There is so much written about fundraising, engaging the Board in fundraising, online fundraising, saying thank you, thank you, thank you, being donor centric, etc.. Yes, it is all vital to nonprofits. It’s not the only thing that nonprofits need to focus on today but it is the area getting the lion’s share of attention. I’m guilty too. But just as the federal government needs to focus on revenue, expenses and better efficiency, nonprofits needs to look at the whole package too.
I have just written an article for my blog at Marion Conway – Nonprofit Consultant, Does Your Strategic Plan Have a Financial Strategy – It’s Crucial, which discusses the importance of financial understanding – especially in small nonprofits. Here are some highlights discussing specific issues faced by small nonprofits.
A common situation in small organizations is this: the finance department consists of a bookkeeper, the executive director’s background is as a program manager and there are no accountants on the Board. Many of these organizations are continually at the edge of a fiscal cliff and deal with ongoing crisis with staff cutbacks or skimping in other ways that actually hurt the organization. Even small nonprofits need to have a sound financial strategy.
Some action steps should include:
Develop more financial management understanding. The Executive Director should take courses and workshops and develop as much financial management expertise as possible. The Nonprofit Finance Fund has chapters throughout the country and offers excellent workshops.
Recruit accountants and financial managers to be on the Board and get them on the finance committee. Develop a list of things for the finance committee to tackle besides developing a budget.
Look at your expenses by program and assess financial viability, effectiveness and relationship to your core mission. I’ve seen several organizations with programs that outlived their viability and only when reviewed in depth were they eliminated.
Understand risk. Understand your insurance policies. Evaluate in terms of cost and coverage.
Establish a line of credit – This is especially important if your funding source makes payment only after services are provided and reports are filed.
Have a rigorous system of maintaining records and issuing invoices and necessary reports for payment promptly. Here again, I have seen nonprofits get in financial emergency situations because they are not prepared to file prompty, complete reports required for government payments for services already provided.
Develop a reserve – There isn’t a simple answer to what is the right reserve level. It depends on your vulnerabilities and accepted risk levels. That’s why you need someone with some financial prowess on your Board. Don’t abuse a line of credit – use it only as intended.
It is important to analyze programs individually. Consider financial health, relationship to mission, effectiveness of the program and infrastructure being used. I have seen many programs that were supposed to pay for themselves that didn’t. They were a drain on the infrastructure and management and sometimes not closely aligned with the mission. If a program is underutilized, what is the reason? Are there better options in the community or have you just not marketed it properly? Has a program outlived its value? Undertaking financial analysis should be only one component of an overall analysis – but make sure it is an accurate one and not a mythical one. It is more important to have high quality for the programs you offer than to keep all of your programs operating. That’s strategic. And being strategic means keeping an open mind about change.
See the case study at my other article at Marion Conway – Nonprofit Consultant
Resources
For more resources, see our Library topic Nonprofit Capacity Building.
Financial Scan – Guidestar and the Nonprofit Finance Fund have partnered to develop this software tool that can help you understand your financial health, provide comparisons with your peer group and offer the base for doing real financial strategic planning. Learn more about Financial Scan here
Transforming Nonprofit Business Models and other resource developed by the Nonprofits Assistance Fund – Learn more here.
Books
Nonprofit Sustainability: Making Strategic Decisions for Financial Viability
by Jeanne Bell, Jan Masaoka, and Steve Zimmerman
The Nonprofit Business Plan: A Leader’s Guide to Creating a Successful Business Model Plan
by David LaPiana
Free Articles
Marion is a popular facilitator of workshops and Board retreats. Her expertise includes strategic planning, board development, governance and harnessing the power of technology.
Carter McNamara of Authenticity Consulting, LLC, provides organizational development, consultant training and Action Learning services, and is developer of the Free Management Library.