KPI of the Week: Operating Reliance Ratio

A KPI for Not-for-Profit Organizations — The operating reliance ratio is a KPI used by not-for-profit organizations to measure how effectively the organization could pay all expenses from program revenues alone. It is calculated by dividing unrestricted program revenue by total expenses. Unrestricted program revenue consists of inflows from operations that can be spent at the discretion of the organization.

What should a not-for-profit organization expect its operating reliance ratio to be? It is ideal for this KPI to be one or greater. However, many not-for-profit organizations must also rely on restricted revenues which would affect the outcome of this calculation. The more reliant on restricted revenues, the lower the operating reliance ratio would be.

Why is this KPI important? By having an operating reliance ratio equal to or above one indicates to those supporting the not-for-profit organization that the program is able to sustain itself. Additional funds collected from sponsors can be used to grow the organization and expand its reach. It also provides an indication that the management of the not-for-profit organization is being mindful of the organization’s expenses, keeping them in line with the cash inflows.

A lower operating reliance ratio could indicate that the organization is either not able to meet its expenses or that it is relying on restricted funds in order to do so. Relying on restricted funds may not be an indication of a poorly managed program if the expenses incurred are related to the programs that the restricted funds are assigned. It is always important to take into account all aspects of the organization in order to assess the target KPI for the organization.

Key performance indicators (KPI) can be excellent tools for measuring and monitoring how the organization is meeting its goals. By choosing KPIs in each area of the not-for-profit organization that best aligns with the corporate’s strategic plan, an organization obtains the confidence that all areas are working toward these same goals. Contact Porte Brown to obtain more information on selecting the best KPIs for your organization.