Dashboard Reporting – Three key metrics

The not-for-profit sector is an ever-growing and evolving industry and with that comes various challenges and opportunities. With good financial reporting and analysis, not-for-profit organizations can prepare for these challenges and take advantage of opportunities that arise timely and with confidence.

One of the biggest challenges for not-for-profit organizations is ensuring adequate funding and management of resources to achieve the organization’s mission. This is a constant challenge for many organizations and one that requires proactive planning among board members and management to guarantee the continuation of the organization. The first step to having good financial reporting, is to have accurate and timely information being reported to the accounting system. This allows management to make timely decisions based on real time data and manage the organization proactively for foreseeable future concerns and potential opportunities.

Financial dashboards can help not-for-profit organizations analyze the relevant information in a summarized, high-level format in order to assist in financial decision making. In this article, we are going to focus on three financial ratios and how to use these tools to help manage the organization’s finances: days cash on hand, the quick ratio, and fundraising return on investment (ROI).

Days Cash on Hand

Days cash on hand reflects the amount of cash available for operating expenses and reflects the number of days the not-for-profit organization can operate with the current cash on hand.  This is one of the single most important factors for a not-for-profit organization as this is the cash available to pay the current obligations of the organization and carry out the mission. Without adequate operating cash on hand, the organization will either have to look for alternative ways to pay current obligations (i.e. using debt) or reduce the amount of services provided. Days cash on hand is calculated by taking the total amount of unrestricted cash divided by the average expenses per day. A good goal is to have 3–6 months of cash available to pay the current obligations of the organization.  Amounts in excess of the 6 month benchmark may be evaluated by the organization’s board for investment or other uses. Monitoring operating cash on hand should be ongoing throughout the operating cycle to ensure that obligations are met and any new factors are taken into consideration and incorporated into the analysis as needed.

Quick Ratio

The quick ratio is a widely used financial analysis tool in both the for-profit and not-for-profit sectors. The quick ratio is defined as ‘the amount of current assets available to pay current liabilities’ and it is calculated by taking the total liquid current assets (current assets less inventory, prepaids) and dividing that by the total current liabilities. The importance of this ratio is it visually shows how many times the organization’s current obligations can be paid using only the liquid assets currently available at that point in time. A ratio greater than 1 means the organization has enough current assets to meet all current obligations at that point in time. A ratio less than 1 means the organization has more current obligations than it does assets to meet those obligations. Although the ideal benchmark for the quick ratio varies organization to organization, not-for-profit organizations should strive for a quick ratio of at least 2. This benchmark provides some cushion to the organization and allows them to stay current on their obligations.

Fundraising return on investment (ROI)

Fundraising ROI is a performance measure used primarily in the not-for-profit world as one tool to measure the effectiveness of fundraising efforts. This ratio is calculated as ‘the total amount of fundraising revenues earned divided by the total amount of fundraising expenses’. This is typically calculated in total or per event (if more than 1 fundraising event occurs in the operating cycle). Often times, not-for-profit organizations tend to focus on the amount of money earned rather than looking at the complete picture using fundraising ROI. The importance of using the fundraising ROI analysis is to see how effective your fundraising expenses were in generating fundraising revenues. There is an old saying that goes “you have to spend money to make money” and that can be true for fundraising events. But the question is, what is the right balance and how effective is the fundraising effort in actually generating value to the organization? If the only analysis is fundraising net income, the organization is not seeing the overall effectiveness of the event. For example, if an organization spends $40,000 to put on an event that generates $50,000 in income, the net income for that event is $10,000. Sounds great right? But using the fundraising ROI, we can see that for every $1 spent, they are only earning $0.25 of revenue. That’s a lot of effort for a small return.  Using this analysis, not-for-profit organizations can choose where to spend their money to get the biggest return and more importantly, they can choose how to spend their time on activities that will have larger ROI’s.

Summary

There are many more financial ratios and analysis tools available to not-for-profit organizations.  The 3 ratios discussed above are important for not-for-profit organizations because they focus on the daily management of cash and expenses in the near term (1–6 months) and the effectiveness of the organizations fundraising efforts (which for many organizations are large events that require significant time and cash commitments). One of most valuable resources to not-for-profit organizations is time. Using these financial analysis tools, the organization will save time managing their available funds and daily decisions as well as be able to better understand how effective their fundraising efforts are being spent, in terms of both time and money. These ratios should be used in conjunction with the review and analysis of actual financial information and not as a replacement to using other reporting tools such as the operating budget and financial statements.