Interested in learning more about this topic? Join us as we partner with Enkel to host a free webinar on January 30, Key Financial Metrics Every Nonprofit Should Track for Long-Term Success. Register today.
Nonprofits operate in a complex environment where maintaining financial health is critical to long-term success. In an uncertain economic and political climate, tracking key financial metrics can give your team the insights and data it needs to make informed decisions, optimize resources, and build confidence with donors and stakeholders.
We support over 100 Canadian NPOs at Enkel, and many nonprofits struggle with identifying and regularly tracking the right metrics to ensure sustainability.
In this guide, we’ll show you four essential financial metrics that every nonprofit should monitor to strengthen financial stability, improve decision-making, and ensure mission alignment.
If you’d like a deeper dive into the metrics you can use to improve your NPO’s financial success, join our upcoming webinar: Key Financial Metrics Every Nonprofit Should Track for Long-Term Success.
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Join Our Upcoming Webinar:
Key Financial Metrics Every Nonprofit Should Track for Long-Term Success
Ready to improve your nonprofit’s financial health? In our upcoming webinar, we’ll dive deeper into these critical financial metrics and provide actionable insights to help you track and leverage them for long-term success.
You’ll Learn:
- Strategies to unlock unrestricted revenue opportunities
- How to manage flow-through agreements
- Conduct a proactive cost review to optimize for 2025
- Strengthen funder relationships with transparent, data-driven reports
- Modernize your financial operations with new technology
Register now to secure your spot!
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Metric #1: Operating Reserve Ratio
The Operating Reserve Ratio shows how many months your organization can continue operating without new revenue. This metric is essential for ensuring your nonprofit can weather financial uncertainty and maintain operations during periods of low cash flow.
Why It Matters:
A healthy operating reserve protects your nonprofit in times of crisis or unexpected downturns, providing a buffer for unforeseen expenses.
How to Calculate It:
Divide your unrestricted net assets by your average monthly expenses. This gives you a clear picture of how many months you can sustain operations with your current reserves.
How It Impacts Decision-Making:
The Operating Reserve Ratio helps you answer critical questions about financial sustainability:
- How long can we keep running without new revenue?
The metric tells you how many months your organization can continue operating if no new revenue comes in. - Are we prepared for a financial emergency?
By regularly monitoring your reserve, you can ensure that your nonprofit is protected against unexpected challenges or disruptions. - Should we allocate more resources toward building reserves?
A low ratio may prompt you to adjust your budget or fundraising strategy to increase reserves.
When to Track:
Quarterly, or after major expenses or changes in funding.
Tools:
Accounting software like QuickBooks Online can help generate this metric from your financial statements.
Metric #2: Program Efficiency Ratio
The Program Efficiency Ratio measures how efficiently your organization is using its resources to achieve its mission. It’s an important metric for assessing whether the majority of your funds are being allocated toward programs rather than administrative costs. Donors and stakeholders often scrutinize this ratio when deciding whether to support your nonprofit.
Why It Matters:
High program efficiency demonstrates your nonprofit’s commitment to maximizing the impact of donor contributions. This can significantly boost donor confidence and increase fundraising success.
How to Calculate It:
Divide your total program expenses by your total expenses. The higher the percentage, the more efficiently your organization is using its resources to fulfill its mission.
How It Impacts Decision-Making:
The Program Efficiency Ratio helps you address important operational questions:
- Are we prioritizing mission-critical activities?
A high ratio indicates that most of your resources are going directly toward programs, which align with your mission. - Are administrative costs too high?
A low ratio may signal that too many resources are going toward overhead, prompting a review of administrative expenses. - How do we compare to other nonprofits in our sector?
Many funders compare efficiency ratios across organizations, so this metric helps you stay competitive.
When to Track:
Annually, during audits or donor reporting periods.
Tools:
Use your year-end financial statements to calculate this ratio. Enkel’s bookkeeping services can help ensure program expenses are categorized correctly.
