Benchmarking is an ongoing process of measuring an organization against expectations, past experience or industry norms for productivity and profitability, and then making adjustments to improve performance in relation to those metrics. Benchmarking provides essential information for effectively developing and implementing strategic plans. It helps an organization keep a watchful eye on its financial health and determine where costs can be cut and revenues increased. Not-for-profits can also use benchmarks to demonstrate their efficiency to stakeholders such as donors and grantors. Ideally, a not-for-profit should consider both:
- Internal benchmarks to monitor and detect trends based on their organization’s historical results and statistics, as well as expectations; and
- External benchmarks to ascertain where it is thriving and where it lags behind based on data from peers.
You should focus on the metrics that are most critical to the success of your organization’s mission and the key indicators of the its financial health and operational effectiveness. For many not-for-profits, those metrics will include:
Program Efficiency (program service expenses/total expenses). This ratio identifies the amount spent on the primary mission, as opposed to administrative and fundraising costs.
Fundraising Efficiency (unrestricted contributions/unrestricted fundraising expenses). How many dollars are collected for every dollar spent on fundraising. What qualifies as a good ratio depends on the organization’s size and types of fundraising activities.
Operating Reliance (program service revenue/total expenses). This ratio indicates whether the not-for-profit organization can pay all of its expenses solely from program revenues.
Organizational Liquidity (expendable net assets/total expenses). How much of the year’s total expenses are considered expendable equity or reserves. The higher the ratio, the better the liquidity.
Organizations should also consider benchmarks such as average donor contributions, expenses per member and other ratios that measure trends for liquidity, operating yield, revenue, borrowing and assets.
Comparing the not-for-profit’s performance to benchmarks allows an organization to zero in on areas with the greatest potential for improvement. An organization may be able to improve performance without making significant changes in its operations. Further, when comparing against external benchmarks, an organization might improve performance by simply adopting best practices used by its peers.
Organizations can obtain information on other not-for-profits’ metrics from websites such as GuideStar, ProfitCents and Charity Navigator or other commercial software. Information also may be available from state government databases and trade associations. Steps should be taken to ensure organizations are truly comparable.
Some organizations have found it worthwhile to include staff in the benchmarking process. Their involvement in setting aggressive but attainable benchmarks and measuring progress can achieve buy-in and help foster teamwork as the organization moves toward its goals.