MANAGEMENT                                                       Performance                                              ...
MANAGEMENT     Many NGOs are adopting the IFRS (International            The aim in analysing and interpreting financial r...
MANAGEMENT     an indicator of the concentration of donations                      This ratio emphasises on the efficient ...
MANAGEMENT  l   Take proactive measures to determine what has to be     utilization of the financial resources combined wi...
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Performance Measurement in NGOs

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Performance Measurement in NGOs is a challenging task as they have both business and social obligations to meet. Traditional accounting measures may not suffice to capture and benchmark growth and other challenges of NGOs. In this paper, we enumerate some key performance measures that could be used by some practitioners.

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Performance Measurement in NGOs

  1. 1. MANAGEMENT Performance Measurement in NGOsPratibha SharmaB Com, Qualified CMAAsst. Consultant (Strategy and Finance group)Browne & MohanBangaloreIntroduction Performance measurementN on-government organizations are important In order to align the activities with their objectives and institutional players in non-formal interventions to meet the donor accountability NGO’s need to measure including health, education, tertiary and primary and monitor performances of various groups. An NGO’scare including aged, policy and institutional building, performance can be measured by how well it achievesgovernance awareness, etc. In a developing country like the goals it has set itself and at what efficiencies. TheIndia, their role and participation is crucial to extensively two principal functions of performance measurementcover and deliver quality services. According to recent systems are, firstly, to ensure that organisations are heldstatistics, India annually raises anywhere in between 400- accountable for their performance and actions; and800 billion INR. Many of these organizations are run secondly, to facilitate learning and improve performance.under state trust acts or as societies or companies act. Performance measures for an NGO could be bothThere are several stake-holders involved in functioning financial and non-financial measures. Such an integratedand growth of the NGO. The board and management are view would offer a comprehensive link between severalfocused on raising funds and deploying them to meet units within an NGO (right from resource generation unitthe objectives of the NGO. The donors are interested in to program management unit). Such a comprehensivechannelizing their contributions through NGO to meet framework is highly recommended. (Epstein andsocial interventions deemed appropriate. Government McFarlan, 2011)and regulatory machinery are concerned about thesources of funds, utilization and management of fundsso that inappropriate activities do not happen. An NGO Financial measures of performancefaces difficulty in the areas of accountability, transparency, A vital measure to evaluate the quantitative parametersinternal control mechanisms and financial management is the financial statements of organisations. (Lewis,(Edwards, 1994). For the organisation to be accountable, 2009) These statements provide the stakeholders with anit must explain how it has used its resources and what insight on the financial situation of the organisation andit has achieved as a result to all stakeholders. Every facilitate better planning and monitoring of activities.person in the organisation has a moral responsibility to With soliciting and using the donor funds comes thefollow the policies and procedures. Transparency can responsibility of being able to justify and provide claritybe achieved only through maintaining complete records on the usage of funds and also plan for effective utilizationand disclosing them without any window dressing or of the limited resources. Therefore transparency is anhidden information. Being a voluntary organisation an essential condition for accountability. NGOs are striving toNGO has to have members who work with integrity and gain the confidence of their donors and internally createaim towards achieving the objectives. Internal control a committed organisation. Many NGOs are proactivelybecomes essential for any organisation to monitor and deciding what more can they inform their stakeholders.measure the integrity of individuals and also keep a check The disclosures in the financial statements are betteron the smooth functioning of the activities. Finally, NGOs and if any person from anywhere in the world is able toneed guidelines to increase trust and awareness about the understand the financial statements then the objective oforganisation (Fowler, 1995). transparency is achieved.1442 The Management Accountant | December 2012
  2. 2. MANAGEMENT Many NGOs are adopting the IFRS (International The aim in analysing and interpreting financial results is toFinance Reporting Standards) system of reporting to assess the financial health of the organisation, compare theincrease the quality of information. These financial performance over the years or with other organisations,statements prepared using common accounting standards effective decision making and better planning for theacross the globe would help the donors and other future. Financial statement is also an important source ofstakeholders better understand and analyse the financial assessing the risk in the organisation and taking appropriatecondition of the organisation. measures to mitigate them. The risks associated with Financial statement analysis offers insights into: an NGO could be that of fraud, theft, volatility in costs,(Lewis, 2009) exchange risk etc. These risks could be mitigated through appropriate internal checks, constant review of the financial l Where has the money come from? For any organisation records and updated information and timely action. The to smoothly function