Our recent webinar, Key Financial Metrics Every Not-for-Profit Should Track for Long-Term Success, sparked incredible engagement, with not-for-profit leaders from across Canada asking insightful questions about financial best practices, compliance, and reporting.
In this post, we’re answering the most common and impactful questions—helping you navigate key financial decisions with confidence.
Want more financial insights? Download our free guide — 15 Must-Track Metrics for Not-for-Profit Leaders.
1. How do we determine whether our funds are restricted or unrestricted?
What it means
Restricted funds must be used for specific purposes as outlined by the donor, grant, or funding body. Unrestricted funds can be used at the organization's discretion to cover general operations and mission-related expenses.
Why it matters
Misclassifying funds can lead to financial mismanagement, reporting errors, and compliance risks.
How to determine fund classification
- Review funding agreements – Does the grant or donation specify how the money must be used?
- Assess reporting requirements – Restricted funds often come with reporting obligations.
- Consult your accounting system – Use separate tracking categories for restricted vs. unrestricted funds.
Key takeaway
Always clarify restrictions before spending funds. If uncertain, consult a finance professional.
Read more:
- Non-Profit Reserve Funds: Five Best Practices for Managing Your Restricted Funds
- Fund Accounting Basics for Canadian Non-profit Organizations
15 Must-Track Metrics & KPIs for Nonprofit Success
2. How do we determine whether a grant is restricted or unrestricted?
What it means
Grants may or may not be restricted, depending on the funder's guidelines. Some grants specify their use for particular programs, while others allow for more flexible spending.
Why it matters
Spending restricted funds incorrectly can result in compliance issues and lost funding opportunities.
How to assess grant restrictions
- Review grant documentation for specific spending instructions.
- Check if there are reporting requirements tied to the grant (restricted grants usually require periodic financial reports).
- If the grant contract doesn’t explicitly state restrictions, confirm with the funder before allocating funds.
Key takeaway
When in doubt, confirm directly with the funder before categorizing grant funds in your books.
3. What is the recommended operating reserve ratio for not-for-profits?
What it means
The operating reserve ratio measures how many months of operating expenses an organization has in reserve.
Why it matters
A strong reserve ensures financial stability, especially during funding fluctuations or economic uncertainty.
Best practices
- Aim for 3–6 months of operating expenses in reserves.
- For organizations with unpredictable funding cycles, a higher reserve may be necessary.
- Track and adjust reserves annually based on organizational needs and economic conditions.
Key takeaway
Building and maintaining reserves provides a financial safety net, allowing your not-for-profit to weather uncertainties without disrupting operations.
Read more:
4. How do organizations determine what percentage of salaries fall under administrative vs. program expenses?
What it means
Salaries can fall into multiple categories depending on the employee’s role and duties.
Why it matters
Accurate classification helps maintain financial transparency and compliance with funder requirements.
How to allocate salaries
- Administrative salaries – Roles like executive leadership, HR, finance, and general management.
- Program salaries – Staff directly involved in delivering programs and services.
- Fundraising salaries – Employees focused on donor relations, grants, and fundraising events.
- Hybrid roles – Employees who split time across functions should have their salaries proportionally allocated.
Key takeaway
Document salary allocations clearly to ensure transparency and compliance in financial reporting.
5. Is it best practice to include staff wages in fundraising expenses, or should fundraising expenses strictly show event-related costs?
What it means
Fundraising expenses may include direct costs (event expenses, marketing, donor outreach) and salaries of fundraising staff.
Why it matters
Misclassifying fundraising wages can lead to inaccurate financial reporting.
Best practices
- If an employee’s primary role is fundraising, their salary should be categorized under fundraising expenses.
- If fundraising is only a small part of their job, allocate salary costs accordingly (e.g., 75% admin, 25% fundraising).
Key takeaway
Clearly define how staff time is allocated to ensure compliance and accurate financial statements.
6. What are the benchmarks for an NPO’s key financial metrics?
What it means
Financial benchmarks provide a point of reference to assess an organization’s financial health.
Why it matters
Without benchmarks, it’s difficult to gauge whether financial performance is strong or needs improvement.
Key benchmarks
- Program Efficiency Ratio – At least 65% of expenses should go toward program costs.
- Administrative Cost Ratio – Generally 10–15%, though this varies by organization.
- Fundraising Efficiency Ratio – A good ratio is 3:1 or higher ($3 raised per $1 spent).
- Donor Retention Rate – The average in Canada is around 40–45%; higher retention means stronger long-term funding.
Key takeaway
Regularly track your financial ratios and compare them to sector benchmarks to stay financially competitive and sustainable.
7. Should donor retention calculations account for lost donors?
What it means
Donor retention measures how many donors continue to give year-over-year, but should also consider donors who stopped giving.
Why it matters
Understanding donor churn helps organizations improve engagement strategies and fundraising efforts.
How to measure donor retention
- Calculate the percentage of donors who gave this year and also gave last year.
- Identify lapsed donors and implement targeted re-engagement campaigns.
- Track first-time donor retention separately from repeat donor retention.
Key takeaway
Retention isn’t just about who stays—it’s also about understanding why donors leave and how to bring them back.
8. How do we conduct a cost review and reduce expenses without impacting program delivery?
What it means
A cost review evaluates operational expenses to identify areas for savings while maintaining mission impact.
Why it matters
Optimizing expenses ensures financial sustainability without sacrificing program quality.
Best practices for cost reduction
- Evaluate contracts – Renegotiate vendor agreements or subscriptions.
- Assess staffing needs – Cross-train employees to maximize efficiency.
- Identify operational redundancies – Streamline processes and eliminate unnecessary costs.
Key takeaway
Regular cost reviews help organizations stay financially lean while keeping resources focused on their mission.
9. How does one decide what exactly counts as an administrative expense?
What it means
Administrative expenses cover costs related to managing the organization rather than direct program delivery.
Why it matters
Proper categorization ensures accurate reporting and prevents misallocation of funds.
Typical administrative expenses
- Executive salaries
- Office rent and utilities
- Professional services (legal, accounting)
- IT and software subscriptions
Key takeaway
Clearly define admin expenses to ensure transparent, funder-compliant financial statements.
Stay Financially Strong in 2025
Financial clarity and best practices are essential for not-for-profits to thrive. By tracking key financial metrics, maintaining reserves, and ensuring transparent reporting, your organization can make informed decisions and strengthen stakeholder trust.
Want more financial insights? Download our free guide — 15 Must-Track Metrics for Not-for-Profit Leaders.
Need expert bookkeeping support? Book a free consultation with Enkel to streamline your organization’s financial operations today.
