Small business people who hear the term “non-profit” sometimes think “Hey - I don’t make a profit, that must apply to me!” Looking at the bottom line is the correct way to look at business, but it’s not always the best way to look at a non-profit.
Actually, the term “non-profit” applies to organizations that are formed for some purpose other than making money. The purpose is usually to champion a cause, meet a need or solve a social ill.
The goals of the non-profit organization are not financial. That’s why the measurement focus is different than business. That’s why financial measures are not the best way to look at non-profits. They’re important, for sure. But they don’t answer the most important questions – did my non-profit champion the cause, meet the need, solve the problem that it was created to address?
One of the most overrused and overrated financial measures is the efficiency ratio. That is, how much of total spending went to program expenses? If you have a good ratio, you tout it on your website and in all your brochures. If your ratio is not so great, you massage the numbers to make it better. The problem with measuring efficiency is of course, it tells you nothing about effectiveness. It’s also a relative measure. What’s appropriate for one organization may be excessive for another.
The GiveWell Blog has an excellent take on efficiency ratios: http://blog.givewell.net/?p=15 .
As a donor, board member or other constituent, how do you evaluate your favorite non-profit to assure that they are carrying out the work?