and sustain would require funds. financial measures present three dimensions of the NGO: The source of funds for NGOs could be primarily (Lewis, 2009) donations, interests, rents or dividends. l For what purpose has it been received? It is essential Financial Sustainability: Financial sustainability for to define the objective of the organisation and the an NGO would mean the long term support that these purpose for which the funds are generated. For any organisations provide to their beneficiaries. Hence, to other company the objective would be profit but for support these activities the NGO must have sufficient an NGO the objective would be to serve the society funds to function and service not just today but also in and expand its reach in uplifting the weaker sections the future. This financial sustainability would be a result of of the society. good financial management which would include planning l How has it been spent? To know and summarise to foresee and predict, organising to work as per the plan, at the end of each financial year what has been the monitoring the activities to compare and match to the application of funds. original plans and reviewing the activities performed. l What are the outcomes of the operation? To provide Efficiency: The efficiency of an organisation is assessed by information internally as well as externally about the measuring the organisations capability to serve as many projects funded, intangible benefits to the project people as possible with is resources at the lowest cost and beneficiaries and the impact that the organisation good service. could create with the activities.Understanding the purpose of objective measures to meet Effectiveness: The capability of an organisation to achievethe needs of each stakeholder paves the path for defining desired results by managing the limited resources andand institutionalizing them. consistent performance.Resource Generation Staff: They would need financial The most common financial measures NGOs could usestatements to analyse the cost incurred for the revenue are, (Lewis, 2009)generated. Their basis would be to evaluate the worth of Ratio Analysis: A quantitative analysis of information inthe expenses in generating funds. the financial statements to evaluate relationships amongFinance Staff: The finance staff would be interested in the financial items. These ratios are used to analyse over time,complete financial statements as they would evaluate the individually or in comparison to similar organisations.current financial condition and financial sustainability Some of the ratios to understand the Financial Sustainabilityof the organisation. To ensure and effective and efficient of the organisation could be:utilization of resources to achieve the organization’sobjectives. l Donor Dependency Ratio: Donor Income/Total Income:Board of Trustees: To keep an eye on how resources arebeing used to achieve the NGO’s objectives. This ratio is a measure of the organisation’s donor income to the total income generated during theDonors: Donors are the lifeline of any NGO. The donors year. The usual norm followed is that if the ratio iswould look at the statements to understand how their funds high then the donor dependency would be high andare being utilised and whether to consider supporting that if the ratio is less, the organisation is independentorganisation in the future. and there is less reliance on the donors to generateProject Beneficiaries: They would be concerned to income. Accordingly there is another view pointunderstand what it actually costs the NGO to provide to this. Considering the donor income it becomesthem the services and how much is it benefitting their very essential to analyse the number of donorscommunity. contributing to that income. The donor mix isThe Management Accountant | December 2012 1443
  3. 3. MANAGEMENT an indicator of the concentration of donations This ratio emphasises on the efficient utilization of through limited donors which poses a risk to the the available funds to generate more funds. It is an organisation. To de risk the organisation it becomes indicator of the real value of the income generated important to dilute the donor income or have a and the outflow to generate that income. If the dispersed donor mix which reduces the risk of expenditure to generate the income is high then dependency on limited donors. This would be a there would be very little margin that could be used true indicator of donor dependency and a measure in the future. to increase donors. Trend analysis of the key financial measures would l Survival Ratio: (General Reserves/Total Income)*52 help us know how the organisation is performing when or 365 compared to last period. What has been the growth, the increase in projects and the expansion through the years? This is a hypothetical ratio which is an indicator of By comparing it may be possible to detect trends and use how long can the organisation survive if all its funds this information to forecast future trends or set targets. The are dried up and there are no donations received trend analysis becomes more meaningful if combined with during the year. In simple terms it would mean if the ratio analysis. with the total income generated the organisation can survive for 52 weeks or 365 days assuming Non Financial Performance Measurement: all activities constant and income generated is In recent years the concern for quality has created a spent then how many weeks or days would the greater demand for more performance measurement organisation sustain with its reserves. The General strategies. The NGOs are under pressure to invest more in reserves here would mean the unrestricted funds/ evaluating the work and measuring its implications both reserves. financially and non financially. A measure of non-financial l Corpus Fund to Earmarked Funds Ratio: This ratio performance is essential to provide a balanced view of provides a comparison between the corpus fund and organizational performance. The scarcity of resources the restricted funds of the NGO. The ratio should not and