Webinar: 5 Metrics to Understand Your Organization’s Financial Health

Leaders and board members need accurate, up-to-date, and clear financial information so they can make good decisions for a nonprofit or church. But they also need the ability to interpret and use this data to make informed decisions. Therefore, the first step is a solid understanding of baseline financial indicators and health. In this webinar, we will explore the fundamentals of nonprofit and church finances so leaders, managers, and board members will be better equipped to interpret financial statements and assess the financial position of their organization.

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During this webinar, you will:

• Examine and evaluate your assets and liabilities for overall value
• Understand your fund balances so you will know if you have the funds you need to operate
• Determine if your spending is healthy so you can plan for future large expenses
• Understand how much money to keep on hand so you can keep your doors open
• Evaluate the financial efficiency of your programs or campaigns

Want a quick recap? Read on for the notes. Also, the webinar’s slideshow is at the bottom of this page.

Tools: How to Get Better at Financial Metrics

It can be a lot of work to pull some of these financial metrics on a regular basis if you are using spreadsheets or business accounting software. For a simpler way to see your most important metrics and get more dynamic reporting, check out Aplos Accounting. We specialize in accounting for nonprofits and churches. We have an option for small organizations to keep accounting simple and a more robust advanced accounting option for extra layers of reporting. Compare the Aplos Accounting options.

1. Expense Ratios

Where is your money going? Does your income statement show you breakouts of spending categories? Has this ratio changed over time? What is your goal for how much of your expenses go to programs or operations?

Expenses for nonprofit organizations and churches are grouped in functional categories, such as programs or supporting service expenses. Supporting service expenses are further broken down into the categories of management, general (administrative), and fundraising. Expenses are directly applied to one of these functional categories, or indirectly applied through an allocation process and plan.

• Program Service Expenses
  These are costs related to an organization’s programs or services, in accordance with its defined mission. For established organizations, program service expenses generally represent the majority of the overall expenses of the organization. This is important because the public generally prefers nonprofit organizations to have the largest allocation to this category.
• Management and General (Operations)
  These are costs related to administering day-to-day activities. Although they are important, these expenses do not directly relate to the organization’s mission. Therefore, organizations generally try to minimize these as much as possible. These expenses typically include bookkeeping, management, and governance.
• Fundraising
  These are the costs of activities appealing for financial support or contributions. Examples include the costs of holding a fundraising event, soliciting contributions, and salaries of individuals involved in the fundraising process.

Not sure how to track your expenses by these categories? You may want to organize your chart of accounts to create account segments. You can also use category tags if you are using Aplos for your fund accounting software.

2. Budget to Actual

Budgeting is a great tool to determine if your spending is healthy so you can plan for future large expenses. Nonprofits and churches often have limited resources. Therefore, they have a strong commitment to steward resources well to carry out their mission. As such, they need an organizational plan—or budget—that reflects how they will spend their limited financial resources to fulfill the organization’s mission. Don’t have a budget yet? Check out this webinar on building a budget for your nonprofit.

So what health metrics do you track? Throughout the year, evaluate your budget compared to your actual spending to see if you planned appropriately and if you need to make adjustments to stay financially healthy. Nonprofit accounting software, such as Aplos, can help you pull these Budget to Actual reports on a monthly basis.

3. Fund Balances

Examine your assets and liabilities to identify your net assets. As a nonprofit or church, your statement of financial position (Balance Sheet) will reflect this equation: Assets – Liabilities = Net Assets. If you are using business accounting software, this report will refer to this as owner’s equity or stockholders’ equity. Although nonprofits and churches do not have owners, they still need to track the net asset for each of their funds. So this makes true fund accounting software a big resource in being able to pull this report.

The net assets section will consist of net assets without restrictions and net assets with restrictions. An important metric for health is the percentage of funds with restrictions and the overall balance for each fund. Monitoring the change of this percentage is valuable so you are aware of how much of your funds are tied to specific purposes and available to use.

4. Cash on Hand

Nonprofits and churches need to understand how much money to keep on hand so they can keep their doors open. An operating reserve is a rainy day fund, so organizations have such funds to prepare for possible storms.

• The rule of thumb suggested by the Nonprofit Operating Reserves Initiative Workgroup is a minimum reserve of 25%, or three months of the annual operating expense budget. Organizations strive to increase that reserve to six months once the three-month reserve is achieved.
• Many organizations have not analyzed what this balance should be. Even those that have determined the appropriate balance may find it difficult to obtain sufficient funding to build their reserves. But this should not prevent the nonprofit or church from performing the exercise of identifying the optimal reserve balance.

Are you and your board able to project how much cash on hand your organization needs to operate?

5. Financial Efficiency of Programs and Campaigns

Evaluate the financial efficiency of your programs or campaigns. Don’t let overhead and cost efficiency metrics tell the whole story. There are other metrics you may use to evaluate your health:

• Department or program budgets and expenses
• Staffing and capacity: Are the right roles staffed with the right people?
• Fundraising costs (divide total funds raised by total fundraising costs)
• New contributors in the past month/quarter/year
• How many contributions did your organization receive this year?
• What channels did those contributions come from?
• What were the standard contribution sizes? Are they growing or decreasing?
• How many gifts your organization received over a set amount of time
• Pledge fulfillment rate
• Donor retention rate
• New recurring givers