Running a nonprofit is no easy task. Resources are often limited, and your organization may have to navigate both internal fundraising challenges and external economic turbulence as you work to make a difference in your community.
The best way to mitigate these issues is to build up your nonprofit’s financial resilience. With systems in place to adapt to changing circumstances, your organization can sustain its operations and continue to provide services no matter what uncertainties may arise.
In this guide, we’ll walk through four strategies for building financial resilience, including how to:
- Manage Your Financial Data
- Diversify Your Revenue Streams
- Maintain the Right Expense Ratio
- Have Reserve Funds on Hand
Financial stability and sustainability is a team effort. Ensure your entire board, leadership team, and staff understand how these strategies apply to their roles, and don’t hesitate to reach out to nonprofit finance professionals if you need help with implementation or have any questions along the way. Let’s dive in!
1. Manage Your Financial Data
Just as your organization tracks its donor data via a constituent relationship management (CRM) solution, you should also manage your financial data using a dedicated accounting platform. This type of software allows you to securely store, organize, and analyze your nonprofit’s spending, fundraising, and donor information for easy reference. Most integrate with accounting software, so you never have to enter the same information twice!
Jitasa’s accounting software setup guide recommends tracking the following information with the platform you choose:
- All of your nonprofit’s day-to-day transactions.
- Budgeted vs. actual year-to-date spending and fundraising totals.
- Donor-imposed funding restrictions.
- Details of grants received.
- Key reports from previous years, such as financial statements and tax returns.
With a unified record of your nonprofit’s financial activities, you can make more informed decisions about how to manage your resources to weather any situation that may come your way.
2. Diversify Your Revenue Streams
Most nonprofits bring in the bulk of their funding through monetary donations from individual supporters. Although major gift fundraising timelines vary, your organization will likely receive the majority of its small and mid-sized contributions at the end of the calendar year given that 30% of nonprofit giving occurs in December.
However, to create a financially sustainable fundraising strategy, your nonprofit needs to bring in consistent funding year-round. Consider diversifying your revenue streams by:
- Starting a recurring giving program where donors can choose to automatically and conveniently contribute a set amount each month.
- Tapping into corporate philanthropy opportunities such as matching gifts, volunteer grants, and sponsorships.
- Leveraging passive fundraisers that allow donors to give without increasing their everyday spending, like gift card sales and restaurant profit shares.
- Accepting various non-cash gifts, including physical goods, no-cost services, stock donations, donor-advised funds, and cryptocurrency.
In addition to providing year-round funding, diversifying your revenue streams in these ways makes it easier to financially recover if a source falls short or worse, falls through. Instead of putting all of your eggs in one basket, make sure you have several types of revenue you can lean on as needed.
3. Maintain the Right Expense Ratio
Most nonprofits categorize their spending based on how it furthers their missions across their financial records, budgets, and reports. This ensures compliance with legal regulations, promotes transparency with charity watchdogs, supporters, and stakeholders, and provides internal insights about whether you’re making the most of your organization’s resources.
The three categories of functional expenses (as these designations are called) break down as follows:
Picture Jitasa: The definitions of the three categories of functional expenses, which are discussed below.
- Program expenses are directly related to your nonprofit’s mission, so they’re different for every organization. For example, a nonprofit that provides free after-school music programs for underprivileged students would include spending on instruments and sheet music under their program expenses.
- Administrative expenses are necessary to operate your organization day-to-day and include things like staff salaries, utility bills, and office equipment purchases.
- Fundraising expenses are the upfront costs associated with launching revenue-generating initiatives, such as event planning, marketing, thank you letters, appeals, websites, and investments in specialized fundraising software.
Your administrative and fundraising expenses combined make up your organization’s overhead. You may have heard of the 65/35 rule of nonprofit spending, which states that at least 65% of your expenditures should be program-related and no more than 35% should go toward overhead. In reality, the exact split will be different for every organization.
It’s best to treat this “rule” as more of a guideline to put as much of your funding toward mission-related initiatives as possible. Therefore, if you need to cut costs at your organization, look for ways to reduce your overhead rather than your program spending. For example, instead of investing in a larger office space, you could switch to a hybrid workplace model to better accommodate all of your employees. Or, you could leverage free resources like Facebook Groups and Google Ad Grants to reduce marketing expenses.
4. Have Reserve Funds on Hand
A common misconception about nonprofit finance is that because these organizations can’t turn a profit, their budgets have to break even every year. However, the term “nonprofit” just means that all funding needs to be reinvested into the organization and its mission. Therefore, it’s acceptable—and advisable—to budget for a revenue surplus if you can.
Then, you can use any funding you don’t spend during the year to build your organization’s long-term savings, also known as reserve funds. Infinite Giving’s guide to nonprofit reserve funds provides the following tips to make the most of these resources:
- Aim to have 6-12 months’ worth of your organization’s administrative costs in reserve at any given time.
- Keep your reserve funds in an FDIC-insured savings or brokerage account for maximum security.
- Leverage low-risk investment holdings like treasury bills and mutual funds to steward your savings and earn additional revenue from them.
Use your nonprofit’s reserves as a true emergency fund—only dip into them when it’s necessary to cover unexpected expenses or make up for significant losses in revenue. To ensure your team is on the same page about when you can spend this funding, add guidelines about reserve funds to your organization’s financial policy handbook.
Keep in mind that financial resilience isn’t just about the systems you have in place—it’s also about your team’s mindset. Train your staff on sustainable financial management procedures as they apply to their roles, but also emphasize the general importance of adaptability in their work. Instilling that value will lay the foundation for more effective prevention and recovery from challenging financial situations at your nonprofit.
Guestblog by Jitasa.
