Then develop short- and long-term solutions. We help many companies, including nonprofits, to conduct benchmarking. We are willing to help you select the right benchmarks, assist with collecting data, and guide you on developing improvement plans. Click here for more information on the many services we provide to nonprofit organizations.