Define Your Strategy
“What gets measured gets done.” The foundation for any organization’s finances is accurate, timely financial statements that are prepared in accordance with generally accepted accounting principles (GAAP). To make consequential decisions it’s essential that every owner, board of directors, executive director, and management team know how to read, understand, and interpret financial statements. If strategy is the compass, then financial statements are the road map, and key performance indicators (KPIs) are the landmarks. If nobody can read the map or doesn’t know what landmarks to look for then the organization will not know if it’s moving in the right direction. Below is the purpose behind many useful KPIs. Based on our clients’ strategies and goals, at Tanner, we help our clients select the right 3-5 KPIs to track the progress of those goals.
Financial Statement Analysis
- Comparative financial statements: Compares a financial statement such as balance sheet, or income statement with prior period statements. Previous financials are presented alongside the latest figures in side-by-side columns, enabling owners, board members, or management to identify trends, track an entity’s progress and compare it with industry standards.
- Common size financial statements: Financial statements in which each line item is expressed as a percentage of a significant total. In the income statement, each item is usually expressed as a percentage of sales, while on the balance sheet, each item is expressed as a percentage of total assets. This approach allows for easier comparison across different entities or periods, regardless of size.
- Compare budget to actual: Compares an income statement budget and actuals. Budgeted amounts are presented alongside actual amounts in side-by-side columns, enabling comparison or budget to actual results.
- Operating cash flow: Is a measure of how much cash the entity has as a result of its operations. This measure could be positive, meaning cash is available to grow operations, or negative, meaning additional financing would be required to maintain current operations.
KPI’s
- Cash burn rate: The pace at which an entity consumes its cash. The burn rate is typically calculated in terms of the amount of cash that the entity is spending per month.
- Donor reliance ratio: Measure of how much an entity uses grants to function. Organizations can benefit from knowing how much funding allows for operation. This allows them to determine their reliance upon grants.
- Fund raising efficiency: This examines how much funding is brought in from different fundraisers. If this ratio equals one or less, then the fundraising activity breaks even, and is not an effective way to raise funds. The higher the ratio, the more effective the fundraising activity.
- Functional expense ratios: Theses ratios examine how expenses are broken out by program, management/general compared to total expenses of a nonprofit entity. NPO’s want the majority of expenses to be directed at program expenses, keeping other expense categories low.
- Program impact index: Measures the effectiveness of programs in meeting the overall goals of an entity. It tells if a program is making a good impact relative to their resources. The impact is measured through the lives improved, communities served or whatever metric an entity has chosen to use to measure their objectives.
- Volunteer engagement rate: This measures the commitment and satisfaction of an entity’s volunteers. Their engagement is critical to an entity’s success because volunteers have the option to walk away if they are not engaged. This can be assessed through various measures such as the retention rate and satisfaction rate. Satisfaction is measured qualitatively through surveys.
- Donor retention rate: This refers to the loyalty that donors have to entity. This is important because when a donor stops giving funds, an entity must find a way to replace those funds.
- Impact per dollar: This demonstrates the success each dollar generates toward an entity reaching its goals. It is essentially a measure of how far a dollar donated can go.
- Grant success rate: This measures the ability of an entity to secure funding through grants. This can help an entity determine if it need to improve its approach to grant proposals.
Let Tanner Help Tell Your Story
Financial statements are more than just numbers on a page that no one besides accountants are meant to understand. They are the numbers that tell the story of every organization. At Tanner, we are not only experts in nonprofit technical accounting, but we understand what donors, bankers, and federal agencies are looking for. We provide accurate financial statements for our clients, and we make sure our clients understand those financial statements and the story they are telling. Then, we take it one step further and help our clients design financial reporting and metrics that will tell them if they are moving toward the strategy they have defined.