increased competition from other organizations for be unduly lopsided on either side. A very high corpus funds has elevated the need for the NGOs to measure and would imply that the NGO is comparatively dormant proactively manage organization performance. The NGOs and a very low corpus would denote insecurity about are accountable to their stakeholders most importantly to its future. their donors and beneficiaries. The analysis of financial statement is usually a post hoc measure detailing the result l Current Ratio: Current Assets/ Current Liabilities of the performance whereas on the other hand the non financial parameter elevates the measurement for strategic This ratio in profit making companies indicates the re-organizing and continuous improvement to better the liquidity position of the company. In NGOs too it performance. determines the ability of the organisation to pay off its NGOS should consistently measure the impact of the immediate debts (within 12 months).A ratio of 2:1 is activities and efforts on the society and individuals and considered satisfactory. This ratio signifies the effective the progress made towards achieving the set objectives. To management of resources by the organisation. determine the ability of an organisation to constantly grow l Income Utilization Ratio: Total Expenditure/Total and improve, the NGOs need to keep a track of the changes Income within and outside the organisation. Necessary skills and tools in employees are essential to drive the strategic goals This ratio is basically to understand how much and align with organizational objectives. has the organisation incurred in expenditure as a Another measure of performance in NGOs could percentage of total income generated. This ratio can be the level of relationship maintained and built through be further broken down into sub ratios such as the the years. The number of new donors added during the ratio between Programme expenses to Total Income year or the repeatability of donors through the years. or Administration Expenses to Total Income. These The jobs created during the year are also an indicator of ratios help the organisation to ascertain the efficiency the organisation’s development each year. (Epstein and to handle expenses with the generated income and McFarlan, 2011) prioritise expenses on the basis of need and original The main objective of these measurements is to: plans. l Align the resources, processes and financials to meet Resource Generation Ratio: Resource Generation the organization’s objectives. Expenditure/Resource Generation Income: l Transform goals set to goals achieved.1444 The Management Accountant | December 2012
  4. 4. MANAGEMENT l Take proactive measures to determine what has to be utilization of the financial resources combined with accomplished from time to time. the efficient and effective non financial resources. Such l Enunciate and strive for a sustainable and efficient measures give an organisation a more informed view of organisation. their performance and better understanding of the impact they are able to create on the communities they serve.Conclusion Good performance is a criterion whereby an organizationThe NGO sector as a whole has traditionally been can determine its capability to achieve its objectives anddawdling in measuring and improving its organisational prevail.performance. This partially is because employees oftensee their aims as somewhat less visible and quantifiable Referencesthan the profitability and stock market measures that 1. Edwards, M. (1994). NGOs in the age of information. IDSthe business sector concentrates on. Performance Bulletin, 25(2), 117-124.measurement gives an overview of organizational 2. Edwards, M. & Hulme, D. (1994). NGOs and development:deficiencies and thereby there is a greater chance to Performance and accountability in the New World Order.discover the relevant areas where improvements are London: Save the Children Fund-UK and Manchester:needed and where rationalizations are most urgent. A Institute for Development Policy and Management.performance measurement system involves creation of 3. Fowler, A. (1995). Assessing NGO performance: Difficulties,an information feedback system by which management dilemmas and a way ahead. In M. Edwards & Hulme,identifies, monitors and takes action to improve selected D. (Eds.), Beyond the magic bullet: NGO performancekey performance indicators that tracks the organisation’s and accountability in the post-Cold War world. London:primary performance areas. Earthscan, and West Hartford:Kumarian Press. Performance measurement as a tool demonstrates and 4. V. Terry Lewis (2009): Practical Financial Managementimproves efficiency in both the financial and non financial for NGOs-Mango (Management Accounting for Non-aspects of the organisation. A fully integrated approach governmental Organisations)to performance measurement is a prerequisite. The 5. VI. Marc J Epstein and Warren McFarlan(2011)-Measuringorganization has to strike a balance between the optimal the Efficiency and Effectiveness of a Non-Profit’s Performance. The Management Accountant — January, 2013 will be a special issue on ‘INFRASTRUCTURE FINANCING’ Articles, views and opinions on the topic are solicited from readers along with their passport size photographs to make it a special issue to read and preserve. Those interested may send in their write-ups by e-mail to rnj.rajendra@icwai.org, followed by hard copy to the Journal Department, 12, Sudder Street, Kolkata-700 016 to reach by 8th December, 2012. The Management Accountant — February, 2013 will be a special issue on ‘NEW PRICING MODELS’ Articles, views and opinions on the topic are solicited from readers along with their passport size photographs to make it a special issue to read and preserve. Those interested may send in their write-ups by e-mail to rnj.rajendra@icwai.org, followed by hard copy to the Journal Department, 12, Sudder Street, Kolkata-700 016 to reach by 8th January, 2013.The Management Accountant | December 2012 1445

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