Which Key Performance Indicators(KPIs) should your Nonprofit be measuring?
KPIs are critical, quantifiable measures of actual performance against strategic goals, over a defined period of time. KPIs are to a Nonprofit leader what the instrument panel is to an Aircraft Pilot. They give advance insight into not only current conditions (eg. direction, speed and altitude)but also future performance ( eg. climbing, descending and estimated time of arrival)of their organization. Nonprofit leaders make their best decisions and their teams achieve their maximum potential by constantly monitoring their KPIs against their goals, and proactively taking corrective actions when required.
Which KPIs should your nonprofit consider prioritizing?
While there are numerous KPIs your nonprofit could be tracking, for the purpose of this article, we will focus on the accountability & finance KPIs tracked by Charity Navigator. Charity Navigator is one of the leading organizations that evaluate the performance of 501(c)(3) in the United States. They analyze performance based on (1)Accountability & Finance, (2)Impact & Result, (3) Culture & Community, and (4)leadership & adaptability. Each charitable organization reviewed is assigned a star rating from 1 to 4, with a 4 rating being the highest rating. Obtaining a 4-star rating from Charity Navigator can boost an organization’s ability to secure donations and grants from donors. The purpose of the star rating is to show donors how efficiently a charity is using their support, how well it is achieving its mission and its commitment to being accountable and transparent. Even though Charity Navigator only evaluates nonprofits with public support greater than $500,000 and total revenues greater than $1 million, nonprofits of any size can use their KPIs to track and manage their organizations successfully and efficiently. It should be noted that a Nonprofit organization must file at least three consecutive years of Form 990 returns with the IRS, in order to receive a score from Charity Navigator.
Charity Navigator Financial KPIs
Average program expense ratio: Nonprofits exist to provide programs and services. They fulfill donor's expectations when they allocate a significant portion of their budget towards their stated missions. Charity Navigator calculates the Nonprofit's average program expense over its 3 most recent fiscal years and then assign a numeric score based on an established scale.
Liabilities to assets ratio: This metric helps donors understand if their donations are primarily being used to service debt and/or other obligations rather than servicing the charitable mission. Charity Navigator calculate a charity's ratio of liabilities to assets by comparing the organization's total liabilities to total assets in the most recent tax year, and then assign a numeric score based on an established scale.
Fundraising efficiency ratio: Financially effective charities should be efficient fundraisers, spending less to raise more. Charity Navigator calculate the charity's average fundraising expenses and total contributions over its 3 most recent fiscal years and then assign a numeric score based on an established scale. It should be noted that this ratio only applies to donor-funded charities with more than $2 million in annual revenue.
Working capital ratio: If a charity has insufficient working capital, it faces the difficult choice of having to eliminate programs and/or staff, take on debts or dissolve operations all together. In contrast, when donations are strong, those charities that build working capital, develop a greater capability for expanding and improving their programs. Charity Navigator analyze a Charity's working capital ratio by determining how long it could sustain its current programs without generating new revenue. They calculate working capital for the most recent tax year, and its average total expenses over its 3 most recent fiscal years. They then calculate the ratio between working capital and average total expense and then assign a numeric score based on an established scale.
Charity Navigator Accountability KPIs
1. Audited Financial Statements/ Audit Oversight Committee: Charities with over $1 million in total revenues are expected to complete an audit. For those with revenue between $500k and $1 million, an audit, review or compilation is expected.. For those with less than $500k in revenue, this metric is not applicable. For larger organizations, Charity Navigator expects them to have an audit oversight committee that is responsible for choosing the independent accountant and overseeing the needed financial documentation. The independent accountant’s audit, review or compilation report should be posted to the Nonprofit’s website.
2. Board Composition: For large donor funded organizations, Charity Navigator verifies that the organization has at least five independent board members, and that those members make up a voting majority. For smaller Nonprofits, a minimum of three board members is required and more than 50% of those members should be identified as independent on Form 990.
3. Material diversion of assets: any unauthorized conversion or use of the organization’s assets other than for the organization’s authorized purposes, including but not limited to theft or embezzlement, can seriously call into question a charity’s financial integrity. Charity Navigator verifies whether there have been material diversion of assets.
