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How to Create Key Performance Indicators.


Key performance indicators (KPI), long familiar to corporate managers, are increasingly being used by financial managers at not-for-profit organizations to measure the effectiveness of an entity's operations. Fundraising will always be a challenge, and thus not-for-profit managers will always need to maximize their available resources. The authors provide background information and processes for developing task-specific KPIs that present clear and relevant information for stakeholders.


Well-managed nonprofits are constantly looking for ways to become more efficient, utilize resources better, and make scarce funding go further. One way to gauge a not-for-profit organization's efficacy is by comparing it to similar organizations, as well as to the organization's own history. Ratio analysis, horizontal analysis, and vertical analysis are a few of the methods familiar to most CPAs. Since the basic information that serves as the foundation for the various analyses comes from the financial statements, these metrics are available to external users as well as internal users.

Key performance indicators (KPI) are task-specific metrics designed to synthesize important operating indicators into a convenient set of management tools. KPIs are often grouped on the desktop of a single computer screen to form the basis of a dashboard: the goal is to have a variety of important information at a manager's fingertips. This article illustrates a process for developing and implementing KPIs that will make a meaningful contribution to a not-for-profit organization's operations.

Developing KPIs

There is a wealth of information available on generic KPIs. A good place to start when developing entity-specific KPIs is with an understanding of the user perspective. There are many stakeholder groups with a need to analyze an entity. Because each stakeholder group will view and analyze the nonprofit from a different perspective, it makes sense that each group will use a different set of KPIs. Such groups include the board, management, staff, customers, vendors, donors, lenders, competitors, auditors, regulators, and watchdog organizations.

To illustrate, take as an example the fundraising function. Developing a KPI regarding the efficiency of an organization's fundraising depends on which stakeholder group will be viewing it. If the initial group of interested stakeholders comprises the board, management, staff, and donors, each group will likely have a different focus:

* The board might be interested in how much the organization raised versus the expectation for the period.

* Management might be interested in the size of the average donation.

* Staff might be interested in how much was raised per full-time equivalent employee.

* Donors might be interested in how much their donation represents as a percentage of the total amount raised.

Exhibit 1 shows a matrix displaying these focuses that demonstrates breadth; each KPI has a similar measurement goal, with variations depending on the perspective. A similar matrix can be developed for each needed metric; for many, there will be several numerators and denominators that can be combined in different ways to produce KPIs that measure different elements of efficiency.

Depth can also be displayed by taking one perspective and developing more than one metric. Multiple measures of similar attributes provide a more robust picture. Staying with fundraising as the metric and using the perspective of management, more KPIs can be developed, such as the following:

* The percentage raised toward this year's goal (Raised to date/Budgeted fundraising)

* The percentage increase or decrease compared to last year (Raised to date/Fundraising total last year)

* The relative importance of fundraising to total revenue (Raised to date/Total revenue this year)

* The expected importance of fundraising to this year's budget (Budgeted fundraising/Total revenue)

Exhibit 2 places the variables that would be needed to complete these KPIs into the same matrix format. As before, the numerators and denominators can be combined in a variety of ways to produce the identified KPIs, as well as others. The benefit of the matrix is its ability to define the information needed to produce a multitude of performance indicators. Seeing the variety of numerators and denominators that have been identified can also lead to the development of new KPIs without needing to collect additional data. Note also that a variable can be both a numerator and a denominator.

The KPIs can also be viewed year-by-year to gauge trends, as shown in Exhibit 3.

New Disclosures Lead to New KPIs

New financial disclosures, whether voluntary and initiated by the organization or involuntary and based on a new accounting standard, offer the opportunity to use this new data to develop new KPIs. Two developments that demonstrate a need for new KPIs are a recent FASB standard, Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, which requires that all nonprofit organizations prepare a statement of functional expenses, and the growing interest in sustainability reporting.

The statement of functional expenses will not be new for some nonprofits (e.g., those classified as voluntary health and welfare organizations), nor for those that file Form 990, which requires a similar breakdown of expenses in Part IX. For other organizations, such as private foundations, the statement of functional expenses may require the separation of program expenses from nonprogram expenses for the first time (in publicly available financial documents). The 990PF filed by private foundations does not have a disclosure similar to Part IX on the 990; this distinction presents an opportunity for the public and other interested parties to create ratios and other measures of performance and efficiency that they previously could not. In addition, organizations may benefit from an internal analysis of these ratios to anticipate how the public may now view them. Some of these ratios may also rise to the level of becoming a key performance indicator for use within the organization.

