Why It Pays to Embrace Outcome Metrics in Nonprofit Accounting

In nonprofits, it’s all about the mission. As a CFO, Controller, or Accounting Professional at a nonprofit, it’s likely that you joined the firm because of this mission. While an honorable choice of career and employer, you’re probably working on a shoestring budget with a smaller staff than you should have, and are already burning the midnight oil to close the books or build a report.

Nonetheless, in order to fuel the growth of your nonprofit, you’re probably going to have to do even more reporting. Today, we would like to discuss the importance of outcome measures—key performance indicators that you should use to communicate your nonprofit’s effectiveness to donors, regulators, and stakeholders.

What are Outcome Metrics?

Outcome metrics are powerful, essential tools for demonstrating accountability and transparency. They can measure financial or non-financial criteria that reflect an organization’s, program’s, or initiative’s efficacy. They’re derived by carefully defining outcome indicators, data-collection methods, analytical techniques, and presentation vehicles that collectively show a rich picture of organizational performance.

These outcome metrics may go by many names and fit in countless categories. Many nonprofits obtain their best results by measuring across multiple dimensions for blended scorecards that encompass activities, capacities, financial results, and other metrics. Ultimately, well-defined outcome measures help organizations to continuously adapt and improve.

Why You Need to Track and Communicate Outcome Metrics

When you run a nonprofit, you know that it’s all about the mission, and the steps you need to take to get there differ from those of a for-profit organization. You need to demonstrate value to the people who want to see you achieve that mission (donors, grantors, members, etc.) you also need to focus on compliance with regulators, not to mention keeping up to date with watchdogs.

You are operating in an ecosystem that will keep you in check—if you don’t show that you’re creating value for the community or getting closer to achieving the mission, the rest of the environment will let you know. A low rating on Charity Navigator is as bad—or worse—than a negative one on the Better Business Bureau, and the loss of nonprofit status from the IRS is often a death sentence.

This is why businesses need to track down the numbers—so they can keep regulators, watchdogs, and donors up to date.

Important Outcome Metrics for Nonprofits to Track

A recent whitepaper from our friends at Sage Intacct looked into some common outcome metrics that growing nonprofits have found useful in communicating efficiency and value to donors, volunteers, and other stakeholders, noting that these three are the most helpful:

Program Efficiency

How many cents of every dollar spent is dedicated to the NPOs goal or programs? This is what program efficiency hopes to answer, giving donors, funders, board members, managers, and more information about whether or not a nonprofit is achieving its mission, or wasting money on overhead. Ideally, this ratio would be equal to one, but such success is unrealistic for most business models.

This ratio is calculated as program service expenses (or money directly spent to further the nonprofit mission of the organization) divided by the NPOs total expenses.

Revenue Per Member

Many membership-based organizations rely heavily on membership dues and program fees. How much revenue are you generating from your membership?

This metric allows you to see if your dues are ample in meeting your organization needs, and can determine whether you need a membership drive, a dues increase, or both in order to continue providing the benefits to members and the community. This measure is calculated by dividing revenue per member by total number of members.

Operating Resilience Ratio

Can your unrestricted inflows today meet all of your expenses? Operating resilience enables managers to gauge whether or not the nonprofit could pay all expenses from program revenues alone.

A good outcome for this measure is one, and in some cases more than one, but most NPOs must also rely on temporarily or permanently restricted revenues. This ratio is calculated as unrestricted program revenue (or inflows from operations that can be spent at the discretion of the NPO) divided by total expenses.

Fundraising Efficiency

How much do you spend to raise a dollar? This metric shows how efficiently your organization raises funds, and is calculated as unrestricted contributions (or incomes from donors who do not specify where it must be used) divided by unrestricted fundraising expenses (or how much money was spent by the NPO to collect those contributions).

An important takeaway from this ratio is how many dollars the NPO can collect for every one dollar of fundraising expense—how efficient is the organization at raising money. The higher the ratio, the more efficient the fundraising efforts.

Outcome Metrics: Measuring What Matters in the Nonprofit World

Recently, Sage Intacct released a whitepaper on tracking and communicating important metrics, and how nonprofits can turn transparency into bigger donations and improved return on mission. Titled Outcome Metrics: Measuring What Matters in the Nonprofit World, this whitepaper looks to define outcome metrics, discuss further why they matter, and even provide success stories. We welcome you to download it here to learn more.