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Thursday, March 5, 2015

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Benchmarking Your University: Beyond the Numbers


The word “benchmark” may strike some as organizational lingo, but the practice of benchmarking often proves valuable for private universities. Those that incorporate financial benchmarks into their operations are better at anticipating negative financial trends and may even see revenues climb, expenses drop and efficiencies improve.

What is Benchmarking?
Benchmarking is an ongoing process of measuring an organization against expectations, past experience or industry norms for productivity and profitability and then making adjustments to improve performance in relation to those metrics.

Ideally, your university will consider both internal benchmarks—to monitor and detect trends, based on your university’s historical results and statistics, as well as expectations—external benchmarks—to ascertain where it’s thriving and where it lags behind, based on data from peer institutions.

Benchmarking provides essential information for effectively developing and implementing strategic plans. It helps an organization keep a watchful eye on its financial health and ensure that it is working at its maximum effectiveness. Universities can use benchmarks to demonstrate their efficiency to stakeholders such as donors and grantors.

Benchmarks for Universities
If you have not already, define what your university needs to measure. Focus on the metrics that are most critical to the success of your mission and the key indicators of the organization’s financial health and operational effectiveness. For many of the private universities and schools that we work with on a regular basis, those metrics will include:

   

Program Efficiency =

Program Service Expenses
Total Expenses

Shows the basic relationship between program expenses and total expenses. The best outcome would be a ratio close to 1, where the majority paid by a nonprofit would go towards programs. This ratio is typically keenly watched by employees, managers, Board members, donors and contributors. It tends to be one of the more important metrics used when assessing performance.

Revenue Composition =

Unrestricted Program Service Revenue
Total Unrestricted Revenue

This metric shows the composition of the university's revenue stream. Specifically, it shows how many cents in program revenue there are for each dollar of revenue generated.

Operating Reliance =

Unrestricted  Program Service Revenue
Total Expenses

This ratio indicates whether your university could pay all of its expenses solely from program revenues. Many times (although not always) program revenues are more predictable and consistent sources of money and, therefore, it is a point of interest to see how able a nonprofit is to liquidate expenses from just program revenue. The ideal score would be 1, or even above 1, in very rare cases.

Fundraising Efficiency =

Unrestricted Contributions
Unrestricted Fundraising Expenses

Shows how much contribution revenue a university can generate from fundraising activities/expenses. The ideal relationship is a high number, which would mean that the institution is able to generate a multiple of how much it costs to do fundraising.


Also consider benchmarks such as average donor contributions, expenses per student and other ratios that measure trends for liquidity, operating yield, revenue, borrowing, assets and similar metrics. No matter which benchmarks you choose, though, you’ll need reliable processes for collecting and reporting the data.

Benefits of Benchmarking
Comparing your university’s performance to peer benchmarks allows you to zero in on areas with the greatest potential for improvement. Armed with this information, you may be able to improve performance without making significant changes in your operations. Further, when comparing against external benchmarks, you might improve performance by simply adopting best practices used by your peers.

In addition, some of our clients have found it worthwhile to include staff in the benchmarking process. Their involvement in setting aggressive but attainable benchmarks—and measuring progress—can achieve buy-in and help foster teamwork as your university moves toward and surpasses its goals.

Less Is More
When looking at benchmarks, don’t drink from the fire hose; focus on what matters most to the financial levers of your organization. Often times, the majority of the data you’ll need will be found in your statement of financial position, statement of cash flow and your Form 990. But it also helps to turn to your financial advisor, who can help you select the most appropriate benchmarks for your organization and provide advice on how to improve your financial and operational performance.

Armanino’s Advantage
Where we differ is not just showing you graphs created from your own tax Form 990, but we go beyond just the numbers to help you find the valuable information. Working with hundreds of schools has given us unique insight into best practices for private universities. As a client of Armanino, you get this value each time we review your financial statement.

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