MAKING YOUR MONEY WORK: Focus on Results, Not Financial Ratios

The frontier for nonprofits these days is impact. How do you measure the social good you do? For that matter, how do you measure which cultural arts are worthwhile or what kind of educational efforts will be effective a decade down the road? What does success mean in the charitable arena?

Forward-looking practitioners are walking away from trying to define or measure impact, mostly because such a goal is so big and amorphous that it’s impossible to realize. Donors and charities can’t really measure it. How do you prove impact?

Instead, as donors continue to demand greater roles and results, nonprofits are increasingly focusing on outcomes as signs of success. That is, do grantees and groups achieve the stated goals of the funding? While that’s still not easy to calculate, at least it’s visible and tangible. Such measurement allows for progress.

But then a corollary challenge arises that’s equally thorny. Let’s say you do quantify the outcome—which now is becoming a proxy for impact. Then how do you best demonstrate those results to donors and the larger community in order to build awareness, boost contributions, and ensure continuing progress?

For people who have made money in business, philanthropy can be a difficult transition. Performance in service of a cause cannot be measured on a quarterly or daily basis. So you need to be realistic. Even the biggest donor must become knowledgeable of what you can achieve given the resources you have. To see the result of giving, you need to stay totally focused. It isn’t easy.

The conventional rule of thumb for measuring a nonprofit organization’s effectiveness is to compare its operating and administrative costs to its spending on programs. When operating costs top 40% of the annual budget—which puts spending on programs at 60%—it may be an inefficient organization, or something may be wrong. Yet such ratios can be exceedingly misleading when making decisions about what to fund or whether a gift has fueled results.

Charities raise money and carry out programs in widely different ways, depending on the type of the cause, the organization’s location, age and other factors. There is no ideal fund-raising percentage or standard for administrative costs that can be applied across the board. In addition, accounting rules allow nonprofits several different methods of calculating fund-raising percentages, which means you may not be comparing apples to apples when you look at such figures.

Then, too, there’s plain common sense. Basing your giving decisions entirely on such formulas begs the reality of trying to get the job done. Every organization will perform more efficiently with well-trained staff and the lights on.

When you are thinking about a donation or a contribution of any kind, the best measure of an organization’s impact is how well it is achieving results and how efficiently and effectively it is fulfilling its mission.