Exhibit 4 presents an illustrative statement of functional expenses from ASU 2016-14 (page 66, ASC 958-205-55-21). Given the popularity of administrative costs ratio analysis, the ratio of supporting activities expenses as a percentage of total expenses is sure to be a metric commonly calculated by both external and internal stakeholders. In this case, that ratio is 13.1%.

Another popular ratio will be the "program activities" subtotal as a percentage of total expenses--in this case, 86.9%. A key difference between Form 990's functional expense breakdown and the one now required by ASU 2016-14 is that FASB includes the ability to differentiate between different program areas, represented by programs A, B, and C. This differentiation provides an opportunity for interested parties to analyze program expense within the context of separate programmatic strategies.

For example, some program areas may be, by the nature of the work, more people-heavy, and others may require more travel expense. Over time, trends within individual programmatic areas can be tracked, which may present a more productive analysis than comparing across program areas that may have different requirements to carry out distinct types of effort.

The KPIs discussed so far have been developed based on knowing what information is wanted and using the inputs to provide that information. Another approach is to look at the available information and form the KPIs by considering what can be calculated. Taking apart the illustrative statement of functional expenses in Exhibit 4 provides this list of the variables:

* Total expenses--Program A/B/C

* Total program expenses

* Management and general expenses

* Fundraising expenses

* Total supporting expenses

* Total expenses

* Salaries and benefits--Program A/B/C

* Salaries and benefits--Total programs

* Salaries and benefits--Management and general/Fundraising/Supporting

* Grants to other organizations-Program A/B/C

* Grants to other organizations--Total programs

* Supplies and travel--Program A/B/C

* Supplies and travel--Total programs

* Supplies and travel--Management and general/Fundraising/Supporting

* Services and professional fees-Program A/B/C

* Services and professional fees--Total programs

* Services and professional fees-Management and general/Fundraising/ Supporting

* Office and occupancy--Program A/B/C

* Office and occupancy--Total programs

* Office and occupancy--Management and general/Fundraising/Supporting

* Depreciation--Program A/B/C

* Depreciation--Management and general/Fundraising/Supporting

* Interest--Program A/B/C

* Interest--Total programs

* Interest--Management and general/ Fundraising/Supporting

There are various ways to develop KPIs from the list of the available variables. One way is to start with the most summarized information and work toward more granular information; this would provide the KPIs shown in Exhibit 5.

Another Approach to KPI Development: Sustainability Reporting

Another development that provides a rich environment for KPIs is the growing interest in sustainability reporting. Accounting in the sustainability context offers different challenges and opportunities; instead of publicly available financial data (as with the statement of functional expenses), the sustainability data used tends to be nonfinancial and internal to the organization. Instead of the public, which may independently create its own KPIs that may reflect in certain ways upon the organization, the intended user of sustainable accounting data is often, at least initially, the organization itself, as it aims to understand and measure its longer-term viability in, and impact on, a changing world.

An organization's viability and impact to a changing world are also the concerns of two prominent organizations dedicated to sustainability accounting: the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI). GRI CEO Tim Mohin summarizes them by saying, "GRI looks at the company's impacts on the world, and the SASB looks at the world's impacts on the company" ("Collaboration among Reporting Frameworks: The Future of Sustainability Reporting," GRI website, Jan. 10, 2018, 2HG97Dn).

A company's impact can be difficult to quantify, and moreover can be vastly different from one organization to the next. In actuality, what sustainability accounting means is very different depending on the operating environment of the organization. Measurements of sustainability depend upon the organization's mission and the realm within which that mission is to be accomplished. Three of the common groupings used are economic, social, and impact; there are multiple layers within each. Below are examples of KPIs drawn from these larger groupings. They represent different areas, but each is important.

