Benchmarking Association Financial Performance Using DuPont Analysis

 As highlighted in last week’s post, Magnifying Financial Insights: DuPont Analysis for Associations, DuPont analysis provides a proven framework for financial evaluations and is highly adaptable for associations. In this post, we delve into one practical application of DuPont analysis: benchmarking.

The data presented here is drawn from publicly available IRS Form 990 filings; however, specific association names have been withheld to protect their privacy.

Trouble in Virginia

The CFO of a prominent Virginia professional association was confronted with a straightforward yet profound question: "Why?"  

The association had achieved a record year, with membership and conference registrations totaling an impressive $9.5 million—exceeding budget expectations. Yet, despite this success, the association operated at break-even, with no surplus to reinvest in its mission or build reserves for future stability. This financial inflexibility signaled an urgent need for a strategic shift.

The initial “Why?” soon expanded into deeper questions: “Where?” and “How?” Where could costs be trimmed without sacrificing value? How could revenue streams be diversified to secure the association’s long-term financial health? Answering these questions required a deeper dive into the organization’s financial performance and a commitment to transformative action.

A Tale of Five States

To assess whether other state societies in the same profession faced similar challenges, the CFO turned to IRS Form 990 filings and applied DuPont analysis. These filings provided the necessary data, including total revenue, expenses, changes in net assets, and figures from the Statement of Financial Position, such as total assets, liabilities, and net assets. By benchmarking Virginia’s financial performance against its peers, the CFO sought to uncover shortcomings and identify improvement opportunities.

Below is the raw data (in millions):

Despite leading in revenue, Virginia is operating at break-even with no surplus. This indicates a critical issue requiring further analysis to uncover root causes and opportunities for improvement.

Return on Net Assets (RONA)

Return on Net Assets (RONA)—the nonprofit equivalent of Return on Equity (ROE) for for-profits—offers a high-level measure of financial performance:

RONA = Change in Net Assets / Net Assets

Here is how the five associations compare:

Virginia’s 0.0% RONA is a red flag compared to peers, where healthy levels range from 4% to 8%. To achieve even a modest 4% RONA, Virginia would need a surplus of approximately $780,000 (4% of $19.5 million in net assets).

While RONA provides an overall snapshot of financial performance, it does not show why the performance is lacking or where to focus improvement efforts. This is where DuPont analysis becomes invaluable. 

DuPont Analysis: Identifying Priorities

DuPont analysis breaks RONA into its three core components: profitability, efficiency, and leverage. By dissecting financial performance into these elements, CFOs can pinpoint specific areas requiring attention and prioritize resources strategically.

Let’s examine each component in detail and explore actionable strategies to improve performance.

Profitability: Net Surplus Margins

Profitability measures how much of an association’s revenue remains as surplus after expenses:

Profitability = Change in Net Assets / Total Revenues

Key Insight: Virginia’s 0.0% profitability signals a critical issue. Without generating surplus, the association lacks the resources to reinvest in its mission or build reserves.

Actionable Items:

• Evaluate Program ROI: Analyze programs to identify which are underperforming and consider restructuring or discontinuing those with low returns.
• Enhance Revenue Streams: Evaluate pricing models and expand non-dues revenue sources, such as sponsorships, digital publications, online courses, certification programs, or partnerships with industry vendors.
• Control Operating Costs: Conduct a comprehensive expense audit to identify cost-cutting opportunities, such as renegotiating vendor contracts or consolidating services.

Efficiency: Asset Turnover

Efficiency measures how effectively an association's resources generate revenue:

Efficiency = Total Revenues / Total Assets

Key Insight: Virginia’s asset turnover of 0.37 is below the median for its peers, indicating an opportunity to more efficiently use assets to generate revenue.

Actionable Items:

• Repurpose Underutilized Assets: Assess physical and intangible assets (e.g., office space, technology systems) to determine if they can be leveraged or repurposed for revenue generation.
• Automate and Optimize Operations: Invest in technology or process improvements that enhance operational efficiency without significant capital expenditure.
• Generate Revenue from Existing Resources: Explore revenue opportunities like renting unused office space or launching digital products that capitalize on existing capabilities.

Leverage: Equity Multiplier

Leverage measures the extent to which assets are financed through liabilities:

Leverage = Total Assets / Net Assets

Key Insight: Virginia’s leverage of 1.30 is stable and comparable to its peers. There is no immediate need to adjust its financing strategy.

Actionable Items:

• Maintain Current Strategy: Continue monitoring liabilities to ensure they remain manageable and align with long-term goals.
• Prioritize Profitability and Efficiency: Focus on improving surplus margins and asset utilization to drive overall financial health.

Closing Notes

DuPont analysis transforms financial data into actionable insights, empowering CFOs to understand the specific drivers of their organization’s financial performance. By benchmarking against peers and addressing weaknesses, associations can achieve healthier RONA levels and strengthen their ability to fulfill their missions.

For the CFO of the Virginia association, the numbers suggest profitability and efficiency are the most pressing issues, while leverage appears stable and requires no action. Addressing these areas with targeted strategies will enable the organization to achieve a stronger financial position, support its mission, and create opportunities for reinvestment and growth.