Analytical Review Procedures for the Not-for-Profit

Evaluating the operating efficiency of a not-for-profit organization can prove challenging because profit-based measures of performance and profitability either don’t apply, or apply to only a portion of the organization’s activities. Often, the profit-based activities exist to support the provision of services that constitute the real mission of the organization. In addition, not-for-profits tend to have differentiating characteristics associated with their services and societal functions that make industry benchmarking analysis less useful than it is for the profit-making sector.

Certain ratios have been developed that are specific to the not-for-profit sector. A helpful summary of some ratios may be found here:  Nonprofit Financial Ratios

To maximize information value, ratio analysis should be combined with trend analysis and budget analysis, both of which focus on the organization’s own trends and expectations. Good sources of industry benchmarks are associations that support organizations in the industry’s own line of work, such as the National Coalition Against Domestic Violence (http://www.ncadv.org) for the operation of a domestic abuse shelter. Another source of information is academic studies, but keep in mind that they are usually not updated regularly.