A Good Read on Nonprofit Finances Courtesy of Forbes Neela Pal.
Recently I wrote about promising new legislation that will allow nonprofits to claim a greater portion of their operating costs from federal grants. This is cause for celebration, but organizations risk losing out on the full value of these and other funds if they are not properly managed.
In my decade working in the sector, every nonprofit I have encountered has been preoccupied with bringing in more money. Much rarer, however, is the nonprofit that carefully scrutinizes how existing dollars are being used. Here are five tips on how to maximize the limited financial resources of a nonprofit organization, without raising another dollar:
1. Elevate your finance office from policing compliance to being a thought partner. High-performing nonprofit organizations may prize dynamism and creativity, but finance staff too often get relegated to conservative roles. They administer budget cuts, track spending, ensure a clean audit, and the like.
While these tasks are valuable, your organization is missing a key opportunity if finance is focused only on compliance. Engage your finance leadership in conversations that matter: geographic expansion, systems upgrades, maybe even fundraising for infrastructure investments.
Having a strategic financial perspective at the leadership table is an effective way to test ideas. Plus, high-functioning financial leaders — with their accompanying prudence and pragmatism — can be a positive influence on the rest of your management team.
2. Strike the right balance in informing your team about the organization’s finances. Despite the best of intentions, organizations can vacillate between droughts and deluges of financial data. At my firm, FMA, I recently encountered a client, a veteran executive director, who refused to share financial information with his program team. This lack of transparency left his program leads with little insight into how their respective areas were impacting the organization’s overall bottom line.
At the other end of the spectrum, another client, a community-based health organization, pelted its over-worked frontline staff with detailed monthly financial reports — in the spirit of fostering full disclosure and accountability — that created more confusion than clarity. The right mix of financial information to share depends on the organization, and should be revisited periodically.
3. Understand the full cost of running your programs and the underlying business model of your organization. Nonprofits often inherit business models based on opportunistic funding decisions made in the past. Transforming an organization from being a passive recipient of funds to an active steward is a valuable process.
Asking the right questions is a starting point and one way to gauge the financial health of your programs. Even in the nonprofit context, profitability can be a useful measure to assess what portion of your organization — and individual program — is under-funded as a result of your business model.
Ask yourself: What are my revenue streams — for example, private funders, government contracts, or foundation grants — and how flexible (or restrictive) are they? On the cost side, what long-term expenses (for example, multi-year leases and funding contracts) is my organization obligated to?
One place to start this analysis is FMA’s program-based budget-builder. This Excel tool helps you allocate non-direct costs to programs to arrive at a “bottom line” for each of them.
4. Evaluate every new funding opportunity from the perspective of what it will cost you to spend the money. Start before the dollars come in the door. Not all dollars are created equal. Too often, nonprofits accept funding sources that inadequately compensate them or that distract them from their competitive advantage.
FMA designed an assessment tool to generate productive leadership discussions around whether a particular new grant or contract is worth pursuing. The tool helps to examine a funding opportunity from multiple perspectives: (1) your organization’s internal capacity to deliver the program; (2) the financial resources needed to successfully run it; and (3) the contractual burdens associated with administering the grant.
Start this conversation when first identifying a potential new funding source. It is too late to step back and objectively reconsider once the dollars have already been committed to program budgets.
5. Maintain a reserve fund to provide stability and reduce uncertainty. As a veteran nonprofit executive shared at a recent meeting: “In a world where all my funding is one-year and all my government funding can end with no notice — and sometimes has — I have to be strategic.”
Being “strategic” can mean many things, and it includes building a buffer against uncertainty through reserve funds: dollars being held for future use. The Operating Reserve Policy Toolkit for Nonprofits is a great starting point on this topic. Just as you need to budget for depreciation expense— to ensure that you can replace capital equipment when obsolete— it is a good idea to incorporate a reserve into your financial planning.
It can be paralyzing to confront wholesale organizational change. These tips will hopefully break down transformation into manageable pieces. At FMA, we encourage nonprofits to approach operational excellence as a process of continual improvement rather than a threshold or destination. In that spirit, consider the upgrade of your organization’s financial capability an ongoing activity, not a one-time event.
