Nonprofit leaders rely on accurate financial insights to make smart decisions that advance their missions. However, without defined benchmarks, it can be difficult to determine whether your organization is on track to meet its fiscal goals.

Financial benchmarks are performance targets derived from accounting data or industry standards. Nonprofit leaders can compare their organization’s performance to these targets to reliably gauge their organization’s health. These insights can also be useful when creating strategic plans, compiling key reports, or justifying financial decisions to board members.

This article explores the financial metrics every nonprofit should monitor and how to apply them at your organization.

1. Operating Reliance Ratio

Operating reliance ratio is a key performance indicator used to gauge your organization’s financial sustainability and operational efficiency. It measures how effectively your nonprofit can cover its expenses using unrestricted revenue.

It’s calculated by dividing unrestricted revenue by total expenses. Different results may indicate the following:

  • A ratio of one or more suggests your organization can sustain operations with unrestricted revenue, allowing donor contributions to support growth. This indicates effective control of expenses relative to unrestricted revenues. A strong ratio supports planning for growth and program expansion without constant fundraising concerns.
  • Lower ratios may point to heavy reliance on restricted funds, requiring careful management. Organizations in the lower range struggle to cover everyday costs and should explore ways to increase their financial sustainability through comprehensive fundraising or cost savings.

Tip: Revisit this ratio quarterly to reflect current operating costs and shifts in available sources. According to Chazin’s article on nonprofit financial statements, accurately recognizing revenue from different sources is critical due to unique reporting requirements for some revenue sources, such as grants, contributions, and event-related income.

2. Program Efficiency Ratio

The program efficiency ratio reveals what percentage of total expenses are devoted to program activities versus administrative or fundraising costs. To calculate it, divide your nonprofit’s program service expenses by its total expenses, then multiply this result by 100 to determine a percentage.

The recommended program efficiency ratio is 70% or higher, although the results of this formula depend heavily on your organization’s type and size. Here is what different results may indicate:

  • 75% or higher: Ratios in this range indicate that the majority of your organization’s resources are dedicated to mission-related activities, which is a positive as long as you aren’t sacrificing critical administrative or fundraising needs to achieve this benchmark.
  • 60% – 74%: Middle ground ratios signal moderate efficiency. In this case, you’re prioritizing service delivery, but there may be room for improvement in your nonprofit’s budget allocation.
  • Below 60%: Lower ratios could be a cause for concern, indicating excessive overhead or underinvestment in mission-related activities.

Keep in mind that larger donors and grantors often calculate organizations’ program efficiency ratio prior to committing any funding. When program expenses get below 70% of total expenses, they generally start asking questions.

Tip: If your nonprofit has a low program efficiency ratio, consider reevaluating your expense allocations or operational strategy. Identify opportunities to reduce expenses without sacrificing program quality, such as recruiting volunteers to take manual tasks off your team’s plate or employing low-cost fundraising initiatives.

Additionally, check to make sure your organization isn’t using an overly conservative cost allocation. For example, many nonprofits categorize depreciation under general and administrative costs. However, if you run a K-12 school, it’s likely that a majority of that depreciation originates from buildings and equipment used to educate children. Since that’s the mission of the school, in that case, you can allocate a proportionate amount to program expenses.

3. Fundraising Efficiency

Fundraising efficiency measures how much a nonprofit spends to raise each dollar of contribution revenue. To calculate fundraising efficiency, divide total unrestricted contributions by fundraising expenses. Your result will be in the cents spent per dollar raised.

By comparing revenue and expenses, nonprofits can understand the true return on investment for their fundraising efforts—the lower the cost, the greater the return. Spending less than $0.20 to raise each dollar is the generally accepted standard for fundraising efficiency ratios, but here is what different results could mean:

  • $0.20 or less: Lower results indicate highly efficient fundraising operations, meaning your campaigns generate strong returns compared to how much you invest in them.
  • $0.21 – $0.35: Nonprofits in this range may want to reassess certain fundraising campaigns or hone their outreach strategies to maximize efficiency.
  • Above $0.35: Higher results suggest that fundraising expenses are too high relative to returns and may require a strategic overhaul.

Tip: Identify the highest-cost areas in your fundraising efforts and determine the best ways to reduce these costs. For example, you may find your fundraising software’s price tag is the cause, or that you’ve spent too much on event decorations. In these situations, you may look for a new solution that provides similar functionality at a lower price or request in-kind donations of decorations from supporters to meet these fundraising needs without spending too much.

Also, remember to itemize fundraising costs to ensure they’re properly allocated. For example, let’s say your nonprofit produces a five-page downloadable resource about your work. Four pages educate the reader on your cause, and one page asks for donations. In this case, 80% of the cost of producing and distributing the resource could be categorized as program costs because of its educational purpose, while the other 20% should be considered fundraising costs.

4. Organizational Liquidity

Liquidity, in the context of accounting standards applicable to nonprofits, is the availability of resources to meet cash needs for general expenditures within one year of the date a Statement of Financial Position is created.

Aspects of liquidity include:

  • Ability to meet short-term obligations: Liquidity describes your organization’s ability to pay off short-term debts and liabilities using readily available assets like cash, marketable securities, and accounts receivable.
  • Ease of converting assets to cash: How quickly and easily can assets be converted to cash without significant value loss? For example, accounts receivable can be converted to cash quickly, but a building owned by your nonprofit would be more difficult to convert because it would need to be sold.
  • Operational stability: Adequate liquidity ensures your nonprofit can cover regular expenses such as payroll, rent, and loan payments without disruption.

Overall, organizational liquidity evaluates how easily your nonprofit can access cash or convert assets into cash to cover operating costs. 

To calculate liquidity, there are a number of different ratios you can use:

  • Current ratio: Current assets divided by current liabilities
  • Quick ratio: Add cash and cash equivalents. Divide their sum by current liabilities.
  • Days of cash on hand: Add total cash and cash equivalents. Divide their sum by the average daily expense rate.
  • Operating reserve ratio: Divide unrestricted net assets by daily operating expenses.

Tip: Evaluate your liquidity position regularly, especially after major financial shifts like large grant wins or seasonal downturns. Work with your nonprofit’s board to develop a liquidity policy that clarifies how your team should build and use your organization’s reserve funds.

Consulting a nonprofit accountant is particularly helpful in this process because an experienced professional knows which assets are keepers and which ones would be wisely used in a time of need.

Here are a few actionable takeaways from this article that you should remember:

  • Operating reliance measures how efficiently your nonprofit can cover its expenses using unrestricted program revenues. The higher the ratio, the better.
  • Program efficiency refers to the amount spent on mission-related activities. The higher the percentage, the better (within reason).
  • Fundraising efficiency measures the cost of raising one dollar of fundraising revenue. The lower the cost, the better (within reason).
  • Organizational liquidity indicates the availability of resources to meet cash needs for general expenditures within one year of a Statement of Financial Position’s creation. The quicker your organization can convert assets into cash, the better.

If your nonprofit’s performance is lacking in any of these key areas, it’s time to revisit your budget and accounting approach. Consult a professional accountant or controller to improve your performance.