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High performing nonprofits must understand how to manage their money. Charities cannot promise great things to supporters and run out of resources along the way. A delicate balance of maintaining healthy reserves, minimizing debt, and sticking to a budget is required. Donors don’t want a bait-and-switch where increased donations go to debt service or get stockpiled in the bank without any increased impact. And no one can tolerate financial mismanagement where an organization lives in the red with unrealistic budgets or doesn’t put the majority of its funds into mission-related activities.
Where do you start when evaluating the health of a nonprofit organization? Incessant headlines about dishonest educational programs, irresponsible board governance, misleading cancer charities, and corrupt first responder foundations remind us a little assessment can go a long way. But most of us don't have time for detailed due diligence. So where do we begin a cursory evaluation of nonprofit infrastructure and impact?
Before you evaluate nonprofit performance, stop and ask 3 questions about the charity:
These 3 questions are all related to OUTCOMES. Outcome measurement and outcome-based evaluations have taken center stage in the contemporary debate about nonprofit performance. I, for one, am a voice and supporter of this trend. However, we can't let the trend rewrite each organization's goals. Some charity's just don't exist to produce the savory long-term, ever-increasing, measurable outcomes that have become all the rage. So if we are going to determine how well an organization is performing, we must first figure out what standards we can and cannot use to evaluate performance.
Endless conversation about "outcomes," "performance," and "impact" needs to come to an end. It doesn't need to stop. It needs to get somewhere. Concrete categories and conclusions need to take shape and either be adopted or discarded. That is what my next 7 blog posts are all about. I'm going to lay out a standardized approach to assessing organizational health and performance in the nonprofit sector.
Before I present the six standards for evaluating nonprofit performance, I've got to be clear about the pros and cons of a standardized approach vs. a customized approach.
None of us wants to be judged for not doing what we never tried to do. But it happens all the time. One nonprofit I recently critiqued responded with this exact complaint, "You can't say we have failed to become partially self-sustaining when we have not made that an explicit goal for the last ten years." The complaint was justified. I had to modify my critique to read: if a donor wants a self-sustaining model, this organization has not developed it in the last ten years.
So how do we create a 'fair' performance standard for measuring nonprofit outcomes? In the world of business investments, analysts can run the numbers and get a clear record of expenses, revenue, and profit. In the nonprofit world, measuring performance is more elusive. There is no absolute standard that applies equally to organizations operating in different program and geographic areas. The only fair approach is comparing the relative performance of organizations in the same sectors.
"We've reached a total of 2.5 million people." I read claims like this one from many nonprofit organizations. The sheer size of the number is intended to impress potential donors. However, totals don't tell the whole story. One family ministry that has reached 2.5 million people in the last 34 years actually is in decline. The number of clients served has been dropping by thousands since 2006. In more alarming fashion donations have increased 18% during that time (significant for a $40 million operation) while clients served has declined 7%. Those trendlines tell the story that matters today. The organization's heyday has come and gone.
An informed practitioner of philanthropic due diligence is not easily taken by totals. The most valuable data is found in a time series not a "total" column.