During tough economic times, your nonprofit organization should always be looking for ways to improve and differentiate itself from other groups. One helpful tool is benchmarking.
Benchmarking is defined by the International Benchmarking Clearinghouse as the systematic, continuous process of measuring and comparing an organization’s business processes against leaders in any industry to gain insights that will help the organization take action to improve its performance.
Why should nonprofit groups use benchmarking?
There are many reasons your nonprofit should consider benchmarking. The most important one is that benchmarking is likely to improve performance by identifying strengths and weaknesses. There may be some segments of your organization that are not performing very well.
In looking at your results against a benchmark, especially over time in a graph, it may become evident that you should be focusing more on those areas that are performing well, or perhaps refocusing more energy on improving the areas that aren’t performing as well.
Other reasons to use benchmarking include gaining a competitive advantage over other organizations, setting higher standards for your organization, increasing donations and becoming more creative by thinking outside the box when establishing best practices.
What are the most important benchmarks to use?
What benchmarks should you use? It depends on the organization. Most for-profit companies will use ratios such as the current ratio, number of days cash on hand, quick ratio, inventory turnover, debt ratio, accounts receivable aging, accounts payable aging, gross profit and return on sales.
For nonprofit organizations, some of these ratios can be used, but other important ones include program services percentage, fundraising efficiency, primary revenue growth, program expense growth, working capital ratio, donor retention, average donation per donor and diversification of funding.
Some nonfinancial program benchmarks include number of people served, client satisfaction rate and number of new clients.
Some management benchmarks include employee turnover, employee satisfaction, board attendance rates, board meeting satisfaction and number of volunteers.
How do you get started?
The easiest way to get started is to collect both financial and nonfinancial data from internal records. By collecting this information, you can determine your baseline – or your current levels of results for a specific measure. This can be measured over a set period of time, maybe five years, or the most recent fiscal year. After you determine your baseline, you can determine what your benchmark is.
The benchmark is the desired level of results you hope to achieve. After you determine the benchmark, it is time to outline the best practices and key activities that need to be put into place to help you achieve your benchmark. Your CPA can assist you with the ratios and determining your baseline.
Who should you benchmark against?
Once benchmarks have been established internally, the next step is to benchmark your organization against others.
The hardest part will likely be selecting benchmarking partners that are similar to your organization. Is there an association, nonprofit publication or website that collects statistics that would be pertinent to your nonprofit? If not, perhaps you could ask them if it would be possible for them to begin collecting those statistics. The website GuideStar (www.guidestar.com) provides financial statements and tax returns of many nonprofits.
At one CPA firm, Wegner CPA’s, LLP, a Wisconsin affiliate of CPAmerica International, the audit practice has historically been concentrated in the nonprofit area. In 2011, the staff compiled information from their audits and IRS Form 990s to determine averages for different key financial, and some nonfinancial, statistics.
They then produced a benchmarking report that they sent to all of their nonprofit clients to use in their own organizations to help them establish benchmarks. The firm now plans to do this annually.
Many of the clients appreciated this information and have begun to understand the importance of using benchmarking as a tool to improve their performance.
If you’re not benchmarking already, consider beginning. It could become one of your organization’s most effective tools.