Understanding the Program Efficiency Ratio for Not-for-Profit Organizations
In the not-for-profit sector, it’s crucial to ensure that the majority of funds are directed towards advancing the organization's mission rather than being consumed by administrative costs. The program efficiency ratio is a key performance indicator (KPI) that measures this efficiency. It is calculated by dividing the organization’s program service expenses by its total expenses. Program service expenses include money spent directly to further the organization’s mission.
What Should Your Program Efficiency Ratio Be?
A not-for-profit organization should aim for a program efficiency ratio as close to one as possible. This indicates that a significant portion of expenditure is dedicated to the primary mission. While it’s unrealistic to expect all expenses to go directly towards the mission, the ratio should be comparable to other organizations with similar missions and business models.
Importance of the Program Efficiency Ratio
The program efficiency ratio answers the critical question: How much of each dollar spent is dedicated to the not-for-profit’s mission? A ratio closer to one signifies that more funds are being used to advance the organization’s goals. Tracking this KPI helps an organization ensure it remains focused on its mission and allows for adjustments if administrative costs start to exceed program expenses.
A higher program efficiency ratio is also a positive signal to donors and investors and monitoring how well an organization achieves its goals. This can enhance donor trust and encourage continued or increased support.
Next Steps
For more information on selecting the best KPIs for your organization, contact Porte Brown. Our knowledge of accounting practices can help you have a clearer understanding of financial strategies that increase an organization's impact.
