Getting tuned up: looking under an organization's economic hood.

Your organization's financial reports land on your desk regularly (hopefully), and they're always the same. Row upon mind-numbing row of numbers cascading down a fistful of pages, their ceaseless uniformity no longer as reassuring as it was in the past.

A few years of experience has helped you tease out what you need from this information, but you suspect these numbers don't tell you everything you really need to know.

You're right. Sometimes looking at the dashboard isn't enough. Sometimes you have to get under the hood--the economic hood, that is.

That sense of partial knowledge you have in looking at financial numbers is rooted in the difference between financial information and economic knowledge. Financial information, inscrutable as it may seem, is the easiest and most straightforward of the two. It is descriptive and linear, and it gets replicated and passed on in well-established ways. Plus, you know where to find it.

True economic knowledge, on the other hand, is harder to come by. Economic knowledge is about the inputs you use, the way you use them up, and the value you create. Economics are related to finances, but they don't always operate in parallel. Financial knowledge lives only in numbers, while economic knowledge is both quantitative and qualitative.

Here's an example of the difference between looking at financial information and economic knowledge. That color printer you bought for ordinary light printing jobs around the office such as printing a .pdf copy of this column (recent ones are available at www.grantthornton.com) had an appropriately light cost, certainly in the low three digits, possibly even less than that. The ink cartridge it uses is also low in cost, assuming you buy one cartridge at a time. The paper doesn't cost much either.

If you wanted to know any one of those costs according to your financial records, you would need to look in two or three different places--equipment costs, office supplies and paper, let's say. By the time you sorted through all the information to find and match up the right costs ... well, you wouldn't. Why not? Because no matter what you found, calculating the costs of printing a page on that printer wouldn't be worth it. In financialspeak, the cost is not material. Who cares whether it cost three cents per page or seven cents per page to print something?

But now let's suppose that instead of buying that cute little printer and the cute little cartridge you invested in a high-speed printer with wonderful color and the ability to print all sorts of special ways, because a high-volume printing business is one of the social enterprises you are about to start up.

And since you'll be in a business with real, live paying customers who want immediate service, you're going to have to have at least one full-time person tending to that printer at all times. And that person is going to need to know all about that monster printer, meaning they will need some training on it and that they probably will demand higher pay because of it. And you'll need someone to cover for that person when he or she gets sick, goes on vacation, or attends printer training. You'll also need someone to sell the printing jobs, and someone to supervise the operation.

Suddenly it is very much worth your while to know the economics of printing a single page. Yet the difficulty of getting that information is far greater than the daunting task of getting it for the little printer because now you have to sort through lots of additional financial accounts, such as payroll costs, training expense, and maintenance contracts. The temptation is to give up and hope for a grant.

Don't do it. Economic knowledge is the most powerful type of quantitative information a streetsmart manager can possess. Having only financial information is like having to look only at footprints when what you really want to know is who produced them and why. The trouble is, by the time you see the footprints it may be too late to find out the other stuff.

Smart managers look for indicators in their numbers, financial or economic. There are a seemingly infinite number of financial indicators, just as there are a wide range of economic indicators. Happily, one needs a far fewer number of indicators for monitoring economic well-being than for finances. The trick is getting the right ones.

Every organization will have different economics it needs to track, and the sheer variety of them is overwhelming. But it is possible to identify certain areas of economic activity that most nonprofits will need to know more about.

Human resources 

The first item to track is personnel. Because so much nonprofit revenue is fixed in one way or another--grants and fixed-amount contracts being prime examples--the use of personnel tends to be overlooked. Yet that is exactly where most nonprofits spend the single largest amount of money, and it is where their economics can most easily go off track.

Take an organization that does a lot of early-stage fundraising. Early-stage fundraising is often characterized by a reliance on special events. At the end of an event, managers usually go to the financial records to learn how much money the event brought in, then they subtract the costs of the event and, if the number is positive (as it usually is), they declare victory.

But that special event was probably months if not years in the planning, and it consumed large amounts of staff time. Most organizations don't track how staff members use their time, but if they did they may find that that "profitable" special event actually barely broke even. That's a classic case of financial information telling one story while the economics tell another.

Any cost that is fixed

Fixed costs is another area where nonprofits should pay careful attention, especially at a program level, as opposed to the corporation as a whole. These are the costs that have to be incurred no matter the level of service provided, and they are different for every program.

Try this test. Calculate a program's fixed costs (define it consistently) as a percentage of total spending during an at least three-year period. If the fixed cost number goes up by more than two points during that time (a jump from 70 percent fixed costs to 72 percent fixed costs is two points), that program may be headed for trouble. Eventually, rising fixed costs crowd out the costs over which managers have some discretion, and the result is a structural deficit.

Tangible assets 

Asset usage is another way to measure economics. Any item such as a building or large equipment that is used for providing services is an economic asset that will get used up eventually, so it is worth tracking its usage. This is one area where financial records can serve up useful data. For example, if you divide an organization's accumulated depreciation charges by its total depreciation charge for any given year you'll get an index called the accounting age of plant and equipment (lower means "newer" equipment).

Track that index over a five or more year period and you'll know whether you're staying on top of your investment in tangible assets. This is a way of keeping on top of the economics of major assets.

A measurement system

Some economic indices can be derived from your financial records and some need a separate system. There are also revenue-related economics, but those are for a future column. You might already be recording personnel usage, although often nonprofits just record hours worked instead of linking the hours to specific programs or projects.

Even if the time and expense of setting up a regular timekeeping system, not to mention the hassle of chasing employees to enter their time, doesn't seem worth it, you may be able to simply pick a few time periods during the year when you can sample everyone's time. It won't be as precise, but it will at least give you a rough idea of how you're using your biggest economic resource. For some organizations, personnel usage may be the most important economic indicator they track.

Financial information will tell you what's going on, up to a point, but it's economics that drives the organization. Make a point of looking under the economic hood. You may find it's easier than you think.

Thomas A. McLaughlin is a national nonprofit management consultant with Grant Thornton in Boston. He is the author of the forthcoming book Nonprofit Strategic Positioning (John Wiley and Sons, March 31, 2006). His entail address is [e-mail]