KPI of the Week: Program Efficiency Ratio

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A KPI for Not-for-Profit Organizations — The program efficiency ratio is a KPI used by not-for-profit organizations to measure how much an organization is spending on its primary mission rather than administrative costs. It is calculated by dividing an organization’s program service expenses by its total expenses. The organization’s program service expenses would be money directly spent to further the not-for-profit organization’s mission.

What should a not-for-profit organization expect its program efficiency ratio to be? It is ideal for this KPI to be as close to one as possible. Donors, board members, and managers expect the majority of a not-for-profit organization’s expenses to be directly related to its mission. However, since it would be unrealistic to expect all money spent by an organization to be used directly toward the mission, this ratio would rarely be equal to one. An expected result would be in line with other not-for-profit organizations with similar missions and business models.

Why is this KPI important? The program efficiency ratio answers the question: How much of each dollar spent is dedicated to the not-for-profit’s goal or program? The closer the ratio is to one is an indicator that more of the funds collected are being used to further the organization’s mission. By tracking this KPI, a not-for-profit organization can determine if it is maintaining the same level of dedication to its mission or if the organization is getting off track. A higher program efficiency ratio can also be an indicator to donors and investors, which indicates the degree to which contributed funds will be used toward the organization’s goals.

Key performance indicators (KPI) can be excellent tools for measuring and monitoring how an organization is meeting its goals. By choosing KPIs in each area of the not-for-profit organization that best aligns with its 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.

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