In the wake of the most recent recession, many nonprofits are taking a hard look at their sustainability over the long term to be ready to face uncertain economic times. After all, an organization in poor financial health may find itself forced to cut programs and services when they’re needed the most. Fortunately, steps you can take now may help reduce such risks while allowing your nonprofit to fulfill its core mission.
The challenge of nonprofit funding
Having a limited number of funding sources is the biggest sustainability challenge for many organizations. U.S. nonprofits typically receive funds from the government, foundations and individual and corporate donors, and often depend heavily on a few funding sources — for example, an annual government or foundation grant.
The danger in such limited reliance was amply illustrated when government and foundation support dried up during the economic downturn, and many nonprofits were forced to close their doors. The problems compounded for nonprofits serving low-income populations that could no longer provide any financial support themselves.
If you don’t have a variety of funding sources, it’s imperative that you branch out. The broader the base, the more stability and protection from economic challenges your organization will have.
Income through fees
A nonprofit needn’t rely solely on outside funders to improve financial sustainability. It might increase revenue by expanding its fee-based service offerings to new locations or populations. For example, an organization that provides services to children with disabilities in schools also could offer the services to children with disabilities in foster homes.
More and more, nonprofits are pursuing formal partnerships with other organizations — sometimes at the prompting of funders — to share costs. Organizations with similar missions and serving similar populations can collaborate to make better use of limited resources while reducing competition for funding. They also can more quickly scale up high-demand programs or services by joining forces.
Rainy day preparation
Maintaining an adequate reserve is a key component of financial sustainability, but some organizations still lack such a fund. Even some nonprofits that have reserves haven’t established a formal policy for determining the appropriate amount, maintaining that amount and allocating funds when necessary.
Of course, having multiple funding sources is no guarantee of security — a harsh economy can have widespread consequences that affect multiple sources. Additional strategies that more indirectly affect financial sustainability include the following:
Step up branding. Strategic marketing and branding are key for promoting an organization and achieving stable financial standing, yet many organizations neglect this approach. A brand that clearly communicates a nonprofit’s mission and services helps to establish a solid reputation that builds trust among donors. This can be particularly crucial when funding pools are shrinking.
Evaluate outcomes. Donors and other nonprofit stakeholders are showing greater interest in the outcomes of programs and services and other nonfinancial measures. Often the number of lives improved has a greater impact on funders than the number of dollars spent. And they want to fund programs that are successful. By evaluating and sharing outcomes, a not-for-profit can demonstrate value, effectiveness and accountability.
Outcome evaluation also is an essential tool for decision making. You can use the process to identify underperforming programs and make necessary tweaks or to prioritize expenditures if funding declines or additional funding becomes available.
Assess your financial standing. No organization can accurately evaluate its financial sustainability without timely, comprehensive and accurate financial reporting. How can a nonprofit know how much funding it needs to support its programs and services without knowing how much it costs to operate?
In addition to providing a current picture of financial standing, financial reports should compare actual figures with historical and projected numbers. Some nonprofits also are introducing “dashboards” that give real-time financial data, ratios and trends in easily understood graphic form.
Involve the board. It’s not enough for the board to simply review financial statements before its meetings. Board members also must provide true fiscal oversight and not leave major financial decisions to staff, no matter how trusted and loyal.
Every board member should undergo training on relevant financial issues and be able to understand financial statements. The finance committee should report regularly to the full board and engage in dialogue about their reports and the organization’s financial health. The board shouldn’t merely take a backward-looking view but should also consider the future — for example, taking into account how current trends and developments might affect future plans for funding the nonprofit’s mission.
Plan for contingencies. When budgeting, every nonprofit should take the time to engage in annual contingency planning exercises. How could your organization continue to serve its mission if it suffered a 10% drop in funding? A 20% drop? Evaluating such scenarios in advance can provide valuable guidance and preserve mission-critical programs and services in times of crisis.
A continual goal
Achieving financial stability is a critical part of sustainability and should reflect both the organization’s mission and its financial needs. Your financial advisor can help you objectively assess and improve your nonprofit’s position.