Nonprofit Ratios: Personnel Expense

     Financial ratios are incredibly valuable. When you shift your focus from the transactional level and instead, take in the bigger picture, you gain a much deeper understanding of your financial health and your long-term sustainability. Today we’ll dive into the personnel expense ratio. I’ll show you how to calculate it and how to meaningfully interpret those numbers. 

What is the Personnel Expense Ratio?

     When it comes to nonprofits, personnel expenses are the most significant chunk of the overall expenses. But, there's a simple way to track how effective you are, by looking at what percentage of your budget is going to salaries, wages, benefits, and other types of compensation. So let's start with how to calculate the ratio. It's actually pretty easy. You’ll want to calculate your total compensation as a percentage of your total expenses. Keep in mind that total compensation includes all your expenses for salaries, wages, benefits, and other compensation. For instance, you might have contractors that you are hiring versus employing because of the size or the longevity of the need for that service. Whatever your combination may be, you’ll want to make sure you’ve added up all of your compensation expenses, and then you’ll divide that number by your total expenses. 

     So for example, if your organization's total expenses are $500,000 and your personnel expenses are $200,000, then your ratio would be 40%.  (200 ÷ 500 = .4 or 40%) 

What is the Industry Norm?

     While I’ve shared industry norms as benchmarks for each of the previous nonprofit ratios in this series, this particular ratio does not carry such an obvious or widely recognized industry norm.  When we look at an organization’s personnel expense ratio, comparing and interpreting this number can be much more nuanced, because this ratio really could look very different even from one healthy nonprofit to another. 

     So instead of an industry benchmark, I’ll share my general observations based on the nonprofits I’ve worked with. I typically see a ratio of around 30% among nonprofits in general. However, I can tell you that in churches, the ratio is consistently and predictably closer to 55% regardless of the church’s size.  So, there's a little bit of anecdotal industry information. I also want to encourage you to look towards your association groups to see if they provide some benchmarking information too.

     One factor that can significantly impact the personnel expense ratio is the level of volunteer participation within that organization. In other words, organizations with a strong culture of volunteerism should see a much lower personnel expense ratio. For example, I know of a pregnancy help organization that operated exclusively through volunteers from its inception. Now, they eventually did reach a point where they needed to hire a director and an assistant, but it took them upwards of 40 years to reach that point. Of course, in this example, this organization would’ve had a much lower personnel expense ratio than many other nonprofits. My point, in sharing this example, is to emphasize the uniqueness of each organization’s personnel expense ratio depending on a variety of factors, including their volunteer culture. So please don’t interpret a low ratio as a need to go spend 30% of your budget on personnel! Look at your ratio in the whole context of your mission and organizational culture. 

Why Your Personnel Expense Ratio Is Worth Watching

     While this ratio varies greatly and industry norms are less defined, this is still an extremely useful tool that you should be tracking over the lifespan of your organization. As nonprofits grow, they are often faced with the same daunting questions:

“Should we add staff?”

“Do we have too many staff?”

“Are we staffed appropriately?” 

     That’s why it’s so important that you identify any industry norms specific to your niche, and that you not only calculate this ratio, but document and track its trends throughout the history of your organization. Doing so will empower you to more objectively answer the hard questions about staffing whenever the need arises. 

     I've enjoyed this month of sharing ratios with you. If you've missed some, you can go back and dive into those other ratios here. I hope they'll be helpful to you. If there's something that you may not have understood clearly or if you'd just like some help implementing any of this in your organization, I'd be happy to help. Don't hesitate to book a strategic consult with me. I look forward to talking to you.