THE BENEFITS OF BENCHMARKING A NOT-FOR-PROFIT ORGANIZATION S FINANCIAL RESULTS

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1 Expertise that Works THE BENEFITS OF BENCHMARKING A NOT-FOR-PROFIT ORGANIZATION S A Well Prepared Benchmarking Report Can Provide Keen Insights into a Not-for-Profit s Financial Performance and Stability In the not-for-profit (NFP) world, a well prepared financial benchmarking report, which includes multiple years of financial information, is often more insightful for members of the organization s board or management than the organization s financial statements. Financial benchmarking is the process of comparing the financial results of one organization against the financial results of another organization, several organizations, or industry benchmarks. Insights that can be gained through benchmarking include: Opportunities for improvement thereby challenging complacency with current or historical performance Positive trends reinforcing behaviors that have led to such trends Negative trends requiring root cause analysis and corrective actions A basis for establishing achievable goals Unlike a for profit company, the focus is often not on the bottom line. While it is important to not lose sight of the need to generate positive financial results to maintain and strengthen an organization s financial position, the focus is often more on how the organization is utilizing its resources to fulfill its mission. Accordingly, the key financial ratios for a NFP differ from the key ratios of a for profit company. WHAT ARE THE KEY RATIOS FOR A NFP? The key financial ratios of a NFP can be broken down into several areas as follows: 1. Operational Performance 2. Liquidity 3. Operating Yield Trends 4. Revenue, Borrowing and Assets (Note For illustrative purposes only, benchmark ratios for private schools with revenue between $5M - $10M have been included herein together with three years of hypothetical data.). KEY RATIO 1: OPERATIONAL PERFORMANCE Operational performance financial ratios include program efficiency, which shows the relationship of program expenses to total expenses. Program efficiency is used by many individuals within and outside the organization to assess an organization s performance.

2 The breakdown of a NFP s expenses can also be important in analyzing a NFP s operational performance. A review of the composition of revenue is useful in determining the level of dependence on outside sources of funding, which tend to be less reliable than program revenues. 2

3 Lastly, it is important to review the percentage of an organization s total expenses that can be funded from program revenues to assess a NFP s operational performance. As non-program revenues are often less predictable, an ideal score would be 1 or above. KEY RATIO 2: LIQUIDITY The key liquidity ratios for a NFP are very similar to the ratios used by for profit companies and may be very familiar. The liquidity ratios measure an organization s ability to meet its obligations as they come due. The most common liquidity ratios for NFP s include: Current Ratio Quick Ratio Days Cash Reserve 3

4 KEY RATIO 3: OPERATING YIELD TRENDS Operating yield trends focus on the organization s ability to fund its operations through program and other unrestricted revenues. The key financial ratios in this area include Gross Program Margin and Operating Margin, which are depicted below. Other important yield ratios include investment yield (Investment Revenue/Average Investment Balance) and fundraising efficiency (Contributions/Fundraising Expense). 4

5 KEY RATIO 4: REVENUE, BORROWING, AND ASSETS The revenue, borrowing, and assets ratios are more focused on the relative rate of growth of these categories. Ideally, an organization s revenues will grow at the same rate or faster than either its fixed assets or borrowings. If not, it is an indication that the organization is becoming less efficient in utilizing its assets or more highly leveraged. Either situation is a warning signal requiring attention unless the trend is caused by nonrecurring events (i.e. major facility expansion). Lastly, NFP s should strive to increase the efficiency of the operations by increasing their operating yield at a rate equal to or greater than its revenues. SC&H offers benchmarking to our not-for-profit clients to provide better visibility into an organization s financial performance that can lead to better informed decision making. If you are interested in learning how benchmarking can benefit your organization, please do not hesitate to contact us. ABOUT SC&H GROUP SC&H Group is an audit, tax, and consulting firm applying expertise that works to minimize risk and maximize value. SC&H Group s practices advise leading companies from emerging businesses to the Fortune 500 on accounting, tax, profitability, and business process solutions. Clients in all states and worldwide benefit from SC&H Group s commitment to delivering powerful minds, passionate teams, and proven results on each and every engagement. Learn more at This document is property of SC&H Group. No replication of its content is permitted without express permission from SC&H Group. POWERFUL MINDS PASSIONATE TEAMS PROVEN RESULTS Visit Toll Free sch_group@scandh.com 5