5 Steps to Financial Health for Your Nonprofit

1. Invest in Board Development

A strong board is the backbone of any successful nonprofit. Equip your board members with the knowledge they need to oversee finances effectively. Implement a formal training program focusing on:

• Accounting Matters: Board members should understand basic accounting principles, including how to read financial statements and interpret key metrics.
• Financial Reporting Issues: Knowledge of nonprofit-specific reporting requirements, such as the Form 990, allows boards to ensure transparency and compliance.

2. Build Realistic Budgets

Unrealistic financial goals can lead to financial strain and hinder your mission. Develop an annual operating budget based on sound analysis and historical data. Here’s how:

• Data-Driven Approach: Utilize existing financial information and industry benchmarks to set realistic expectations for revenue and expenses.
• Flexibility: Plan for unexpected situations by building in a margin of error for unforeseen circumstances.
• Active Monitoring: Closely track actual results against the budget throughout the year. Identify variances as soon as they occur and adjust strategies or expenditures accordingly.

3. Leverage a Finance Committee

Form a dedicated Finance Committee composed of board members with financial expertise. This committee can provide in-depth review and oversight of:

• Internal Financial Results: The committee dives deeper into financial statements, identifying any areas of concern.
• Budgetary Performance: The committee tracks expenses against the budget and recommends corrective actions when needed.
• Financial Strategies: The committee analyzes financial data to inform strategic decisions regarding fundraising, investments, and resource allocation.

4. Define Key Performance Indicators (KPIs):

Measuring financial performance solely based on budget adherence is a limited approach. Establish a set of KPIs that go beyond just the financial bottom line. Examples include:

• Program Impact: Track metrics that demonstrate the effectiveness of your programs in achieving goals (e.g., number of people served and client satisfaction rates).
• Fundraising Efficiency: Measure the cost-effectiveness of your fundraising activities (e.g., cost per dollar raised).
• Volunteer Engagement: Monitor volunteer retention and identify areas for improvement (e.g., volunteer hours and satisfaction surveys).

By monitoring both financial and non-financial KPIs, the board gains a well-rounded picture of the organization’s overall health and effectiveness.

5. Create a User-Friendly Financial Dashboard:

Financial statements aren’t always easy to understand for non-financial professionals. To ensure all board members grasp the organization’s financial health, develop a financial dashboard.

• Visual Appeal: Present key financial information and metrics in clear and concise charts and graphs.
• Regular Updates: Keep the dashboard updated with the latest information, providing a real-time snapshot of the organization’s financial status.
• Targeted Information: Tailor the dashboard to highlight information most relevant to board oversight and decision-making.

By implementing these five key strategies, your nonprofit can build financial strength and stability. A well-trained board, realistic budgets, a dedicated finance committee, well-defined KPIs, and a user-friendly financial dashboard will equip your organization for long-term success.

Brady Ware Nonprofit Advisors want to help you fulfill your mission with financial health and compliance services and a network of nonprofit consultants who specialize in strategic decision-making.