Although they rightly focus on mission, nonprofit leaders also need to get management, staff, and board members to understand the relationship between money coming in and the organizations ability to effectively deliver programs and services. Key performance indicators can help.
A key performance indicator (KPI) measures performance. KPIs frequently help to value difficult-to-measure activities such as the benefits of leadership development, engagement, service, and satisfaction. At bottom, KPIs enable each organization to evaluate its progress toward its vision and long-term goals.
KPIs are not a single figure; they trend over time. There should also be a variance analysis of each KPI, showing actual versus planned figures. Benchmarking KPIs are useful when comparing your organization to other organizations with similar missions and programs.
Ensuring Effective Performance Measures
To ensure effective performance measures, your KPIs should focus on measures that link money to mission. For example, revenues increasing over time do not necessarily indicate success if the revenue-per-person-served does not increase. Conversely, the cost-per-person-served is a more effective measure of success than just how many people you serve. If your cost-per-person-decreases over time, it shows grantors and donors that you are becoming more efficient and, hopefully, more effective.
If your revenue-per-person-served decreases faster than your expense-per-person-served, that could be an indication of trouble in future years. This is a more useful measure to help direct the future of the organization than total revenue and expenses. To take it one step further, more revenue-per-person-served does not indicate success unless you have a program success or quality indicator such as a consumer satisfaction survey, graduation rate, or job placement rate. If success or quality factors are holding steady or increasing while cost-per-person-served is decreasing, this truly shows funders the value in making an investment in your organization.
Many organizations will create a scorecard, which reflects all KPIs which are key to the success of the organization. These scorecards are usually different for the board, management, and program staff, as all have a different, but important focus on the organization. .
When setting up your scorecard and KPIs:
Identify your team #147; it should include both finance and program staff and members of management to ensure all areas of the organization are considered. This also helps to create buy-in and ownership.
Get buy-in and ownership on a scorecard/KPI-setting program at the highest level of your organization to ensure long-term commitment.
Start with your mission and strategic plan; set goals tied to your mission.
Identify programs that will help you accomplish each part of your mission:
Consider context. How does each KPI link a particular program to the mission and vision of the organization?
Understand your audience. Is your board a group of savvy finance professionals or more focused on programs? Do they truly understand your current financial statements? (Or, are you OK with only a small segment of your board members fully understanding your financial reports?)
What key information needs to be communicated so the team can make strategic decisions?
Review internal data sources for reliability, accuracy and timeliness. (Creating a new report where an already effective report exists is not efficient. The goal is to save time, not create more work.)
How do you define success? Put a stake in the ground.
As you begin a program of measurement, do not look at the same measures every month. Set a schedule for reviewing KPIs on a rolling cycle. Certain measures may only be available once per month, while others change monthly. Ratios that show trends over time tend to be the most meaningful, so multiple period should be reflected. Make sure that the measures are easy to calculate, understand, and include a simple call to action.
Keep in mind that all ratios should not be positive. If all ratios only show positive information, you are probably not setting your goals high enough. Truly well designed scorecards should call the organization to improve over time, rather than stay the same.
Measuring Your Measures
Every ratio and every KPI needs a purpose. Too many measures can be as ineffective as too few. Select your measures carefully. Make sure the measures tell a story. If they do not, replace them.
Ask yourself: Are the KPIs being presented effectively? Are the KPIs increasing managements and boards understanding of the organization and how it is being run? Do the KPIs allow them to make more informed decisions? Do the KPIs result in strategic level discussions? If the answers to any of these questions is no,” re-examine your scorecard.
Finally, KPIs should result in action and drive your organization to achieve better results. In fact, you should measure what you do well less frequently than the activities you dont do as well. KPIs should challenge you to do better.
Rebeka Mazzone, CPA, is Director of Business Development and Client Services for Rhode Island at Accounting Management Solutions, Inc. Call her at 401-374-3222 or email email@example.com.
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