Why Nonprofit Organizations Need Effective Financial Dashboards
Now, more than ever, management and the boards of directors of nonprofit organizations are becoming keenly aware of the increased need to evaluate key financial performance indicators on a regular basis. Management requires a way to quickly consider key information at a high level in order to make informed decisions on the performance of the organization, a segment of their work, a contract or initiative, or all of the above – often at the same time.
In the for-profit world, this summary report of key performance indicators is called a “dashboard.” Many organizations are beginning to adopt these reports as a standard component of the reporting package. The dashboard report summarizes key financial data, sets benchmarks for the organization and allows users to quickly and efficiently view their performance. In addition, this process gives users an idea of how well the organization compares against the goals and expectations set by management and the board.
In facing the challenges of shrinking funding from federal, state and local governments, nonprofit boards need to develop a similar dashboard to better monitor and evaluate financial performance on an ongoing basis. The traditional monthly reporting packages, which usually include the statement of financial position, statement of activities, statement of functional expenses and a cash flow forecast, do not always highlight the key indicators that would show whether an organization is off course and heading for trouble, or if it is in a financially stable position. Since traditional reports are only provided monthly, they may not offer time-sensitive information as would a dashboard, which is typically set up to be generated daily.
Dashboards come in many shapes and sizes. As a guiding rule, it is best to develop a dashboard based on a combination of key financial data and industry benchmarks. In setting your nonprofit’s benchmarks, first determine how the organization is evaluated by others. Funding sources, lenders and trade associations are all good indicators. Next, determine what goals you have set for your organization to achieve, such as capital reserves, working capital, productivity of staff, and/or staffing ratios. Use these goals as the standards to benchmark performance against. For example, if an organization has a loan covenant set by their lenders to meet certain financial metrics such as working capital—current assets over current liabilities—this could be incorporated into the dashboard. A deteriorating working capital ratio is usually one of the first indicators that the performance of an organization is not headed in the proper direction. The dashboard can also help if the organization has quarterly or semi-annual requirements to report these covenants to their lenders.
Dashboards can also include program specific performance, such as outcome levels and productivity. While not necessarily a financial measurement, these ratios can measure program performance which may be an indication of whether or not a funder may renew a program, or if the reputation of the organization may be put at risk.
As with all benchmarks created for a dashboard, their purpose should be to ensure management and the board of directors understands how the organization got to where it is at that particular time. This tool can help those in leadership roles decide whether or not action is warranted or if deviations from the benchmark need to be corrected.
With increased scrutiny of nonprofits and the rapidly changing economic landscape making financial decisions difficult, nonprofits need to re-evaluate the way they monitor their financial well-being.