Evaluating the Performance of Your Organization: KPIs and Benchmarking

Many not-for-profit organizations are facing an uncertain future. Increasingly limited funding sources, particularly federal grant funding, have forced not-for-profit organizations to look for new revenue sources, create efficiencies, and reduce costs. It can be challenging for organizations to know where to start looking at viable options to make up the “gap” and how to evaluate the financial health of their organizations.

Two important tools that allow the organization to assess its current financial health in making strategic decisions are key performance indicators (KPIs) and benchmarking.

What Are KPIs? Key Financial Metrics for Not-for-Profits

KPIs are quantifiable metrics that represent or characterize an organization’s financial situation. They are used to measure a company’s financial strength and progress toward its strategic, financial and operational goals. KPIs can be “leading indicators”, forecasting future performance, or “lagging indicators”, focusing on achieved results. 

KPIs should:

• Provide clear data to measure organizational goals
• Allow for comparisons over time to track trends
• Use a variety of data points to measure things such as liquidity, product profitability, membership growth, marketing efforts and employee turnover

Some common examples of financial KPIs include:

• Net Operating Margin
• Return on Investment
• Current Ratio
• Operating Reserve Ratio
• Debt-to-Asset Ratio

The key to successfully crafting KPIs is in planning and consideration of the goals of the organization, ensuring the data inputs are relevant and reliable, and the goals are specific, measurable and actionable. 

What Is Benchmarking for Not-for-Profits?

Benchmarking is the process of measuring and comparing your organization against other organizations and industry norms. Benchmarking is not limited to financial metrics or KPIs but can also include evaluating processes and best practices. Benchmarking gives insight into how your organization is performing compared to others. 

Some benefits to benchmarking include:

• Strategic decision making – comparing your organization to others may identify better ways to manage resources, to structure the organization and to identify potential new revenue streams. It can help management set realistic financial and operational targets.
• Efficiencies – benchmarking data may identify process improvements that reduce costs and improve productivity.
• Tracking – benchmarking over time can help identify industry trends and allow you to track your organization’s progress.
• Builds confidence of your stakeholders – you as the not-for-profit leader can build confidence with the Board, donors, members, employees and business partners, by showing the strength of your organization relative to other organizations in similar sectors.

While benchmarking can be a very valuable tool, its benefits are reliant on the quality of the data used. Planning and thoughtful design of the benchmarking analysis are critical to its success.

Some key things to consider when benchmarking are:

• Selecting the right/comparable data to benchmark. Consider:
  • Industry – make sure you are selecting organizations that meet your criteria, such as are similar in nature and/or types of financial information.
  • Data quality – make sure the data is current and relevant. If the data is too old, it may not capture recent changes in the industry.
• Consider non-financial data when analyzing the benchmarking data. Identifying industry trends and other external factors impacting your industry is as important as analyzing financial metrics and ratios.
• Survey the intended audience of the data to establish the goals of the analysis and ensure the gathering of relevant and appropriate information.
• Be sure your staff has the capacity to collect data and perform the analysis required for benchmarking.

KPIs vs. Benchmarking: How They Work Together

KPIs are internally derived metrics used to track an organization’s goals, while benchmarking uses KPIs and other metrics and data to compare an organization to external competitors and industry standards. When used in conjunction with each other, benchmarking and KPIs allow organizations to continuously monitor their ability to meet defined targets, identify their strengths and weaknesses and facilitate comparisons with other organizations. While benchmarking and KPIs can be used to measure past performance, their real power is in providing management with information that can be used to create a roadmap for a successful future.

Interested in finding out more about KPI’s and benchmarking? Contact the nonprofit experts at CBIZ.  We have helped our clients in both areas and can help your organization during this critical time.