Operating Margin

Operating margin is a key financial metric. Operating margin is the difference between revenue and expenses, expressed as a percentage of total revenue. Operating margin is a measure of how well the nonprofit controls costs per dollar of revenue.

To illustrate the operating margin calculation, consider a nonprofit with total revenue of $1,000,000 and total expenses of $900,000. The operating margin formula is:

Operating Margin = ((Total Revenue−Total Expenses) / Total Revenue) × 100%

Operating Margin = (($1,000,000 − $900,000) / $1,000,000) × 100% = 10%

This means the nonprofit has a 10% operating margin, indicating that for every dollar in revenue, it retains $0.10 after covering expenses. A positive margin like this enables the nonprofit to reinvest in its mission, save for future needs, and ensure financial stability.

Nonprofits should strive for an operating margin in the high single digits to low double digits. Too low of an operating margin risks poor reserves, especially after debt servicing. Too high an operating margin and criticism regarding lack of spending on programs could develop. Of course, nonprofits early in development that are investing in programs may have lower operating margins. The point is to pay attention to this metric to monitor fiscal health.

Maintaining a positive operating margin is essential for financial stability and long-term sustainability. A healthy operating margin allows the nonprofit to reinvest in programs, and build financial reserves. Nonprofits with consistently negative margins may struggle to cover operational costs, risking program cutbacks, or closure.

Nonprofits can improve their operating margin by diversifying revenue streams and controlling expenses. A mix of earned income, grants, donations, and investment income helps reduce reliance on any single funding source. Effective cost management, such as streamlining operations, negotiating better vendor contracts, and leveraging technology can enhance financial efficiency.

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