Financial Performance Metrics for Nonprofit Organizations: A Comparative Study

Abstract

This article assesses the effectiveness of various financial performance metrics for non profit organizations (NPOs). Comparing traditional financial ratios with social return on investment (SROI) and other impact-oriented measures, we analyze their strengths and weaknesses in evaluating an NGO's financial health and social impact. Through a comparative study of diverse NGOs across different sectors, we examine how various metrics illuminate different aspects of their performance. Based on the findings, we propose a framework for selecting and combining metrics to provide a comprehensive understanding of an NGO's financial and social effectiveness. Financial performance metrics (FPMs) are crucial for non-profit organizations (NPOs) to assess their financial health, demonstrate accountability to stakeholders, and secure funding. However, the selection and application of FPMs in the non-profit sector are often inconsistent and context-dependent, leading to challenges in benchmarking and comparative analysis. This study addresses this gap by conducting a comparative analysis of FPMs employed by NGOs in different contexts. The study draws on data from a sample of NGOs operating in diverse geographical locations and program areas. Through document analysis and semi-structured interviews with NGO financial managers, the study identifies the most commonly used FPMs, their strengths and limitations, and the factors influencing their selection. The findings reveal significant variations in FPM adoption across contexts, highlighting the need for a more nuanced approach to FPM selection and application in the non-profit sector. The study contributes to the literature by offering valuable insights into the current landscape of FPMs in the non-profit sector and providing recommendations for developing context-specific FPM frameworks. This research can guide NGOs in selecting and utilizing appropriate FPMs to enhance their financial transparency, accountability, and effectiveness.