By Michael F. Cade, CPA, CGMA
For nonprofits to achieve their missions over the long term, their leaders need to understand organizational performance. CPAs working for nonprofits have a responsibility to provide useful information to those leaders for decision making. Historically, CPAs were expected to focus mostly on financial metrics, but today nonprofits need financial leaders who can go beyond the numbers and provide mission performance assessments that integrate and interpret financial and nonfinancial components.
Take an inventory of readily available performance metrics for your organization. Standard financial statements provide a solid understanding of the nonprofit’s financial condition. To be useful for decision making, the financial information needs to be accurate, timely, and presented in an understandable format. Statements should include variances with explanations, as well as indicators of trends or cycles.
Look for ways to condense data, such as dashboards, to focus attention on specific areas of concern or key performance measures. Use charts and graphs to explain business cycles and trends, and to support forecast expectations. Provide relevant comparable information, such as rolling results, and include forward projections to show patterns.
Program Reporting: Programs are the engine that drive nonprofit performance, so consider adding a program portfolio analysis to your reporting. This will provide a snapshot of which programs are contributing to the sustainability of the organization and which are not. If your organization has numerous programs, look for ways to cluster similar or related programs to help users understand relationships, such as shared resources and common funders.
Indirect Cost Absorption: Many funders place restrictions on the amount of indirect cost burden they will fund. Decision makers need to have a clear understanding of how much of the nonprofit’s indirect costs are being paid by programs and how much is unfunded. This information needs to be provided both at the program level and for the consolidated entity.
Liquidity: New accounting standards require disclosures related to liquidity, including quantitative measures and qualitative narratives. As liquidity gains exposure through the financial statements, CPAs will need to provide more information to management and the boards. If you are not already doing so, start building a sound cash forecasting process. While building your process, consider component metrics such as the timing of fundraising campaigns with significant programs or events.
Pipeline: Understanding volume, priority, and probability of opportunities for new funding is critical to decision makers. Known as pipeline, these metrics are often associated with the development team. However, nonprofit CPAs should understand and integrate pipeline data into forecasts and budgets. CPAs can also add value by helping to define standards for pipeline metrics. People identifying and advancing opportunities often wildly overestimate win probabilities, so adding a dose of healthy skepticism can avoid missed budgets and forecasts.
To build a broad picture of an organization’s performance, nonprofit CPAs must include data points from outside of the finance department. Examples of nonfinancial metrics to consider include the following:
Nonprofit CPAs should help translate these data points into a more comprehensive performance analysis. Look for relationships between these metrics and results. You may find leading or supporting indicators that will improve forecasting processes and substantiate budgets.
The best information for decision making includes past results and reasonable expectations for the future. Two concepts come into play when projecting forward: capabilities and capacity. Capabilities define what skills or services the organization possesses that are aimed at fulfilling its mission. Capacity is the amount of those skills available, or how much service can be provided.
When assessing performance, consider if the organization is using its assets effectively and efficiently. Look for skill or service gaps created by turnover, and understand the impact to the mission. Similarly, identify programs or functions that are under- or over-utilized, and include those metrics in your mission-focused reporting.
A related external performance metric is value provided. This metric aims to measure how well your organization’s service meets the community’s needs. Again, this can be measured via gap analysis and capacity. Determine if the nonprofit lacks the skills or services needed by the service community or if there are too many or too few resources to fulfill the needs.
Assessing results versus budget or versus previous results provides only part of the mission performance picture. For more complete information, you need to provide data points that measure your organization’s performance versus similar organizations. Metrics like growth, turnover, program margins, fundraising, client satisfaction, and many others can be found or derived via public sources and engagement in associations. Adding comparative performance metrics provides context and helps avoid unreasonable assumptions and expectations.
For nonprofit CPAs, it is time to go beyond the numbers and ponder the concepts of mission performance reporting. Start with a strong foundation of useful financial measures broadened with mission-focused metrics about programs, liquidity, and pipeline. Gain an understanding of nonfinance functions, and integrate related or supporting metrics. Then consider looking forward as a new facet of reporting by assessing capabilities and capacity. Finally, layer in an assessment of organizational performance as it compares to similar nonprofits. Take these steps to add value to your organization by moving from limited financial reports to mission-focused performance assessments.
Michael F. Cade, CPA, CGMA, is a strategy consultant and executive coach for MFCCoach LLC in Morrisville, and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at firstname.lastname@example.org or on Twitter @mfccoach.
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