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.
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, http://bit.ly/ 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 January Attempts Successes C-Suite 35 7 Senior staff 60 10 Middle staff 78 5 Junior staff 233 30 February 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):
Budgeted 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 donation FTE=Full Time Equivalent KPI=Key Performance Indicator Exhibit 2 Sample KPI Matrix--Depth Management 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 2016 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 Subtotal 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 expenses 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 Services Gender Identity A 10% 5% 15% 75% B 70% 75% 80% 25% C 20% 20% 5% 0% Race A 30% 10% 40% 20% B 20% 40% 50% 40% C 50% 50% 10% 40% Ethnicity 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% Race A 35% 30% B 20% 30% C 45% 40% Ethnicity A 10% 25% B 10% 20% C 40% 30% D 40% 25%
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|Author:||Haber, Jeffry; Schryver, Caitlin|
|Publication:||The CPA Journal|
|Date:||Apr 1, 2019|
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