Can too much emphasis be placed on common metrics applied to and used to evaluate not-for-profits? 

Posted on 05.18.15

Can too much emphasis be placed on common metrics applied to and used to evaluate not-for-profits? 

Author: John E. Kent, Jr., CPA | Partner | Not-for-Profit Team

Can too much emphasis be placed on common metrics (key ratios) applied to and used to evaluate not-for-profit (NFP) entities?  Recently, there has been more discussion around how much emphasis should be placed on them especially with the amount of subjectivity layered within them.  The intent of the ratios is to give granting agencies, foundations and donors the ability to make assessments about a NFP before making a contribution or grant.  NFPs have great latitude in allocating expenses among functional categories (program, administrative, and fundraising) that are not explicitly tied to an activity of the NFP.  Generally Accepted Accounting Principles (GAAP) requires that the methodology selected by the NFP be reasonable, objective and based on data that can be financial or non-financial.  GAAP also requires NFPs that fall under the voluntary health and welfare organization guidance to present an additional financial statement called a statement of functional expenses. Besides these requirements, there are few, if any, bright line tests with respect to how NFPs allocate these expenses functionally.  Consequently, consistency between different NFPs is nearly impossible to achieve on what is arguably the most significant indicator produced by the organization.

Most agree that it is preferable to show more resources allocated to program services versus administration or fundraising. However, it is possible for an organization to harm itself by not supporting administrative and fundraising activities that are needed for the long-term health of the organization. While these metrics will always have a role in evaluating a NFP, they should be used in conjunction with the important work the organization is performing in the community.

Questions on how this may apply to your not-for-profit organization?  Contact your Keiter representative or E-mail: information@keitercpa.com | Phone: 804.747.0000

Posted by: John E. Kent, Jr., CPA

John has more than 25 years of experience in public accounting providing auditing and business consulting services to clients in the retail, manufacturing, construction, and not-for-profit industries. He specializes in benefit plan audits, mergers and acquisitions, business planning, and financing. His experience includes designing and implementing cost accounting and inventory control systems for multi-industry companies, conducting LIFO inventories, and assisting clients with adopting new accounting standards. Read more of John's insights on our blog.