4. IRS Form 990 Listed on the website: Charity Navigator checks to ensure that the Nonprofit has posted its most recently filed IRS Form 990on its website. A direct link from a charity’s website to its Form 990 on an external site is sufficient. As with the audited financial statements, donors need easy access to this financial report to help determine if the organization is managing its resources well.
5. Documents Board Meeting Minutes: An official record of events during a board meeting ensures that a contemporaneous document exists for future reference. Charities are not required to make their board minutes available to the public. For this metric, Charity Navigator verifies that the organization reports on its Form 990 that it retains those minutes.
6. Whistleblower Policy: This policy outlines procedures for handling employee complaints and provides a confidential way for employees to report any financial mismanagement. Again, Charity Navigator does not review the actual policy, they verify that the Nonprofit indicated the existence of a policy on Form 990.
7. Conflict of Interest Policy: This policy protects the organization and by extension, those it serves, when it is considering entering into a transaction that may benefit the private interest of an officer or director of the organization. Charities are not required to share their conflict of interest policies with the public. Charity Navigator simply verifies that that the charity reports the existence of the policy on its Form 990.
8. Records Retention & Destruction Policy: This policy establishes guidelines for the handling backing up, archiving and destruction of documents. This fosters good record keeping procedures that promote data integrity. Charity Navigator does not review the actual policy, they verify that the Nonprofit indicated the existence of a policy on Form 990.
9. Website listed on Form 990: Nonprofits should have an online presence so that the public can easily find information about their programs, activities and leadership.
10. Loan(s) to and from Related Parties: Making loans to related parties, such as key officers, staff or Board members is not standard practice, as it diverts funds away from the Charity’s mission and can lead to real and perceived conflict of interest problems. The IRS requires charities to disclose on their Form 990 any loans to or from current and former officers, directors trustees, key employees and other “disqualified persons” Some state laws actually prohibit loans to board members and officers. Loans to the Nonprofit from employees and trustees is also not encouraged as these could also lead to real or perceived conflict of interest. Furthermore, it suggests that the organization may be financially unstable. Charity Navigator verifies whether there have been loans to and from related parties. (It should be noted that this KPI applies to donor-funded charities with $2 million or more in annual revenue)
11. Provided copy of Form 990 to the Governing Body ahead of filing: This is considered a best practice as it allows for thorough review by the individuals charged with overseeing the organization. The Form 990 ask the charity to disclose whether it has followed this best practice. (It should be noted that this KPI applies to donor-funded charities with $2 million or more in annual revenue)
12. Donor Privacy Policy: Charity Navigator verifies whether the Nonprofits website has a donor privacy policy and it its contents are sufficient to protect the donor’s information. (It should be noted that this KPI applies to donor-funded charities with $50 million or more in annual revenue)
13. Board members listed on the website: Publishing this information enables donors and other stakeholders to view the make up of the board of directors. Charity Navigator reviews the Nonprofit’s website to ensure its board members are listed. (It should be noted that this KPI applies to donor-funded charities with $50 million or more in annual revenue)
14. Key staff members listed on the website: While key staff should be reported on the Form 990, the Charity’s staff may have changed since. Charity Navigator verifies that key staff members are listed on the website. (It should be noted that this KPI applies to donor-funded charities with $50 million or more in annual revenue)
15. Process for determining CEO Compensation: The Nonprofit should have a documented policy that it follows each year. The policy should at a minimum indicate that an objective and independent review process has been conducted to determine the CEO’s compensation. This includes benchmarking against comparable organizations. Charity Navigator verifies that this process is documented on the Form 990. (It should be noted that this KPI applies to donor-funded charities with $50 million or more in annual revenue)
16. CEO name & salary listed on Form 990: Charity Navigator verifies that the nonprofit complied with the Form 990 instructions and included this information.(It should be noted that this KPI applies to donor-funded charities with $50 million or more in annual revenue)
17. Board members and compensation status is listed on Form 990: Charity Navigator verifies that all Board Members are listed on the Form 990, with an indication of whether or not they are compensated. No Board Member should be compensated for simply being on the board. (It should be noted that this KPI applies to donor-funded charities with $50 million or more in annual revenue).
Assuming your Nonprofit has strong Charity Navigator ratings on the above mentioned governance and financial KPIs, this can serve to strengthen donor engagement and donations, a goal all Nonprofit organizations strive to attain.