Running a Tight Ship

Improved program management can make for smooth sailing

Not-for-profits face pressure from all directions to administer programs and services effectively. Watchdog groups and funders expect not-for-profits to achieve certain benchmarks, and organizations have their own performance demands. In today’s environment, after all, they must either operate efficiently or risk extinction.

To control costs and improve delivery of programs and services, not-for-profits need to focus their time, money, and human resources on what’s truly important: achieving their mission. Here are a few ideas to help you better assess and improve your effectiveness in this area.

Calculate key ratios

Charities must have a handle on how much of their expenditures go toward programs as opposed to administrative and fundraising costs. The following are some key ratios that not-for-profits will need to calculate and monitor if they’re to evaluate and improve program efficiency:

Percentage spent on program activities. This number offers insight into how much of your total budget is used to provide direct service. To calculate this measure, divide your total program service expenses by total expenses.

Many watchdog groups, such as the BBB Wise Giving Alliance (www.give.org), are satisfied with 65 percent. But organizations must spend at least 75 percent of their total income on programs each year to be part of the United Way’s Combined Federal Campaign.

Percentage spent on fund raising. Another important measure is the amount an organization spends on fund raising. To calculate this measure, divide total fund-raising expenses by contributions (donations, legacies and other gifts). The standard benchmark is 35 percent, although many organizations aim to do better than that.

Current ratio. This number is an indicator of an organization’s ability to pay its bills. It’s worth monitoring closely, as it provides a snapshot of financial conditions at any given time. To calculate, divide current assets by current liabilities. Generally, this ratio should not be less than 1:1.

Reserve ratio. This is an indicator of an organization’s ability to sustain programs and services during temporary fluctuations in support, revenue and expenses by having sufficient expendable net assets and related cash and cash equivalents or short-term investments. Some advisors suggest targets of 30 to 90 days or more. The target should be based on the nature of a not-for-profit’s operations, its program commitments and the predictability of its funding sources.

To calculate, divide expendable net assets (unrestricted and temporarily restricted net assets less net investment in property and equipment and less any nonexpendable components such as charitable remainder trust interests) by one day’s expenses (total annual expenses divided by 365).

Not-for-profits can use the information gleaned from these numbers to drive continuous improvement in delivering programs and services.