Financial Management · Financial and other objectives in not-for-profit organisations

Measuring Performance and Problems in Not-for-Profit Organisations

Updated 11 October 2026 · Fact-checked

Not-for-profit organisations (NFPs) exist to deliver services, not profit, so profit cannot measure success. You assess them with value for money (economy, efficiency, effectiveness) and non-financial measures. Problems include hard-to-quantify outputs, many stakeholders with conflicting aims, and funding limits. Answer by naming the problem and applying it to the scenario.

Understand Measuring Performance and Problems in Not-for-Profit Organisations

A not-for-profit organisation (NFP) exists to provide a service or benefit, such as a charity, hospital, school or government body. Its main aim is not to make a surplus for owners. Because of this, profit and share price cannot be the main measure of success.

Commercial firms have one clear financial yardstick: wealth for shareholders. NFPs have multiple objectives. A charity may want to relieve poverty, raise awareness and keep costs low at the same time. These aims can conflict, and none is expressed in money.

The usual framework is value for money (VFM). It has three parts: economy (spending less on inputs), efficiency (getting more output from inputs) and effectiveness (achieving the organisation's objectives). All three must be considered. Cheap inputs that produce poor results are not good VFM.

The main problems in measuring performance are these:

No profit measure. There is no single bottom line to compare against.
Outputs are hard to quantify. How do you put a number on better health, education or wellbeing? Outcomes may appear years later and be caused by other factors too.
Multiple stakeholders. Donors, government, beneficiaries, staff and volunteers want different things, so there is no agreed measure of success.
Funding constraints. Money comes from donations or grants, not sales. Budgets are fixed, funders may restrict how money is used, and income is uncertain.
Weak link between cost and benefit. Users often do not pay, so there is no market price to show what the service is worth.
Other issues. Targets may distort behaviour, volunteers are hard to direct, and the organisation may be unable to control the outcomes it is judged on.

To cope, NFPs use a mix of financial measures (cost per beneficiary, admin cost as a share of income, spending within budget) and non-financial measures (waiting times, pass rates, satisfaction, number of people helped).

Key rules to remember

Economy: Economy = spending the minimum on inputs of suitable quality; Looks at input cost only. Example: price paid per unit of supplies.
Efficiency: Efficiency = output ÷ input (or the same output for fewer inputs); Example: cases handled per member of staff, or cost per case.
Effectiveness: Effectiveness = actual outcome achieved compared with the objective set; Example: percentage of target beneficiaries actually helped.
Cost per unit of service: Cost per beneficiary = total cost ÷ number of beneficiaries; A simple efficiency measure. Compare over time or with similar bodies.
Administration cost ratio: Admin cost ratio = administration costs ÷ total income (or total expenditure); Donors watch this. A low ratio is not always good if it means under-investing in control.

How to solve Measuring Performance and Problems in Not-for-Profit Organisations questions

Use this method for any question on measuring NFP performance or its problems.

1Read the scenario and identify the type of NFP and its main objectives.
2Decide what the question asks: problems, measures, or both.
3State why profit is not suitable and what the organisation is trying to achieve instead.
4List the relevant problems (no profit measure, hard-to-quantify output, multiple stakeholders, funding limits) and tie each to a fact in the scenario.
5Suggest measures under economy, efficiency and effectiveness, using both financial and non-financial indicators from the scenario.
6Calculate any ratios asked for and comment on what they show.
7Add a limitation or caution, for example that a measure may distort behaviour.
8Finish with a short, clear conclusion that answers the question set.

Quickest way: Problem, scenario, measure

When to use it: Use for objective test questions and short written parts when time is tight.

Spot the keyword: profit, output, stakeholders, funding or VFM.
Match it to the problem: no bottom line, unquantifiable output, conflicting stakeholders, or restricted funds.
For a measure, ask: is it about input cost (economy), output per input (efficiency) or objectives met (effectiveness)?
Write one point per mark, each linked to the scenario.

