Regardless of who your organization serves, you face a broad set of challenges and complexities on a daily basis.  Funding priorities shift, regulations change, and staffing issues persist.  How can your financial approach work for you instead of constantly chasing resources?  Here’s a summary of what we recommend all leaders consider as they review and design their organization’s finances:

1. Mind Your Balance Sheet:  As a field, we’re conditioned to focusing on getting to a break even budget each year.  But how many resources do we need to have on our balance sheets to support and sustain our long-term mission?  What kind of liquid cash reserves need be present to support healthy debt?  How much debt is too much? Balance sheet building begins with creating operating reserves to see your organization through unexpected challenges or an economic downturn.  Current best practice is to maintain a reserve that amounts to three to six months of operating expenses. These funds can be invested in a conservative financial vehicle that generates a return that may produce sufficient monies to fund a new project.  These reserves require regular operating surpluses to grow resources balances each quarter and fiscal year.

    

2. Grow Revenue & Funding Diversity: A diverse and sustainable funding base is a cornerstone for thriving non-profits.  Relying on a limited stable of funding sources places the organization at risk in the event the funding source is interrupted or dries up.  If your organization does have one primary government funder, are those funds subject to annual renewal (i.e. grants) or part of an ongoing fee-for-service program?  Government funding comes with its own set of strings, red tape, and other systematic issues.  It’s critically important your leadership has expertise in your organization’s funding rules and limitations.

    

3. Budget Defensively:  The old quote is, “No plan survives contact with the enemy.”  For nonprofits it’s more like, “No budget survives contact with uncertainty.” And we’re all swimming in uncertainty, now more than ever.  So how do we manage in uncertain times?  Budget defensively.  Limit income projections to sources that are 100% certain or highly likely to be realized.  The fastest way to blow a budget is by including income from capacity that’s being developed and doesn’t yet exist.  We recommend leaving that kind of income out of your budget altogether.  If it materializes on schedule, then it’s a positive news item.  If the schedule is delayed, no harm is done. Similarly, uncertain expenditures should be projected conservatively high.  Assume overtime costs will increase year-over-year.  Assume health insurance premiums will increase by more than 10% again.  And so on.  Then balance your conservatively expenses within the known income sources so that the budget calls for a positive net income for the year.  In the short term this will likely cause some pain in the form of cuts, but in the long run this approach is central to building healthy reserves, seize opportunities, and ensure your mission’s long-term sustainability.

    

4. Manage to Key Performance Indicators (KPIs): Peter Drucker is credited with the phrase “what gets measured, gets managed”. KPIs are part of a team’s tool box to assess how the organization is performing.  Organizations should develop and use KPI’s that provide relevant and meaningful data on how the organization is achieving its objectives. The list should also include some KPIs that assess financial health, such as: 1) Revenue Growth, 2) Actual to Budget performance (both revenue & expense), 3) Debt to Equity ratio, 4) Operating Reserve months of coverage, and 5) Bank Loan Covenant Ratios.

Taken together, these principles will help your organization build the resource base to best execute your mission and meet the needs of your community.  The goal should be to build a financially strong organization while implementing transparent financial reporting that builds trust with stakeholders, donors and the public.  Effectively communicating the organization’s financial well-being is pivotal, not only as a testament to its stability but also as a catalyst for sustained expansion and the successful realization of its mission.