First Published as “Make Your Nonprofit Financially Sustainable” in NonProfitPRO on December 6, 2018.
You know that delivering on your organization’s mission over time requires financial resources. The alternative is not pretty—no money, no mission, as it is said. As a board member, one of the most important components of your governance role is to ensure that the finances of the nonprofit you help oversee are sustainable. But what does that really mean; in other words, what does a board member need to do to, on a day-to-day or board meeting-to-board meeting basis to ensure that goal is met?
There exist some people who are able to read regular financial reports and intuit or “see” what is happening inside an organization. That’s a wonderful skill and hopefully your board has one or two of those folks. For the rest of the board and other key stakeholders, it is mission-critical to find ways to effectively evaluate and communicate the financial state of the state to ensure it is well-understood.
From the outset, since understanding your organization’s finances is so important, there needs to be agreement to spend some time pulling this information together and reviewing it, and the skill set to do that. Pushback on financial questions or a lack of transparency is a red flag; if you are having trouble getting the financial information you’re looking for, keep digging. A profound stalemate should prompt you to consider bringing in an outside accounting or audit firm.
What kind of information will help you make good judgments and decisions? Best practice is to look at financials in the two ways: a) financial cycle reporting and b) analysis of trends and sensitivity to different potential scenarios that could impact the organization.
A. Organizations produce lots of different financial cycle reporting and documents, including account ledgers (records of money going in and out of accounts), income statements, balance sheets, annual reports and the tax form 990. To understand what is happening with the organization, it is helpful to look at three years of documents or more.
B. Because standard financial reports are not designed, per se, to give most people who are not finance pros an intuitive “feel” for what is going in with an organization’s financials and because they do not include “what if” analyses, those need to be prepared separately. Here’s an example of why this second category of information matters. A list of transactions from an online banking portal does not show spending patterns. On the other hand, a budgeting tool does show what going to each category of expense, and it can do that over whatever period of time is meaningful. The same idea is true of organizational finances.
So how do you get a hold of this part B analysis? Here’s a roadmap that we use to help boards and leaders and we hope it helps you, too.
- All analysis should be for a minimum of three years—five years is great if you have it.
- Make a list of all of the questions you and others on the board or in leadership roles have about organizational finances other than what is in the financial reports. Some examples are:
- Trends in sources of funding—and relative to sector trends
- Results of specific fundraisers and events over a period of year
- Trends in expenses by category
- Client and program demographics. Which are growing? Shrinking?
You’ll have a list of questions that are specific and relevant to your organization. To make the information fully digestible to mere mortals, ask that it be presented both numerically and graphically.
In my travels I have heard wonderful nonprofit people express shame or discomfort about having conservative reserves or generating revenue (or donations) above operating expenses. I have a different view. The financial strength to meet goals, pay staff, give raises as appropriate, innovate programming, weather crises, and consider expansions and mergers—these are all responsible financial management tools and techniques.
Money above that needed immediately is not being distributed to shareholders or investors because you are not overseeing a private sector entity, it is being used for good, and it is excellent management to be sure your organization has sustainable finances.