Let's be honest. While operating a nonprofit organization is meaningful and fulfilling in many ways, the unique challenges associated with long-term financial viability can quickly inject stress and frustration into the bigger picture.
"Am I spending in the right areas?"
"Do I get enough support from my donors?"
"How do I raise more funds?"
"Will the organization be operational a year from now?"
These are the questions that keep nonprofit leaders up at night, and you're not alone when feeling overwhelmed at the scope of it all. However, while balancing the financial and operational needs of a nonprofit organization can be a tricky one to get right, there are practical steps you can take to position yourself for success.
Below is a beginner's guide to nonprofit financial management that will touch on seven critical components to long-term financial viability when operating a nonprofit organization.
Prioritize Goal Setting
When establishing and/or growing a nonprofit organization, an invaluable practice that should be in every leader's toolbelt is process-oriented goal setting.
The creation and prioritization of short- and long-term financial goals is what continuously drives organizations to hit their targets and ultimately fulfill their mission statements. For nonprofit organizations especially, process-oriented goal setting helps address the "why" and the "how" of budgeting needs and donor engagement strategies that will significantly impact long-term solvency and viability.
The important thing to remember is that while having a collection of "pie in the sky" goals concerning your financials can help keep the organization on course, it is the shorter-term, highly actionable goal setting and execution that will truly drive results.
Process-oriented goals can be three times as effective as result-oriented goals when planning short- and long-term financial success.
Establish a Balanced View of Expenses and Contributions
As a nonprofit organization, having a balanced view of financials throughout the year is critical. To do this properly, it's essential not to over- or under-estimate your operating costs as well as your incoming financial support.
If COVID-19 has taught us anything, it's that relying too heavily on historical financials to drive all decision-making comes with significant risks. To mitigate these risks effectively, nonprofit organizations should constantly have their fingers on the pulse of all contributions and expenses on a month-by-month basis.
All incoming revenue sources for nonprofits should have risk percentages associated with them. This will help to keep reasonable expectations in place as you balance your functional expenses like salaries, rent, utilities, supplies, etc., with your current financials.
One way organizations can achieve this is by grading each of their revenue sources throughout the year based on probability. This can be by assigned letters A, B, C, and so on, or simply by assigning probability percentages to each one (i.e., “There is a 50% chance we’ll receive this funding”). When reviewing all of your projected revenue sources over the course of the year, you’ll be able to see overall probabilities associated with them. When your revenue probabilities increase your overall risk percentages increase. This will help you prioritize fundraising and donor engagement strategies and timelines accordingly.
Create a Finance Committee
A vital step to take when building a solid foundation for your nonprofit organization is establishing a finance committee. Nonprofit finance committees are typically made up of a board treasurer, executive director, and bookkeeper.
Finance committees play an essential role in the organization and take on tasks associated with nonprofit bookkeeping, budgeting, financial planning, reporting, and internal compliance monitoring and control. Often, these committees are mandated by the organization's bylaws and help establish accountability policies that ensure the organization remains solvent.
While establishing a finance committee is a great first step, it's equally important to ensure it is formatted to be successful. This involves setting a clear outline on how the committee should function, establishing processes that need to be adhered to, and implementing a healthy cadence for quarterly or bi-annual meetings.
Keep Accurate Records
It should go without saying, but accurate recordkeeping is one of the defining qualities of highly successful nonprofit and for-profit organizations. Good recordkeeping takes discipline, consistency, and an organized approach to leadership and accountability. However, if appropriately mastered, it can provide a slew of benefits for growing nonprofits, including:
improved operational efficiency
reduced financial risks, especially when considering potential tax implications
added transparency of accountability across the organization
a clear understanding of bylaws and compliance expectations
Apply Budgeting Templates
Outside of having an extensive list of highly engaged donors, effective budgeting is another critical contributor to your organization’s financial health. Budgets are what keep your organization's financials trending where they should and mitigates the risk of having dangerously high expenses in relation to incoming revenues.
While annual budgets are usually managed by internal staff, board members representing the finance committee are typically responsible for regularly reviewing and approving budgets as the organization progresses. When managing this initiative, there are many steps nonprofit organizations can take to keep their budgets realistic and manageable long-term.
There are a variety of pre-established budget templates organizations can apply when balancing their single- and multi-year financials. Budgeting templates are categorized in various ways, including annual expenses and income, startup funding, fundraising, grant proposals, strategic plans, and many others to get you started along the right path.
Maintain an Operating Reserve
A common mistake that many nonprofit leaders make, especially at the lean stages of organizational development, is not establishing and maintaining a healthy operating reserve. While every organization is different, it's important to have money saved for a "rainy day" that will help absorb unexpected costs associated with building repairs, software or hardware needs, funding shortages, and anything else that impacts the bottom line.
As crucial as the reserve itself, however, is how it is managed. Operating reserves should be visible to all relevant stakeholders, and there should be very clear policies and procedures that govern how they should be used.
Team Up With a Consulting Group
As a nonprofit leader, it's vital that you balance the operational needs of your organization while ensuring it continuously stays in alignment with your vision. However, as the organization begins to grow and financial challenges continue to keep pace, tackling short- and long-term strategic planning on your own can be a struggle.
As a nonprofit leader, you can benefit from the specialized guidance of a financial management consultant. Our friends at Bookr and Metis can help you clarify all of your financial management strategies.
Of course, your financial management process should fit within an overall strategic plan. A strategic planning consultant can be an invaluable partner in developing your organization's overall strategy and capacity. Whether guiding you on fundraising options and approach, helping you establish an optimal organizational structure, or building a plan for long-term viability, strategic planning consultants can give you the focus to build and grow a successful nonprofit from the ground up.
As a nonprofit organization, planning your financial success isn't without certain sacrifices and a disciplined approach to organizational development. However, by following this beginner's guide to nonprofit finance, you'll be on your way to establishing a strong foundation of success conducive to long-term sustainability.