Metric #3: Administrative Cost Ratio
The Administrative Cost Ratio measures how much of your nonprofit’s total spending goes toward administrative and overhead costs, such as salaries, office space, and other general operating expenses. Maintaining a balanced administrative cost ratio is critical for showing donors and stakeholders that your nonprofit is both efficient and sustainable, without compromising on the operational support needed to fulfill your mission.
Why It Matters:
While keeping administrative costs low is often a goal, underfunding these areas can limit your organization’s ability to function effectively. A healthy Administrative Cost Ratio strikes a balance, demonstrating that your nonprofit is lean but has the necessary infrastructure to achieve long-term success.
How to Calculate It:
Divide your total administrative expenses by your total expenses. A lower ratio typically indicates that more resources are being directed toward mission-critical programs, but it’s important to ensure administrative needs are adequately supported.
How It Impacts Decision-Making:
The Administrative Cost Ratio helps you answer key operational questions:
- Are we investing enough in operational support to sustain growth?
If the ratio is too low, it may signal that your organization isn’t putting enough resources into essential functions that keep your nonprofit running smoothly. - Are our overhead costs too high?
A high ratio could indicate inefficiencies in spending, prompting a review of operational costs. - How do we compare to sector benchmarks?
Many donors and stakeholders assess the administrative cost ratio when deciding whether to contribute, so keeping your ratio in line with similar organizations can help maintain donor confidence.
When to Track:
Annually, when preparing financial reports for stakeholders or conducting operational reviews.
Tools:
This metric can be easily generated from your financial statements, using tools like QuickBooks Online. Enkel’s fractional CFO services can help you evaluate and optimize your administrative costs to maintain a balanced ratio.
Metric #4: Fundraising Efficiency
Fundraising Efficiency measures how cost-effective your fundraising efforts are. It calculates how much you spend to raise a dollar and is a crucial metric for determining whether your fundraising campaigns are providing a good return on investment (ROI).
Why It Matters:
High fundraising efficiency means your nonprofit is raising funds at a lower cost, leaving more resources to dedicate toward mission-driven programs. Poor fundraising efficiency could indicate that your methods are not as effective and may need adjusting.
How to Calculate It:
Divide your total fundraising expenses by your total fundraising revenue. The lower the ratio, the more efficient your fundraising efforts are.
How It Impacts Decision-Making:
Fundraising Efficiency helps you assess the effectiveness of your development efforts:
- Are we raising funds efficiently?
A low ratio signals that your fundraising efforts are cost-effective and worth continuing or expanding. - Which fundraising campaigns are worth the investment?
This metric helps you compare different campaigns, allowing you to invest in the most profitable ones. - Do we need to optimize our fundraising strategy?
A high ratio may indicate inefficiencies, prompting a review of your fundraising approach and resource allocation.
When to Track:
After each major fundraising campaign or annually for a big-picture view.
Tools:
Use your CRM fundraising reports and accounting software to analyze this metric. Enkel’s fractional CFO services can help you evaluate the ROI of various fundraising methods.
Conclusion
Tracking these four essential financial metrics can provide valuable insights into your nonprofit’s financial health, helping you make informed decisions, improve operational efficiency, and build stronger relationships with donors and stakeholders.
By regularly monitoring your Operating Reserve Ratio, Program Efficiency Ratio, Liquidity Ratio, and Fundraising Efficiency, you’ll have the tools needed to navigate uncertainty and ensure long-term sustainability.
Join our upcoming webinar, Key Financial Metrics Every Nonprofit Should Track for Long-Term Success, to learn how to calculate and leverage these metrics to drive your nonprofit’s financial success.
At Enkel, we work with Canadian nonprofit organizations to provide reliable, accurate monthly bookkeeping, payroll, accounts payable, and controllership services. If your nonprofit is looking for a bookkeeper to handle the books, get in touch with us today to learn more about our nonprofit accounting services.