Economic: Enterprise Risk Management

An organization needs to use its resources efficiently in order to ensure long-term sustainability, and this includes mitigating risks. Risks at the enterprise level come from the inside as well as the outside. One of the top-of-mind issues for organizations is cyber-risk, and KPIs can be used as a tool to track elements of the organization's risk management program. If the IT department performs (or hires consultants to perform) phishing or penetration tests, it can use KPIs to track the number of staff sent phishing emails at each test date and the number of employees who clicked on the phishing link. They can track these attempts over time to ensure that their internal training has been happening often enough.
KPI tracking might look like the following:

Phishing Test


                  Attempts   Successes

C-Suite                35           7
Senior staff           60          10
Middle staff           78           5
Junior staff          233          30


                  Attempts   Successes

                       29           4
Senior staff           65          12
Middle staff           82          12
Junior staff          235          25

Social: Diversity, Equity, and Inclusion

Many nonprofits have initiatives to develop a more diverse group of board members and managers (e.g., promoting women into top management). What the initiative will specifically hope to achieve will differ across entities, but no matter the focus, the organization has a goal in mind, and this goal can be tracked with a KPI. While perhaps not as dynamic nor easily graphed in real time, a quarterly or annual KPI can be useful in show the nonprofit how well it is attaining its goal. Exhibit 6 shows a diversity KPI matrix that focuses on gender, race, and ethnicity.

Impact: Organization Reach

There are many ways to measure impact, and these ways will differ between organizations based on their mission. One aspect of impact that is similar across organizations is market awareness, which can be operationalized as "communication." For many nonprofits, the dissemination of their work, their research, and their findings are an integral component of their impact. It would therefore be valuable to have KPIs that measure this.

Most organizations today have Twitter accounts and Facebook pages; KPIs can be established tracking followers, likes, and retweets. A real-time graph can be developed for the organization that shows the number of followers. Where there are annual follower goals established, the KPI can track progress against those goals. Some organizations might also include these KPIs on their website, to share with the public.

Human service organizations regularly track the number of client contacts and patient visits. The tracking of these figures makes for a useful KPI, as seen in this hypothetical example:

* 9,296 individual lives impacted in 2016-2017

* 363,840 units of service provided

* 188,834 children and their families have been impacted by our programs over the last 65 years.

If the organization budgeted a certain number of service visits (for contract monitoring or its own planning purposes) this can be incorporated into the KPI (again, the example here is hypothetical):

Cohort       Actual    Quarter     Year

Infants         490       500     2,000
Children      4,200     5,000    20,000
              1,120     1,000     4,000
             32,085    37,500    50,000

Another impact element that an organization can track with KPIs is the number of downloads from its website. The downloads might be annual reports, financial statements, Fonn 990s, or position papers on certain program initiatives. This would provide a robust measure of reach and acceptance.

The Value of KPIs

KPIs are useful tools to manage mission-critical data. They can also be used to create functioning dashboards that provide a multitude of information on one screen. As an organization uses data to better define its core mission, it gains insight about what's most important to measure--an iterative process which can take time. Building organizational capacity to create meaningful KPIs may benefit organizations in the long term. No matter how you do it, every organization runs smoother and more efficiently when data drives its decisions and there are few better ways to utilize data then KPIs. In addition, stakeholders will increasingly expect externally facing KPIs. A formal approach to developing, using, and evaluating the information provided by KPIs will make a not-for-profit organization more efficient and better functioning because people tend to improve what they measure. KPIs also offer a standard to help in benchmarking, which provides additional data points for use in analysis of the organization's efficiency.

Jeffry Haber, PhD, CPA, is a professor of accounting at the LaPenta School of Business, lona College, and the senior director, finance, at the Commonwealth Fund, New York, N. Y. Caitlin Schryver is president of Dots Will Connect, Ithaca, N. Y.
Exhibit 1

Sample KPI Matrix--Breadth

                    Board                Management

Numerator     Raised to date       Raised to date

Denominator   Total to be raised   Number of donations

KPI           % of total raised    Average donation size

                  Staff              Donors

Numerator     Raised to date   Donation amount

Denominator   FTE              Total raised

KPI           Amount raised    Proportion of total
              per FTE          represented by

FTE=Full Time Equivalent

KPI=Key Performance Indicator

Exhibit 2

Sample KPI Matrix--Depth


Numerator      Raised to date
               Budgeted fundraising
Denominator    Budgeted fundraising
               Fundraising total last year
               Budgeted fundraising last year
               Total revenue
               Total budgeted revenue

Exhibit 3
Sample KPI Matrix--Year-to-Year

                               2018                   2017

Average donation       Total raised/Number    Total raised/Number
                       of donors              of donors

