Money Matters: Setting up financial dashboards for nonprofits

Michelle M. Cain, The Daily Record Newswire

Now more than ever, management of nonprofit organizations and their boards of directors need a timely way to evaluate key information at a high level in order to make informed decisions on the performance of the organization, a segment of the organization, or a contract or an initiative of the organization. It’s important that they evaluate key financial performance indicators on a regular basis.
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 view their performance. In addition, this process gives users an idea of how well the organization compares against 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 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 statement of cash flows, 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 are not offering 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 organization’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 its 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 its lenders.

Dashboards can also include program specific performance, such as outcome levels and productivity. While not necessarily a financial measurement, these ratios could 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. For example, an organization may be funded to operate a program with a certain staffing ratio, such as for every 15 children in its care there will be one full-time-equivalent social worker. Now, due to staff turnover and the inability to hire replacements, the organization is operating at a staffing ratio of 30 to 1.

Financially, the organization may be operating at a surplus and that will be indicated in certain financial benchmarks. However, this benchmark may be an indication of a bigger problem and a risk to the organization. As with all benchmarks created for a dashboard, their purpose should be to ensure management and the board of directors understand how the organization got to where it is at that time and to decide whether or not action is warranted or whether or not deviations from the benchmark need to be corrected.

The process for developing the dashboard must be a partnership between management and the board of directors, the underlying principle being that you need to develop how much content is to be presented, how often and to what depth. Often times, too much information may be counter-productive and make it difficult to analyze what’s really important. External reporting requirements, funding source criteria and time-sensitive data should all be factored into the dashboard.

An organization needs to establish this process upfront when establishing a dashboard; otherwise there is no process in place to ensure it is updated and utilized. The effort may be time-intensive to develop but then many of the items can be automatically pulled from your accounting system and the formulas will do the calculations. The IT department may have to be brought in to help develop and maintain these reports for finance. However, a responsible team member should be assigned to review the output and make sure any updates in the accounting system are rolled into the dashboard.

A dashboard serves many purposes to those that read it. Most importantly it drills down beyond the data that has historically been reviewed each period by management and the board of directors to look for trends, both positive and negative, and make sure that all stakeholders have full awareness of the direction of the organization.

—————

Michelle M. Cain, CPA is a partner with Mengel, Metzger, Barr & Co. LLP. She can be reached at Mcain@mmb-co.com.

Comments

  1. No comments
Sign in to post a comment »