After identifying your nonprofit’s greatest financial challenges and reframing the perception of your nonprofit operations as a business, what steps can you take to develop new strategies that move your organization from financial stress to financial health and sustainability?
The first step is simply committing to the development of more robust nonprofit financial management and financial risk management policies. The development of clear risk management protocols and contingencies cannot be overemphasized.
Here are several research-backed recommendations for overcoming nonprofit finance challenges:
Learn to say no.
Nonprofits must be more strategic about which contracts and funding streams to accept. This requires clearly defined leadership roles and communication between finance executives who are empowered to make strategic decisions at their organizations.
Streamline the planning processes.
Now more than ever, scenario planning should be a normal part of your financial planning process. First, develop a list of current financial risks and uncertainties. These could include risks unique to your organization as well as broader, even global challenges such as a pandemic like COVID-19. Then assess the likelihood and potential financial impact of each. Finally, develop contingency plans for reducing the likelihood and impact of each risk. Some scenarios, such as COVID-19, are unavoidable. But nonprofit leaders can still plan for the ways a pandemic or the resulting economic downturn could directly impact your nonprofit.
Your organization should also have formal plans in place for recovery and program continuity in the face of financial disaster or even bankruptcy. These plans should be discussed in advance during stable times with government agencies and partners so that everyone is prepared to act in a crisis.
Create clear financial benchmarks and targets.
Compare your nonprofit’s financial performance to peers on an annual basis using IRS Form 990 data and explore the use of “self-rating” tools to combine financial measures into an overall indicator of organizational health.
Also, develop targets for operating results associated with financial stability. These can include targets for cash, unrestricted net assets, operating reserves, and access to credit.
Consider your board.
The primary purpose of boards of directors is to ensure the health and future of their organizations. It is critical to ensure that they do not get mired in operational issues of the organization, but rather focus on the sector landscape, big-picture trends, and community needs. To participate in intelligent risk management, board directors must also understand important contracts and the associated processes for approval and registration. Make sure to recruit trustees with financial and risk management expertise.
Diversify funding sources.
Continue and redouble efforts to develop alternative revenue sources and to diversify their funding profiles. GuideStar reports on its blog that developing or fortifying strategic partnerships with corporations can help nonprofits improve public image, attract and retain investors, and potentially bring in “volunteer hours, pro bono services, in-kind gifts, potential individual donors, board members, and honorees.”
Boost back-office awareness.
Assess whether your staff possess adequate financial expertise to properly manage funds and recognize growing financial risks. Whether you employ a dedicated CFO or outsource bookkeeping and accounting through investments in operations support services, it is critical to ensure your organization is equipped to deal with the particular requirements of nonprofit accounting, program and grant accounting, and government contracting.
Consider outsourcing finance functions.
The Nonprofit Risk Management Center reports, “Fiscal outsourcing can be helpful to a nonprofit that finds itself ill-equipped to manage these and other financial risks alone.” By outsourcing operations, your in-house staff can freely focus on what matters—the mission.
Outsourcing also gives organizations flexibility so they only have to pay for what they need. For example, a small organization might not need a full-time CFO. With contracted agreements, organizations can ensure the right level of expertise is always on hand, not to mention they never have to deal with staff turnover.
In some scenarios, getting help with nonprofit finance can greatly expand an organization’s capacity for impact. This is why the Alliance offers back-office operations services specifically designed to efficiently and effectively meet the administrative and financial needs of community-based organizations. Organizations can outsource various financial duties for which internal capacity and resources may be limited, such as accounting, bookkeeping, payroll processing, and risk management.
The financial challenges facing nonprofits are considerable. When organizations can gain support to manage their finances more effectively, these challenges can become less daunting, and the entire community benefits.