Financial Metrics: A Guide for NFP Boards

It’s easy to count how much money you’ve made. It’s not so easy to demonstrate that you really are helping children to reach their full potential, or how effectively you’ve raised awareness of a rare disease. Yet not-for-profit (NFP) organisations are increasingly expected to quantify their achievements – and the directors must ensure they’re measuring the right things.

“The board sets the strategic direction and will want to track the organisation’s progress and achievement of these objectives,” says Andrea Petersen, Managing Director, Not for Profit Accounting Specialists.  “The directors usually set key performance indicators (KPIs) for the chief executive officer (CEO), who is tasked with delivering the strategic objectives.”

The focus of the KPIs will change according to the nature of the organisation.

Petersen highlights four key financial metrics that are relevant to all organisations.

  • Net Equity Position – Do the organisation’s assets exceed its liabilities? If liabilities exceed assets the organisation is in a negative equity position which can be an indicator of insolvency or lack of sustainability in the longer term.
  • Liquidity – This is measured by the ratio of current assets against current liabilities and is an indicator of cash flow and the ability of the organisation to meet its short-term obligations.
  • Operating Reserves – The ratio of retained earnings against annual operating expenses is an indicator of how long the organisation could continue to operate in the event that all income streams ceased.
  • Actual versus Budget Comparing actual income and expenditure against budget and identifying significant variances highlights areas of over or under spending, or over or underachieving of income targets.

To view the full Better Boards article, click here.

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