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Building Nonprofit Sustainability and Financial Independence
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As we continue to think about 2020 events and how nonprofits are adapting to the ongoing changes, an important topic that keeps coming up centers on building nonprofit sustainability. What exactly does sustainability refer to in the nonprofit setting and why should this be top of mind? To be clear, in terms of sustainability, we generally mean maintaining an organization’s financial position (i.e., keeping the lights on). While this is a commonly asked question on many grant applications, the standard response is usually that organizations will raise more money to ensure long-term sustainability. This is very misleading because the answer is much more nuanced.
Perhaps we should think about the topic differently and instead focus on enhanced financial management, internal controls, and building cash reserves. This is certainly a mouthful and not a very glamorous topic. Also, sustainability goes beyond responsible budgeting and digs a bit deeper into how your organization is effectively managing its funds and leveraging different models in order to gain more financial independence and be less reliant on other philanthropic support. However, as we navigate different paths to ensure the same level of support to your organization’s target populations, we should consider these issues further.
Financial Management
Have you sat down and analyzed how you are spending grant funds, donations, and sponsorships — or how your program income has changed over time? It is common for large organizations and agencies to leverage income from programs that rely on fees for services (e.g., insurance income or pay-as-you-go) to offset expenses related to other programs that are open to all (e.g., no cost or thresholds for participation). Have you noticed any changes with how programs have expanded or contracted depending on the income structure? What are you doing to address these changes, and will this impact your services?
It may be helpful to sit down with your CFO or accountant to get an understanding of your organization’s financial picture (pre-pandemic and current) to learn about changes related to your organization’s investment activities, assets, in-kind donations, and how these impact the larger financial picture. You might even want to learn how to read a 990 form or audit — or familiarize yourself with examples of what these documents look like for organizations with a strong financial position (and conversely those with a weaker financial position). Once you obtain this knowledge as a fundraiser, you can use it to anticipate your organization’s financial story (including projected funding gaps) and tell it more effectively to both stakeholders and potential supporters.
Internal Controls
For those who receive federal grants, the administrative requirements outlined in the Uniform Grant Guidelines – 2 CFR 200 stress the necessity of internal controls. Basically, internal controls are the safeguards within each organization to ensure effective stewardship and maintenance of income and expenses. While your nonprofit may not have a detailed internal control policy, as is required for federal grant recipients, you might have some procedures in place that were developed by the CFO, auditor, or accountant. It is important to realize that effective controls are a sign of an organization’s fiscal strength and reflect the value a nonprofit places on fiscal responsibility. These policies need not be long or cumbersome, but clearly stated and updated on an annual basis.
Building Cash Reserves
The National Council of Nonprofits has stated that:
“For seven consecutive years Nonprofit Finance Fund’s State of the Sector report revealed that less than 25% percent of those nonprofits responding had more than 6 months of cash in reserve. In fact the majority of the nonprofits responding reported that they had less than three months of operating reserves on hand. And close to 10% had less than thirty days of cash on hand. This may be the reality for many nonprofits, but that does not mean that it is optimal.”
If there were ever a rainy day, it is now during the pandemic. Cash reserves are essential to continue maintaining critical programs and ensuring staff get paid. It is a misnomer that, as a nonprofit, you are not supposed to have cash reserves; this contradicts nearly all conventional wisdom and advice related to effective business operations. If you do not have this resource set aside, it will become increasingly difficult to ensure financial independence (or at least security that essential programs and services will not be eliminated due to fluctuations in funding cycles). Does your organization have a safety net or even a cash reserve policy?
Oftentimes, the financial overview (or financial story) can be overlooked. It might seem too challenging, burdensome, or complicated. However, if you can take the time to truly evaluate and analyze your organization’s financial picture, it will help remove some of the focus on fundraising itself as a means for building nonprofit sustainability. What will you do first to understand your organization’s financial picture?
This post was co-written by Rachel Werner and KJ Lucas Matos of RBW Strategy.
KJ Lucas Matos began her professional life as an academic researcher—successfully pursuing federal funding with fellow investigators in support of public health projects. Over the course of her nearly 20-year fundraising career, she has served as a grant writer, planning and development associate, national discretionary grants manager, development director, senior fundraiser and founder of her own consulting firm. She has secured nearly $60 million to date from private and public entities. She has an MA in Sociology from Brown University and BA in Sociology from Johns Hopkins University; she is a former Columbia University Child and Family Policy Fellow and American Sociological Association – National Institute of Mental Health Fellow. KJ has held memberships in the Grant Professionals Association and Association of Fundraising Professionals. She has authored peer-reviewed and popular articles on a host of business, finance and education topics.
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