Guest Blog by Jon Osterburg of Jitasa
In recent years, “sustainability” has become a buzzword for many fields and practices, and nonprofit finances are no exception. Your organization’s leadership team has likely discussed how to create a “sustainable” funding model to fuel “sustainable” growth. But what does sustainability actually look like?
Financial sustainability means that your nonprofit has both the foundation and momentum to fund your operations year-round while working toward future expansion.
The key to achieving this kind of financial sustainability is implementing effective management practices at your organization. To help you get started, this guide will cover four essential tips for improving your nonprofit’s financial management strategy.
1. Assemble a Financial Management Team
The first step your nonprofit should take toward proper financial management is to have multiple professionals on your team dedicated to financial work. Each of them should have their own area of expertise and responsibilities, but they should also work together to ensure accuracy and accountability.
The four core members of your nonprofit’s financial management team are your:
- Treasurer. As the financial expert on your board of directors, your treasurer will focus on activities related to financial oversight, such as approving budgets and preparing recurring financial reports to help the rest of the board make informed decisions.
- Chief financial officer (CFO). Your CFO should work closely with the rest of your nonprofit’s leadership team on financial strategy tasks, such as managing grant funding and forecasting future cash flow.
- Bookkeeper. Your nonprofit bookkeeper’s area of expertise is financial recordkeeping, as well as other everyday, practical tasks like writing checks, making deposits, and managing invoices.
- Accountant. Accountants focus on financial analysis and reporting tasks such as reconciling bank statements, preparing for audits, and filing tax forms.
For the last three roles, you can either hire someone in-house or leverage outsourced services to gain access to the professional expertise you need at a reduced cost. Just make sure that your financial management team members have experience working with nonprofit finances (since it requires a different approach from for-profit organizations) as well as the necessary training and certifications for their roles (e.g., your accountant should be CPA-certified).
2. Diversify Your Nonprofit’s Revenue Streams
If your team has previously discussed the idea of a sustainable funding model, it should have included a variety of revenue sources. Diversified funding helps your nonprofit build resilience—if one source falls short of its goal or you incur unexpected expenses, it’s easier to stay afloat if you have multiple revenue streams to fall back on.
The five major categories of nonprofit revenue include:
- Individual donations. These likely make up the bulk of your organization’s funding and include small, mid-level, and major gifts, as well as event revenue and in-kind donations.
- Corporate philanthropy. This category includes all contributions to your nonprofit from for-profit organizations, such as sponsorships, matching gifts, and volunteer grants.
- Earned income. Although this type of revenue isn’t commonly associated with nonprofits, your organization can earn some of its own revenue by starting a membership program, selling branded merchandise, or charging for services provided.
- Investments. This revenue stream also isn’t common for nonprofits (aside from endowment funds), but your organization can generate revenue on its savings by investing in stocks, bonds, treasury bills, mutual funds, and even cryptocurrency.
- Grants. Typically provided by government entities or foundations, grants are often critical for funding your nonprofit’s key initiatives. To increase your chances of winning grant funding, Getting Attention recommends looking for grants that align closely with your needs and submitting well-written proposals by the funders’ deadlines.
For your nonprofit’s revenue generation strategy to be sustainable, it not only needs to include multiple sources, but your total amount of funding for each year should also exceed your organization’s total expenses. Along with creating additional resilience, bringing in more than you spend allows you to build up your organization’s emergency fund and other savings for the future.
3. Allocate Expenses by Function
According to Jitasa, there are two ways your nonprofit could allocate its expenses: based on the nature of payments made (natural expenses) or based on how each expenditure furthers your mission (functional expenses). While the first way is more straightforward, the second is preferred because it promotes greater financial transparency and aligns with nonprofit reporting requirements.
Here is a breakdown of the three categories of functional expenses and some natural expenses that fall under each category:
- Program expenses (directly related to furthering your mission): Purchases of supplies and resources to serve your beneficiaries, such as food and toys for rescue pets at an animal shelter
- Administrative expenses (associated with operating your organization): Staff salaries, utility bills, office equipment purchases
- Fundraising expenses (upfront costs of revenue-generating activities): Event planning, marketing, fundraising software fees
Just because administrative and fundraising costs aren’t directly related to your nonprofit’s mission doesn’t mean they’re inherently bad—in fact, some level of overhead (as these two categories are called when combined) is necessary for your organization to thrive. However, if you find that your nonprofit is spending more than it brings in, find ways to reduce overhead before taking any funding away from your programs. For instance, you could look into free marketing tools or try switching to a hybrid office model to reduce utility costs.
4. Compile Financial Statements
Between all of the revenue you generate and the expenses you incur, your nonprofit likely collects a lot of financial data. Instead of sifting through the raw numbers in your database to attempt to make decisions, summarize the most important information by compiling reports known as financial statements.
There are four core nonprofit financial statements your team should be familiar with. One is the statement of functional expenses, which organizes your nonprofit’s annual expenditures into the categories listed in the previous section. The other three include the:
- Statement of activities (or income statement), which outlines your organization’s revenue, expenses, and change in net assets for a given year.
- Statement of financial position (or balance sheet), which provides an annual overview of your nonprofit’s assets, liabilities, and total net assets.
- Statement of cash flows, which shows how cash moves in and out of your organization on a monthly basis through operating, investing, and financing activities.
These statements allow your team to easily reference financial data as you complete a variety of internal tasks, such as budgeting, filling out tax forms, and setting fiscal goals. Many organizations also publish their financial statements as appendices to their annual reports to promote transparency with external stakeholders.
Transparency and accountability are at the heart of a sustainable nonprofit financial management strategy. Internal accountability ensures that your whole team is in the loop and on the same page about your organization’s current financial situation, future goals, and plan to bridge the gap between those two things. External transparency builds confidence among your nonprofit’s supporters that will make them more likely to stay engaged with your organization and contribute toward your goals long-term.
About The Author: 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.