This post was contributed by Jennifer Alleva, Chief Executive Officer at Your Part-Time Controller, LLC.

While developing programming, building donor relationships, and working with beneficiaries is the heart of what your nonprofit does, you must also complete the behind-the-scenes tasks necessary to keep your organization afloat.

Regularly assessing your nonprofit’s financial health ensures your organization is on track for continued success. And, if you identify any risks or shortcomings, you can proactively adjust your strategy to get your nonprofit back on track.

To guide you through this process, we’ve compiled a list of different nonprofit health indicators and what they mean so you can successfully manage your finances and keep your nonprofit in a healthy position.

1. Revenue Diversification

Revenue diversification refers to generating revenue through a variety of different sources. For nonprofits, these revenue streams may include:

• Monetary donations
• Grants
• Program fees
• In-kind contributions
• Ticket sales
• Membership dues
• Corporate sponsorships

It’s essential to diversify your revenue, especially in light of charitable giving declining by another 2.1% in 2023. After all, if your nonprofit relies on a singular funding source and it dries up, you’ll put your organization at risk. The more forms of revenue you have, the more stable your nonprofit will be if one of those revenue streams declines.

Having different revenue sources can also give your nonprofit more flexibility in its resource allocation, help you develop a comprehensive strategic plan, and strengthen your response to financial distress.

To measure your revenue diversification, follow these steps:

• Identify your revenue sources. Start by listing all of the different revenue sources your nonprofit leverages.
• Categorize them. Group these revenue sources into appropriate categories. For example, under contributed income, you might have categories for individual giving, corporate donations, foundation grants, government grants, and in-kind donations.
• Calculate the percentage of total revenue. For each category, divide the revenue generated from that specific category by your total revenue for the fiscal year.
• Set goals. Compare the percentage of total revenue that each source brings in. If you’d like to further diversify your revenue, work with your team to set appropriate goals. For example, you might aim to increase individual giving by 15%.

Reaching your revenue diversification goals may require you to get creative. Don’t be afraid to try new fundraising strategies or further personalize your appeals to gain more support from different sources.

2. Fundraising Efficiency

Fundraising efficiency compares the funds a nonprofit invests in fundraising activities against the contributions it raises. To determine your fundraising efficiency, you’ll first need to identify the following figures:

• Fundraising expenses. Add up all of the direct and indirect costs of your fundraising efforts. These may include:
• Staff compensation
• Fundraising event costs
• Marketing material costs
• Relevant overhead expenses
• Funds raised. Next, you’ll determine the total amount of funds you’ve raised over a specific period, typically the fiscal year.

Then, you’ll divide the funds you’ve raised by your fundraising expenses to calculate your fundraising efficiency. A high fundraising efficiency indicates that you’re using your resources effectively, while a low fundraising efficiency may prompt you to explore how you can better optimize the fundraising process to raise more relative to your expenses.

Since each organization has unique fundraising considerations, it’s recommended that nonprofits use a variety of metrics to assess fundraising effectiveness, allowing you to properly evaluate all the ways your nonprofit brings in revenue.

3. Cash Flow Management

Cash flow management refers to the process of monitoring the inflow and outflow of cash over a certain period, such as the fiscal year. The best way to keep track of your cash flows is by preparing a rolling cash forecast.

As YPTC’s nonprofit financial statements guide explains, this document is one of four core nonprofit financial statements charitable organizations should create and contains the following categories:

• Cash Flows from Operating Activities. Operating activities include transactions related to the production of income, such as receipts from the sale of goods or services and cash paid to employees and other suppliers of goods or services.
• Cash Flows from Investing Activities. Any proceeds from sales or maturities of your investments count as cash inflows for this category, whereas outflows would be purchases of investments, property, or equipment.
• Cash Flows from Financing Activities. Typical financing activity inflows include lines of credit and proceeds from loans. For outflows, include payment of any debts you’ve incurred, such as your mortgage.
• Changes in Cash, Cash Equivalents, and Restricted Cash. To assess how your cash flows have changed over time, note your cash, cash equivalents, and restricted cash at the beginning and end of the period you’ve specified.

When your organization keeps track of cash flows, you can ensure you have enough liquidity to cover day-to-day expenses and keep your organization in a stable financial position.

4. Financial Stability and Sustainability

As a nonprofit, you want to ensure your finances are stable for the short term, so you can keep your normal operations going, and for the long term, so you can expand and make a greater impact for years to come. 

Start by measuring your financial stability with this ratio:

• Current ratio. The current ratio divides your current assets by your current liabilities to determine your ability to cover short-term obligations. If your current ratio is greater than one, you likely have adequate liquidity. However, if your current ratio is less than one, you may need to reallocate resources to meet your short-term obligations.

Additionally, you can measure financial sustainability through:

• Operating reserve ratio. The operating reserve ratio divides the total of your unrestricted net assets less your net fixed assets by your annual operating expenses to determine how prepared your organization is to handle unexpected expenses. The result of the ratio tells you how many months’ worth of operating expenses your organization could fund using its unrestricted net assets. It’s recommended that nonprofits have at least three to six months’ expenses in reserve.

Proving your nonprofit is in a financially stable and sustainable position will help you build trust with donors and encourage them to continue contributing to your organization.

5. Donor Engagement

Since many nonprofits rely so heavily on individual donations, it’s key to keep donors engaged and excited about your organization. Plus, in some instances, it can be more expensive to acquire new donors than to retain your current supporters, providing another incentive for increasing donor engagement.

Measure donor engagement as it relates to your organization’s financial health through:

• Donor retention rate, which divides the number of donors who contributed again this year by the total number of donors who contributed last year
• Donor lifetime value, which typically depends on your nonprofit’s average donation amount, frequency, and donor lifespan

To effectively retain your donors and build a sustainable community of funders, you need to practice proper donor stewardship. Double the Donation’s donor stewardship guide recommends implementing these easy strategies:

• Thank donors. Show donors you appreciate them by thanking them privately through thank-you notes or emails and publicly through social media shoutouts, donor appreciation events, or donor walls. Just make sure to check with donors before publicly recognizing them to ensure they’re comfortable with it.
• Report on their impact. Demonstrate how valuable donors’ funds are to your nonprofit by sending them impact updates and reports. Include beneficiary stories for a personal touch.
• Offer them additional engagement opportunities. Get donors involved in nonmonetary engagement opportunities, such as volunteering and advocacy work, to make their experience with your organization more worthwhile.

In addition to numerical metrics, you can use surveys to gauge donor engagement and the effectiveness of your stewardship efforts. Donors may provide helpful suggestions you can incorporate to improve your strategy.

Don’t fret if you’re overwhelmed by the prospect of assessing all of these metrics on your own. Consider hiring a fractional CFO to assist you with financial planning and analysis so you can focus on more mission-critical work.

---

ABOUT THE AUTHOR
JENNIFER ALLEVA

Jennifer Alleva is the Chief Executive Officer at Your Part-Time Controller, LLC (YPTC), a leading provider of nonprofit accounting services and #65 on Accounting Today’s list of Top 100 accounting firms.

Jennifer brings over three decades of expertise in accounting and leadership to her role as CEO of YPTC. A graduate of Boston College and a Certified Public Accountant, Jennifer joined YPTC in 2003 following a career in public accounting with Arthur Andersen and serving as Director of Finance and CFO for several companies. Jennifer was named YPTC Partner in 2007 and served as YPTC Managing Partner from 2018 to 2024.