Financial Best Practices for Nonprofits
We at Green Owl Consulting are very moved by the impact that nonprofit organizations can accomplish, sometimes with very few resources and very little support. And we strongly believe that in order for organizations to continue their amazing work and fulfill their missions, they must maintain financial sustainability.
To assist nonprofit boards and management staff in this area, we’ve created the following summary of general best practices that can be used as a guide.
Cash Reserves
Financially healthy nonprofit organizations typically have at least six months of operating cash available at all times. While this number may vary greatly from one organization to the next, six months is generally accepted by most.
Organizations that often struggle to maintain sufficient working capital should aim for at least three months of operating cash and work to slowly move towards six.
Keeping all your eggs in one basket.
Leaning too heavily on one or a small few sources of income can put a nonprofit organization into a precarious position. Ideally, nonprofits should seek to diversify their “portfolio” of revenue streams to include a mix of the following:
Individual / board / major gifts
Foundation / corporate / gov't grants
Bequests, estates, planned giving
Special fundraising events
Program fees / Membership dues
Fees for goods, services
Investment interest
There isn't necessarily a perfect mix of income that applies to all nonprofit organizations. However, there should be a focus on developing a healthy balance of multiple sources to minimize risk.
Additionally, if a large portion of the organization’s revenue comes from a single source, the organization should strive to operate as though those funds do not exist in order to reduce its dependence on that source.
Special Events
It's important to not have too many special events since this may decrease the overall impact of each event. Many successful nonprofits hold two major events per year, each aimed at a different audience:
One event is to celebrate the mission with the community.
Typically, these events are easy for people to join and participate in terms of price, location, etc. The goal of these types of events are to build relationships, not necessarily to raise money. This is a good opportunity to get volunteers and program participants more involved and excited about the mission.
The other event is typically aimed at large names and large dollars.
This event is often more of a gala: higher-priced tickets and tables are sold for a catered evening at a nice venue. Corporate sponsorships are obtained to help cover the expense, while ticket sales and other donations add to the organization’s overall income. Of course, relationships should also be developed and cultivated at these events, as well.
Some successful nonprofits only hold one special event each year rather than two. Either way, one of the events should be a signature event that people can attribute back to the organization.
Role of the Board of Directors
(This one is a biggie.)
In addition to oversight, guidance, and governance duties, the Board of Directors of a nonprofit organization has a fiduciary duty to ensure the organization has sufficient resources, income, and cash to accomplish its goals. This is a very important measure of Board effectiveness, capability, and commitment.
This is accomplished by:
Leveraging their personal and professional networks to find and facilitate opportunities, influencing potentially large donors, and guiding fundraising activities.
Giving an annual gift. Foundations, corporations, and large donors typically prefer to see 100 percent participation from Board members on this point as a measure of commitment and engagement.
Many nonprofit organizations implement a “give/get” policy in which Board members are required to give or successfully solicit a minimum amount each year. In these cases, members of the Board should determine an annual amount that is appropriate, and prospective Board members should be made aware of the expectation before coming on board. Additionally, it should be a goal of the Board that this annual amount increases every two years, whenever possible. In either case, Board members are expected to hold each other accountable to the policy.
Enhancing public relations and garnering support from the community.
Periodically reviewing their performance as a Board in the areas listed above at least every 3-5 years.
Other External Engagement
Marketing and communication efforts are important to obtain a following and ongoing support from the general public. This can be accomplished with newsletters, active social media use, press releases, and more.
An effort should be made to share the organization's mission and activities with others and to get them to excitedly pass on that information to their networks. The goal here is for the organization to remain in the forefront of its supporters' minds. This type of strategy and action will bring a continual and growing flow of support into the organization.
By using the above information as a guide, nonprofit organizations can begin to develop both immediate and long-term strategies to move towards financial sustainability, successful mission fulfillment, and true societal impact.
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