5 Financial Metrics You Should Be Reviewing Monthly (and Two Questions to Ask Annually)

In the financial office, most of your work is cyclical. Pay vendors. Close books. Run reports. Repeat. But for many nonprofit organizations, there is often more work than staff to do it, so it is easy for steps to be missed. At best, it’s a mental burden of, “Did I run that report?” At worst, it’s second-guessing the accuracy of your data.

Creating a monthly workflow corrals those steps into a regular checklist, transforming a random list of tasks into a habit that happens each month. When you establish a monthly workflow for your financial office, you improve your audit readiness, allow for clearer forecasting, and decrease the stress on your staff.

In our webinar with Stephanie Skryzowski, CFO and founder of 100 Degrees Consulting, she walked through the steps of creating monthly, quarterly, and annual workflows for your nonprofit finance office. Here are the five metrics you should be reviewing each month as part of your workflow, and two questions you need to ask yourself every year.

Metrics to Review Monthly

1. Revenue Diversity

How to Calculate It: The income from the revenue source divided by total revenue
Why It’s Important: If your organization becomes too reliant on a small number of revenue streams, you will be making some very difficult decisions if one of those sources of income disappears. You should have a good mix across your top five income sources, such as individual grants, major donors, and events. Looking at this metric monthly will help you recognize if any one source of income is nearing half or more of your income.

2. Revenue and Expense Growth

How to Calculate It: The difference between revenue over a previous period and expenses over the same previous period
Why It’s Important: You want to keep an eye on your revenue growth for obvious reasons—do we have the income to pay our bills and support our programs? Also keep an eye on the change in your expenses from month to month. If you see a 5% growth in revenue over the previous month but a 7% increase in expenses, that quickly becomes unsustainable.

3. Burn Rate

How to Calculate It: Total expenses divided by the number of months
Why It’s Important: You need to know how much you spend each month so that if something changes with your income streams, you have time to adjust. For example, if a large grant you rely on lets you know in January that it is changing its payout from July to September, you’ll know how much you need to adjust over the next six months to avoid a shortfall in July and August.

4. Operating Margin

How to Calculate It: Calculate your net income (revenue minus expenses), then net income divided by revenue
Why It’s Important: Your operating margin tells you how profitable you are. While most nonprofits are not concerned with making a substantial profit, most do care about making payroll and expanding programs when they can. If you have a thin (or nonexistent) margin, it’s difficult to grow.

5. Cash on Hand

How to Calculate It: Total cash balance divided by burn rate
Why It’s Important: Having cash in the bank provides a level of security for an organization. If the worst happened and all your income sources dried up, you would have time to re-evaluate and look at options. Your organization can make decisions from a place of strength instead of jumping at funding options that might pull away from your mission. As a general goal, your cash on hand— which can also be considered your operating reserve—should equal about three to six months of operating revenue.

Questions to Ask Annually

1. Do these processes still work for me?

At least once a year, look at your big processes and workflows—grant management, time tracking, expense management—and make sure they still meet your needs. Will these processes help you grow, or will they hold you back? If they are starting to feel restrictive, put a plan together to evaluate other options, even if a change won’t happen for a few years.

2. Am I still in compliance?

As part of your strategic planning or annual audit, review your compliance documentation and internal controls to make sure they are still valid. This includes your IRS registration, such as your 501(c)(3) and 990 filings as well as any FBAR foreign bank account filings. This is also a good time to check any changes to state laws for charity regulations to make sure you are in good standing in all the states you operate in. You might also use this time to make sure all your Board meetings are properly documented, conflict of interest policies are signed, and you have an up-to-date executive compensation review.