Common mistakes in Measuring Performance and Problems in Not-for-Profit Organisations

Saying NFPs have no financial objectives at all.
Students read 'not-for-profit' as 'no money matters'.
Fix: State that NFPs must still control costs, stay solvent and use funds well. Their financial aim is usually to break even or meet budget while delivering the service.
Mixing up economy, efficiency and effectiveness.
The three terms sound similar.
Fix: Economy is input cost, efficiency is output per input, effectiveness is achieving objectives. Check which one the example describes.
Giving a generic list of problems with no link to the scenario.
Students memorise a list and write it out.
Fix: Use facts from the case, such as a named funder, a service target or a type of beneficiary, to show how each problem arises.
Treating low cost as proof of good performance.
Economy is easy to measure, so it is overused.
Fix: Point out that low cost may mean lower quality or poor outcomes. Always consider effectiveness too.
Ignoring non-financial measures.
FM is a numbers paper, so students focus on ratios.
Fix: Include measures like waiting times, satisfaction, success rates and beneficiary numbers, as the output of an NFP is often non-financial.
Forgetting that targets can distort behaviour.
Students see targets only as helpful.
Fix: Mention that staff may chase the measured target and neglect unmeasured areas, for example shortening consultation time to hit a waiting-time target.

Worked examples

Example 1

A charity helping homeless people spent ₹40,00,000 last year, of which ₹6,00,000 was administration. It supported 2,000 people. The year before it spent ₹36,00,000, with ₹5,40,000 on administration, and supported 1,800 people. Calculate cost per person supported and the administration ratio for both years, and comment.

Show the solution

Last year cost per person = ₹40,00,000 ÷ 2,000 = ₹2,000.
Prior year cost per person = ₹36,00,000 ÷ 1,800 = ₹2,000.
Last year admin ratio = ₹6,00,000 ÷ ₹40,00,000 = 15%.
Prior year admin ratio = ₹5,40,000 ÷ ₹36,00,000 = 15%.
Both measures are unchanged, so efficiency by these measures is the same.
Caution: these show cost and size, not effectiveness. They do not show whether people left homelessness or the quality of help.

Answer: Cost per person is ₹2,000 in both years and the administration ratio is 15% in both years. Efficiency is unchanged, but effectiveness cannot be judged without outcome measures such as the number housed long-term.

Example 2

A public hospital is told to measure its performance. Explain three problems in doing so.

Show the solution

Problem 1: no profit measure. The hospital's aim is to improve health, so there is no single bottom line to judge it by.
Problem 2: outputs are hard to quantify. Patient health outcomes depend on many factors, may take years to show, and quality of care is difficult to put into numbers.
Problem 3: multiple stakeholders. Patients want short waits and good care, government wants cost control, and staff want good conditions. Their aims conflict, so no single measure satisfies everyone.
Link to a measure: use waiting times and cost per treatment, but warn that a waiting-time target may lead staff to rush patients.

Answer: The three problems are the lack of a profit measure, the difficulty of quantifying health outcomes, and conflicting stakeholder aims. Using VFM measures and a range of non-financial indicators helps, but each has limits.

Exam tips

Always tie each problem to a detail in the scenario. Generic lists earn few marks in Section C.
Learn the three VFM terms precisely. Objective test questions often ask you to classify an example.
When you calculate a ratio, add one sentence of interpretation and one limitation.
Show both financial and non-financial measures. Examiners expect a balanced answer.
For objective questions, remember that answers are all or nothing, so read every option before choosing.

Practice questions from Financial and other objectives in not-for-profit organisations

Measuring Performance and Problems in Not-for-Profit Organisations in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Measuring Performance and Problems in Not-for-Profit Organisations: frequently asked questions

Why is profit not a good measure for not-for-profit organisations?

Their purpose is to provide a service, not to generate returns for owners. A surplus may even mean the organisation is not spending enough on its mission. Success must be judged by outcomes and VFM.

What are the main problems in measuring NFP performance?

The main ones are no profit measure, outputs that are hard to quantify, multiple stakeholders with conflicting aims, and funding constraints. You should link each to the organisation in the question.

How do you measure the performance of a charity in ACCA FM?

Use economy, efficiency and effectiveness. Combine financial measures such as cost per beneficiary with non-financial ones such as number of people helped and satisfaction levels.

What is the difference between efficiency and effectiveness?

Efficiency is how well inputs are turned into outputs. Effectiveness is whether the outputs achieve the organisation's objectives. An organisation can be efficient but not effective.