Importance of          Total fundraising      Total fundraising
fundraising--budgeted   budgeted/Total         budgeted/Total
                       revenue budgeted       revenue budgeted

Importance of          Total raised/Total     Total raised/Total
fundraising--actual     revenue                revenue

Are we on track with   Total fundraising to   Total fundraising to
fundraising?           date/Total             date/Total
                       fundraising budgeted   fundraising budgeted


Average donation       Total raised/Number
                       of donors

Importance of          Total fundraising
fundraising--budgeted   budgeted/Total
                       revenue budgeted

Importance of          Total raised/Total
fundraising--actual     revenue

Are we on track with   Total fundraising to
fundraising?           date/Total
                       fundraising budgeted

Exhibit 4

Sample Statement of Functional Expense

                                           Program Activities

                                    A        B        C      Programs

Salaries and benefits            $7,400    $3,900   $1,725   $13,025
Grants to other organizations     2,075      750    1,925      4,750
Supplies and travel                 890    1,013      499      2,402
Services and professional fees      160    1,490      600      2,250
Office and occupancy              1,160      600      450      2,210
Depreciation                      1,440      800      570      2,810
Interest                            171       96       68        335
Total expenses                   $13,296   $8,649   $5,837   $27,782

                                   Supporting Activities

                                 Management    Fundraising
                                 and General

Salaries and benefits                $1,130          $960
Grants to other organizations
Supplies and travel                     213           540
Services and professional fees          200           390
Office and occupancy                    218           100
Depreciation                            250           140
Interest                                 2Z            20
Total expenses                       $2,038        $2,150

                                  Supporting Activities

                                 Supporting     Total
                                  Subtotal     Expenses

Salaries and benefits                $2,090    $15,115
Grants to other organizations                    4,750
Supplies and travel                     753      3,155
Services and professional fees          590      2,840
Office and occupancy                    318      2,528
Depreciation                            390      3,200
Interest                                 47        382
Total expenses                       $4,188    $31,970

KPI                                        Calculation

Expenses as a percentage   Programs/Total expenses
of the total               Supporting/Total expenses

Each cost center as a      Program A/Total expenses
percentage of the total    Program B/Total expenses
                           Program C/Total expenses
                           Management and general/Total expenses
                           Fundraising/Total expenses

Each program as a          Program A/Program expenses
percentage of total        Program B/Program expenses
program expenses           Program C/Program expenses

Salaries and benefits      Total salaries and benefits/Total expenses
as a percentage of         Salaries and benefits--Program A/Total
total expenses             program A expenses

                           Salaries and benefits--Program B/Total
                           program B expenses

                           Salaries and benefits--Program C/Total
                           program C expenses

                           Salaries and benefits--Management and
                           general/Total management and general

                           Salaries and benefits--Fundraising/Total
                           Fundraising expenses

Salaries and benefits      Salaries and benefits--Program A/Total
from each cost center      salaries and benefits
as a percentage of
total salaries and         Salaries and benefits--Program B/Total
benefits                   salaries and benefits

                           Salaries and benefits--Program C/Total
                           salaries and benefits

                           Salaries and benefits--Management and
                           general/Total salaries and benefits

                           Salaries and benefits--Fundraising/Total
                           salaries and benefits

Exhibit 6

KPI Reporting for Diversity

                 Board    C-Suite   Middle Mgmt   Program

Gender Identity
         A        10%        5%           15%        75%
         B        70%       75%           80%        25%
         C        20%       20%            5%         0%

         A        30%       10%           40%        20%
         B        20%       40%           50%        40%
         C        50%       50%           10%        40%

         A        10%        5%           20%         5%
         B        30%       25%           25%        20%
         C        20%       40%           20%        45%
         D        40%       30%           35%        30%

                  Administration         Fundraising

Gender Identity
         A                  65%                   50%
         B                  35%                   50%
         C                   0%                    0%

         A                  35%                   30%
         B                  20%                   30%
         C                  45%                   40%

         A                  10%                   25%
         B                  10%                   20%
         C                  40%                   30%
         D                  40%                   25%
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Title Annotation:InFocus
Author:Haber, Jeffry; Schryver, Caitlin
Publication:The CPA Journal
Date:Apr 1, 2019
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