Benchmarking for Nonprofits: Seeking Insights to Propel Your Organization Forward

By Jayme F. Moore, CPA and Linda J. Kramer, CPA, MBA

Nonprofit organizations facing tighter budgets and greater competition for financial support understand that sophisticated donors evaluate a range of key performance indicators when determining where their dollars can most effectively be used. So, it’s essential these days for nonprofits to measure their financial and program performance in ways that can be quantified and reported to stakeholders.

This is where benchmarking comes in. Benchmarking is a process of measuring an organization’s productivity against past experience or industry norms and adjusting to improve outcomes. Ideally, a nonprofit will consider both internal benchmarks and external benchmarks to determine where the most effective improvements can be made.

Benchmarking provides information that helps nonprofits develop and implement strategic plans. It helps an organization monitor its financial health and determine where costs can be cut and revenues increased. Nonprofits also use benchmarking data to demonstrate their efficiency to donors and grantors.

No One Size Fits All

No one size fits all when it comes to benchmarking for nonprofits. Every organization is different and many organizations have different goals for their benchmarking experiences. To ensure that your organization realizes the most effective insights and data from a benchmarking project, discuss the goals internally with staff and with the board of directors before embarking on your journey.

For many nonprofits, measuring the following metrics against past experience or against similar organizations provides a good starting point:

  • Program efficiency (program service expenses as a ratio of total expenses). This ratio identifies the amount you spend on your primary mission, as opposed to administrative and fundraising costs.
  • Fundraising efficiency (unrestricted contributions as a ratio of unrestricted fundraising expenses). How many dollars do you collect for every dollar you spend on fundraising? A higher ratio indicates more efficient fundraising. To determine whether your fundraising efficiency is strong, compare against your organization’s past experience.
  • Operating reliance (program service revenue as a ratio of total expenses). This ratio indicates whether your nonprofit could pay all of its expenses solely from program revenues.
  • Organizational liquidity (expendable net assets as a ratio of total expenses). How much of the year’s total expenses is considered expendable equity or reserves? The higher the ratio, the better the liquidity.

Additional benchmarks that can be considered, based on your organization’s profile and mission, include average donor contributions, expenses per member and other ratios that measure trends for liquidity, operating yield, revenue, borrowing, assets and similar metrics. No matter which benchmarks you choose, you’ll need reliable processes for collecting and reporting the data.

Benchmarking Against Yourself and Other Nonprofits

Once you have identified the key performance indicators and metrics that are most relevant to your benchmarking effort, it’s essential to start the process by compiling and calculating the data a metrics for your own organization. Benchmarking against your own historical performance provides a solid understanding of what the numbers mean and how they relate to your plans for improvement.

When it comes to external benchmarking, finding reliable data for organizations that are similar to yours can be challenging. Does fundraising data from an animal rights organization relate to that from a hunger relief organization? Probably not. The costs of fundraising for two such organizations can be vastly different, even though the amounts raised may be similar.

Nonprofit industry reports and websites sometimes publish performance benchmarks from participating nonprofits, which sometimes provide a glimpse into those organizations’ strength in a variety of key metrics. But data from a self-selected group of organizations may or may not provide a realistic view of the entire nonprofit sector in which your organization operates.

The process

The key to a successful benchmarking process is understanding what you want from it and what your organization will do with the information once it’s finished. Before you start, consider the following process:

  • Identify the goals and decisions that will be shaped by your benchmarking findings. What are you trying to learn?
  • Identify the key data you need to achieve your goals.
  • Select the organizations most similar to yours for which you will gather benchmarking data.
  • Gather and analyze the data.
  • Identify key metrics and opportunities to improve.

Done well, benchmarking can yield insights about your organization’s strengths and vulnerabilities that may surprise you or may affirm what you already knew.

Contact your G.T. Reilly advisor for further information about how benchmarking may benefit your organization.