Achieving Nonprofit Financial Sustainability

These findings clearly indicate many nonprofit organizations are struggling to cover basic operating and program costs, set aside financial resources for future use, and lack the funds to make needed investments in infrastructure like technology, training, facilities, and Board development. Further, these organizations lack the financial resources to respond to an unanticipated need for funds. How does an organization overcome these challenges when 71% of NFF Survey respondents reported an increase in demand for their services over the past two years?

So, what can you do to better position your organization financially and achieve long-term financial sustainability?

Better Budgeting

Too many organizations establish their annual budget with the goal of generating enough revenue to cover anticipated expenses for the year. Essentially, they budget to live paycheck to paycheck. If the goal is to build operating reserves for the future, an organization’s budget must reflect a targeted surplus for the year to be set aside for the future.

Consider the following:

Annual expenses are expected to be $480,000. Our targeted operating reserve is 6 months of operating costs or $240,000. Our strategic goal is to fund the operating reserve over the next 5 years. To achieve this, we need to generate revenue of $528,000 for the year to cover the $480,000 of anticipated expenses plus 20% of the $240,000 targeted reserve.

Retire Debts

To build up reserves more quickly, an organization should do whatever it can to retire loans and other debt obligations as soon as possible. This requires a payment strategy similar to that used to provide the budgeted surplus for the year. Determine your budgeted debt services costs and reflect these costs in your annual budget.

Fundraising

We all know, “No Money, No Mission.” Many organization leaders indicate raising revenue to support programs and building capacity is extremely difficult at this particular time. Despite this perception, charitable giving in America continues to thrive and governmental funding sources remain robust.

In its Charitable Giving Statics for 2022, Nonprofits Source reported that Americans gave $471 billion to charities in 2020, based on its most recent data. Further, their study provides many useful statistics and demographic information on charitable giving.

So, how does an organization raise even more funds to build an operating reserve of unrestricted dollars during these tough times? We have shared several articles on fundraising in prior newsletter articles and fund development has been the primary focus of our Take Five Nonprofit Leadership Conference the past few years. These resources are available at our Nonprofit Leadership Series YouTube channel to assist in developing your fundraising strategy.

Developing a Cash Reserves Policy

Those responsible for financial oversight are responsible for ensuring the financial sustainability of the organization. The board of directors should adopt a “reserves policy,” to establish guidelines on (i) how much will be set aside for reserves, (ii) what types of expenditures result in reserves being used, (iii) how the determination whether or not to dip into reserves will be made, (iv) the process for repayment to the reserve account, and (v) whether there should be any directions, restrictions, or limitations on what the money held in reserve may be used for.

Other Considerations

Many things impact an organization’s future and financial stability. It is important to not lose sight of the following basics with respect to financial oversight:

• Use the annual budget as a decision-making tool in addition to a monitoring tool
• Adjust the budget when assumptions change
• Follow up on budget variances whether positive or negative
• Develop a cash flow forecast
• Educate staff and Board members on finances
• Be mindful of the additional costs to launch programs
• Remember all expenditures should support achieving the organization’s mission

Planning for the Unexpected

Without question having an adequate operating reserve is the best solution to overcoming an unexpected financial challenge. That said, what does an organization do when facing a financial challenge when there are no surplus funds to draw from?

If your organization is heavily reliant on a particular source of program funding, it is beneficial to develop a plan on how the organization will respond to a significant reduction or the loss of this revenue. When facing a significant loss in revenue, an organization must respond quickly to realign operations and reduce costs. In other words, “hope for the best and plan for the worst.”

Maintain a line of credit with a bank. While taking on debt is not an optimal solution, it may be necessary to borrow money to fund unbudgeted and unexpected costs like significant repairs to a facility, or the repair or replacement of mission-critical capital assets.

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.