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The Four Most Common Financial Performance Metrics
Watchdog organizations often determine the effectiveness and efficiency of a nonprofit using various ratios and metrics. The four most common metrics are: program expense, administrative expense, fundraising expense, and fundraising efficiency.
Program Expenses
The program expense metric is a ratio that articulates the amount of every dollar spent on programs that are derived directly from the mission of the NFP. This is a primary metric for most watchdogs because it is critical to donors. Most donors are driven to a particular cause because that unique cause has resonance with them (e.g., the arts, a specific medical condition, remedy for a social issue). The higher this ratio, the more satisfaction most donors feel about giving. CharityWatch and the BBB both recommend ratios greater than 60-65%. Charity Navigator feels that 75% is sufficient.
Administrative Expenses
Like the program expense metric, the administrative expense metric considers how much of every dollar spent by the NFP goes to recruiting, developing, supporting, and retaining talented employees to advance the mission of the organization. Conventional wisdom says this number should be low (or at least significantly lower than the program expense metric), but there is considerable discussion in the NFP community about what might be an acceptable ratio.
Fundraising Expenses
The final expense metric is the calculation of fundraising expense. This ratio is similar to the previous two in that it is simply the calculation of the percentage of each dollar that goes toward raising additional funds for the NFP. Like administrative expense, this value is traditionally lower for most organizations, but it will fluctuate based on the type of NFP. Fundraising and administrative expenses constitute everything outside of program expense so, according to CharityWatch and the BBB, these two should be no greater than 35-40%; per Charity Navigator, that ratio would top out at 25%.
Fundraising Efficiency
Fundraising efficiency is the measure of the rate of return on fundraising dollars spent. For example, an NFP that spends $500 to raise $5,000 has a fundraising efficiency ratio of .10, meaning that the NFP spends $0.10 to raise $1.00 in contribution revenue.
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