This post summarizes a presentation of the same name I gave March 23, 2015, as part of the University of Central Arkansas’s (UCA) “Nonprofits Survival Workshop Series.” Click here to learn more about UCA’s valuable series.
Nonprofit finances aren’t intuitive. There isn't an obvious commercial return, clients rarely pay or only pay partially for the product, and nonprofit organizations rely on third parties to subsidize the cost of delivering services and meeting their missions. What’s more, donors and funders often want their contributions to go directly to the people served. So where does that leave nonprofits? Donors and funders often see overhead and the surplus left after paying expenses as unnecessary and unrelated to achieving the mission. However, those indirect expenses are real, and creating a cushion for unforeseen future issues is critical to long-term survival. As a board member or nonprofit leader, you have to keep in mind that your nonprofit has to meet the total bottom line, not just the program expenses.
When thinking about managing a nonprofit’s finances, you must make sure financial resources are:
Developed – know where your organization’s income is coming from and that it is, or will likely be, available when needed
Managed – identify who will be responsible for holding your organization financially accountable
Protected – ensure that your organization’s resources are maintained in a secure account and that reserves are soundly invested
Deployed – distribute resources in a way that is aligned with your organization’s mission while covering overhead expenses
Legal – work with legal counsel to review your organization’s financial planning and activity to ensure you are operating within legal parameters set for nonprofits
In all that you do, make sure you are working with the highest ethical standards. To this end, provide honest, accurate information about your organization to the public, honor your donors’ intentions, and respect your donors’ privacy. Not only will this help you build rapport with existing donors and funders, it will help you build trust and develop opportunities to strategically partner with other organizations within the community you serve.
Financial documents are intimidating to many, and I’ve heard it said more than once that someone would rather have dental surgery than read through an organization’s financial statements. As a CPA, I might be more than a little biased, but the truth is there’s nothing scary about financial documents. Financial documents simply tell a story; there are no absolutes, and if you begin thinking in terms of what the documents tell you, you’ll find you can pull enough information to ask the appropriate questions without an accounting degree.
So, let’s look at the parts of the story:
Statement of Financial Position or Balance Sheet will show the organization at a point in time. It reveals what the organization owns, and what it owes on that date. Questions that you might consider include:
Is the cash balance increasing or decreasing over time?
Is the cash balance enough to cover current expenses?
How many months will that cash last? Having less than three months cash on hand is tight, while having more than six months cash gives the organization room to handle some risks like funding cuts or unexpected expenses.
Does the organization have any reserves?
Look at two time periods side by side: is the organization stronger or weaker than it was? Do you know why?
Statement of Activities or Income Statement tells you what happened during a period of time: a month, a quarter, or a year. You can see the money that came in, and from where, as well as how that money was used or spent. Questions you might consider here include:
Are expenses covered by revenue?
Did revenue sources expand, increase, or decrease?
Is revenue steady or based on periodic large inflows like an annual fundraiser?
Is revenue restricted to certain purposes? If so, how much revenue is available for general operating expenses such as rent, administrative salaries, and equipment?
Look at two time periods side by side, typically the same period in two years and ask whether the organization is stronger or weaker? Were there costs in the prior period that don’t appear this year? Why?
Do these expenses make sense for the kind of work the organization is doing?
Your organization’s budget is at the core of its financial planning. To build a budget, start with what you know about your organization’s needs and aspirations, ask relevant questions, and take it one piece at a time. Referencing your organization’s previous financial documents, ask yourself:
What do we need to achieve our goals?
What will likely change this year compared to previous years? Will my organization be cutting back on programs? Will we be adding new programs?
Who will we be receiving funds from? How much are we likely to receive?
While putting your organization’s budget together, remember to not be a perfectionist. Budgets are a plan, and plans change. That said, your budget will be more reliable – again, not perfect, we’re aspiring for a reliable estimate – if you start with your likely expenses before moving on to revenue. As you do this, refer to previous actual financial statements, which can serve as a useful tool to see what you’re planning will ultimately look like. And finally, don’t limit your organization by setting a strict budget; think in terms of what your organization’s goals are and strive to meet them. In other words, work within your means but don’t let the previous year’s revenue prevent your organization from making incremental growth and improvement.
Nonprofit finances aren’t intuitive, but they also aren’t impossible to understand. Keep looking for the story the numbers tell and align that with your understanding of the organization. Ask questions, and remember to cover all the costs, not just the programmatic costs.