By Charles Watson
It is often said that nonprofits should be more businesslike. Although I usually take umbrage at such a sweeping generalization, the point that many a nonprofit fails because it loses sight of good financial and operational management practices is worth taking to heart.
Nonprofit Quarterly, a leading publication of the sector, suggests that the single largest concern, capturing more than 50 percent of the responses from a recent survey, was board room attention to economic uncertainty and increased volatility. Since it is highly unlikely that we have the power to control the economy and thus eliminate uncertainty and volatility, our time is better spent on ensuring that we can weather the storm. That means focusing on long-term sustainability, resiliency and having financial systems in order.
The board should prioritize its efforts on charting the future, shoring up or overhauling core infrastructure and engaging the nonprofit as a living organism rather than disparate parts. That is easier said than done since most board members prefer to pay attention to the things they know best, which can lead to focusing on trees rather than the forest.
It is exceedingly easy for boards to get lost in minutiae and subsequently fail to make decisions that result in action in a timely matter. Board agenda should reflect a bias for a “need to act” versus “need to report”. To help the board focus on what matters, dashboards that monitor key performance indicators are essential.
A nonprofit dashboard gives important information to decision makers in a quick-read way. A good dashboard is a tool that supports the strategic plan and condenses key status information into visually obvious indicators typically using colors and graphs. For example, items needing action/correction might be in red, things to monitor more closely in yellow and things that are meeting/exceeding goals in green. Another useful part of a well-constructed dashboard is its ability to measure changes over time. While a dashboard is useful if it just shows where things stand at this moment, it becomes far more powerful when board members can see trends that answer the question “are things getting better or worse?”
The idea of providing financial data to board members is not a new one but often the point is lost in the complexity of standard financial reports, which need to be more easily understood to be effective. Choosing what to measure should be a deliberate, thoughtful, and inclusive process. The most useful indicators are a result of an authentic understanding of your nonprofit’s business model. Measure and monitor key elements that reflect both the revenue and expense side of the equation. Identify your most critical and/or most volatile revenue streams focusing on the factors that impact its reliability and predictability. Examine your expense structure to pinpoint which cost drivers are both significant and can be more readily adjusted to a changing environment. Finally, define the key service delivery elements of each program that influence results — things like client volume, turnover, retention and quality.
Different types of nonprofits have different business models with different drivers for success. By way of example, let’s focus on the revenue and cost drivers in a fee-for-service delivery model and consider key performance indicators relative to those drivers on a dashboard. In this example, it is important to monitor enrollment levels and the profitability of the programs given those enrollment levels. So, let’s track enrollment including acquisition and retention. We’re going to track the resulting revenue from our enrolled program participants and we’re going to monitor the overall surplus/deficit of the program. The questions we want to focus on as we analyze the results may include: Are we charging the right amount in fees? Are we collecting on those fees? Are we under-enrolled? Are we maintaining a steady stream of new participants? Are we losing participants before they complete the program? Are our costs low enough for us to generate a profit?
While dashboards can be awesome in their ability to help focus a board’s attention on the right things, a dashboard has limitations. It doesn’t tell you if you’re taking the right road to Santa Barbara or, more importantly, whether you should be going to Ventura instead — that’s the strategic plan’s job.
• Charles Watson is an interim affiliate of the Third Sector Company and senior vice president of The Oertel Group: Maximizing Nonprofit Performance. He is the former CEO of Interface Children Family Services in Ventura County.