Identifying and Using Key Financial Indicators as Essential Management Tools

by Meave G. O’Marah
Founder and Principal of The Owner’s Representative

Meave O'Marah led a training on non-profit finance in September 2009, as part of TSNE's Capacity Building Training Series. Here she shares some pointers from the training.

Know Your Key Indicators and How to Identify Them

Key indicators are metrics and ratios that help assess the financial and operational health of your organization. What you measure depends on what your organization does and how it is structured.

The goal of using indicators is to develop ways of looking at your organization through your financial as well as operational results that help you assess whether you are fiscally healthy and whether you are adhering to strategic, mission-driven targets.

To identify your key indicators, start with the following:

Review your most recent annual financial statements and compare one quarter to the next.
Look at margins: This will give you a better sense of trends than looking at raw numbers alone.
- net surplus
- program costs as a percentage of revenue
- general operations as a percentage of revenue
- staffing costs as a percentage of total expenses
Assess your revenues and expenses in terms of what you do: the number of clients you have helped, the cost per client to deliver your services. This will help you think about your financial condition as it relates to your operations and programmatic work.
Make sure to look at your balance sheet and cash flows as well as your statement of activities. It is essential to maintain control over your daily cash balances, investments, and debt and credit balances. You should review these amounts relative to each other and also relative to your annual budget. You should have two to three months cash saved or accessible to cover unanticipated shortfalls.
Pay particular attention to seasonal fluctuations.

Organize Your Key Indicators into a Performance Dashboard

Once you begin to look at your financial and operational data, patterns and trends will start to emerge. Identify the top 10 or 12 data points and metrics that you think are most likely to be leading indicators; that is, those most likely to predict changes before they occur. For example, if you rely on a mix of public grants, individual donations and fund-raising revenues, you should look at these amounts relative to each other rather than in the aggregate or you may miss a shift in the balance between the 3 that should indicate either attention need to restore balance or the need for a strategic shift in generating revenues.

Your dashboard should be 1 and not more than 2 pages and should be prepared in Excel or another spreadsheet product. This way you can automate calculations and incorporate information from your accounting system.

You should produce a dashboard at least quarterly, and potentially monthly. Once you have used the dashboard for a year, review the metrics you have included to see whether they are generating useful information. If not, replace them with something else, but give it enough time to see whether trends are emerging.

If you have the capacity to run regressions, you can also look for relationships between different variables to add a deeper level of sophistication to your analysis.

Share Your Metrics Organization-wide

Articles on Nonprofit
Budget and Finance

One lost opportunity for many nonprofits is in sharing financial projections and results. While the mission may be the driving force of an organization, the finances are an essential component to fulfilling the mission and attaining goals. Developing a shared understanding of the finances definitely helps organizations set priorities, grow and also manage through difficult periods.

Both the staff and the board should understand and be familiar with core financial data. This usually includes high-level budget numbers, revenues by major source, and current year budget versus historical performance. The dashboard can – and should – be shared as well, but may need to be adjusted if it contains sensitive information for senior management and board review only. Review of the dashboard and financial performance should be done regularly, and at least quarterly.

If your organization has department-level budgets and dashboards, the above should hold true at the department level. Without sharing this information, it is difficult to hold staff accountable for financial performance; and without a sense of accountability, it is easy to lose sight of slipping financial performance.

Codify Financial Practices

Make sure your nonprofit has a Finance Operations Manual that clearly lays out practices, timeframes and responsibilities. A potential outline would include the following sections:

Financial Principals
Budgeting
Accounting System Design and Maintenance
Strategic Planning and Finance Initiatives
Financial Reporting
Accounting Operations (e.g. Segregation of Duties, Period Closings, Annual Review, etc.)

Final Rules of Thumb

Keep it Simple

Keep everything from your accounting system design to dashboards to reports simple and add complexity as you identify a need for it. It is easier to add detail and harder to simplify things.

Avoid Garbage In = Garbage Out

Pay attention to the quality and consistency of data management and entry. You can only rely on data for making decisions if it is top quality.

Don’t Buy Into the Notion that Numbers and the “Bottom Line” Don’t Matter

Today’s nonprofits have introduced many concepts from the business world and generally to good effect. Among these practices is attention to the bottom line. Achieving an operating surplus is the most reliable engine for growth and planned growth can only occur if an entity can operate more efficiently than break even.