By Jon Osterburg

Blog Ann Green

 

Effective financial management is critical for your nonprofit to grow and thrive long-term. Explore four considerations

for achieving financial sustainability.

 

 

If you work for a new nonprofit, your team’s primary goal is probably to get your operations off the ground and start furthering your mission. But once your organization has existed for some time, you’ll likely start considering how to make it thrive long-term. You’ll create strategic plans, brainstorm new projects and programs, and organize campaigns to raise the necessary funds to execute your ideas.

 

One important but sometimes overlooked step in future planning is ensuring proper nonprofit financial management. To build capacity, you not only need to fundraise efficiently but also track and allocate funds to sustain your organization’s operations as it grows.

 

In this guide, we’ll review four considerations to keep in mind as you assess your nonprofit’s financial sustainability—and, therefore, how ready it is for expansion. Let’s get started!

 

1. Accounting Infrastructure

Your nonprofit’s internal financial systems can make or break its growth potential. After all, to build up your organization, you first need a solid foundation! Before you can grow, you should have a strong accounting infrastructure that consists of:

1. Fiscal policies and procedures. These guidelines govern how your team members handle your organization’s funding as they perform their daily tasks. Create a shared fiscal policies and procedures handbook for easy reference across departments. In it, include guidance on gift acceptance, conflicts of interest, expense reimbursement, and staff compensation, among other aspects of nonprofit finance.

2. Methodology. According to Jitasa, most nonprofits start out using the cash accounting method to track their finances—i.e., recording revenue when it’s received and expenses when they’re paid. However, you should transition to accrual accounting as your organization’s finances become more complex. Since this method involves recording revenue when it’s pledged and expenses when they’re incurred, it allows you to monitor your nonprofit’s financial commitments more comprehensively.

3. Software. Switching to accrual accounting also requires your organization to upgrade from a spreadsheet to a dedicated accounting platform to track its finances. When shopping for this type of software, remember that most of the top accounting solutions on the market are designed for for-profit businesses. However, you can configure them to align with your nonprofit’s recording and reporting needs.

 

Every other aspect of nonprofit financial management stems from this infrastructure—from budgeting and tax filing to setting fiscal goals in your strategic plan. So, work with your organization’s financial professionals to ensure your systems are in top shape.

 

2. Finance Team

In addition to strong financial systems, your nonprofit needs multiple dedicated professionals to maintain them. Having a team rather than an individual financial manager allows you to delegate tasks according to each member’s expertise and bandwidth, and they can check each other’s work to catch and fix any errors as early as possible.

 

Here are the four major nonprofit financial roles your organization needs to fill  :

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1. Treasurer. As the financial expert on your nonprofit’s board of directors, your treasurer is responsible for financial oversight. Some of their responsibilities include approving budgets, implementing risk management plans, and reporting your organization’s finances to the rest of the board.

2. Chief financial officer (CFO). This individual works closely with other members of your nonprofit’s leadership team on financial strategy. Their duties range from budget creation and cash flow forecasting to grant management and financial policy development.

3. Bookkeeper. This professional is primarily in charge of financial recordkeeping, so they’ll perform most of the data entry in your accounting software. They also frequently handle other day-to-day financial tasks for your organization, such as managing invoices, making bank deposits, and processing payroll.

4. Accountant. After your bookkeeper records data, your accountant will use that information to perform their financial analysis and reporting duties. These include bank reconciliations, audit preparation, financial statement creation, and tax filing, among other responsibilities.

 

To fill the last three roles, your organization can hire someone in-house if you have the budget and need to do so, or you could outsource the roles. Outsourced bookkeeping, accounting, and fractional CFO services provide access to all of the expertise of full-time professionals at a reduced cost. Either way, make sure every member of your financial team has experience working with nonprofit finances so they understand your unique needs.

 

3. Revenue Streams

To prepare your nonprofit for expansion, you need to have steady funding coming in each month so you can cover all of your expenses and save for the future. Here are some ideas you can use to diversify your organization’s funding model, broken down according to the five major categories of nonprofit revenue:

1. Individual donations: Small, mid-level, and major monetary gifts; event revenue; in-kind donations.

2. Corporate philanthropy: Matching gifts, volunteer grants, sponsorships.

3. Earned income: Membership dues, merchandise sales, service fees.

4. Investments: Endowments, stocks, bonds, cryptocurrency.

5. Grants: Government grants, foundation grants, marketing grants.

 

Bringing in revenue from multiple sources boosts your organization’s financial sustainability—if one stream falls short of expectations or you incur unexpected expenses, you’ll have more options to fall back on as you make up the difference. Plus, the more funds you raise from different sources, the more flexibility you have as you save for the future.

 

4. Reserve Funds

Your nonprofit’s long-term savings—also known as reserve funds—are critical to its longevity. Not only do they provide you with a safety net in case of emergency, but they’re also often the first money you’ll draw from when your organization is ready to expand. 

 

However, like with other aspects of finance, reserve funds are only useful if you manage them properly. Infinite Giving’s nonprofit cash management guide provides the following tips to help you start saving more sustainably:

1. Keep 6-12 months of operating expenses in reserve. This benchmark will see your nonprofit through many circumstances outside of your control. It’s also useful when most of your new fundraising dollars are going toward growth initiatives, but you still need to keep your lights on.

2. Store reserve funds in sweep accounts. A sweep account is a type of brokerage account that provides more FDIC protection than normal bank accounts (often covering up to $5 million). They allow your nonprofit’s cash to stay safe while making investment easier.

3. Steward your savings by investing in low-risk vehicles. This strategy allows you to grow your reserves without massive fluctuations in value while ensuring you can access them as needed. Some of these vehicles include mutual funds, CDs, and treasury bills.

 

Additionally, include guidance on reserve funds in your nonprofit’s fiscal policies and procedures handbook. Cover your savings targets and sources to draw reserve funding from, as well as when your team can take money out of your reserve fund and who is authorized to do so. This way, you’ll make sure you only dip into your organization’s savings when it’s truly necessary.

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While many duties associated with achieving sustainability fall to your finance team, it’s actually a team effort that requires your entire nonprofit’s cooperation. All of your staff needs to commit to your policies, communicate effectively with your financial professionals, brush up on basic financial literacy concepts, and maintain your revenue streams and reserve funds. Instill a sustainability mindset in your team from the start and lead by example to set your organization up for financial success.

 

Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not for profit organizations.