Is your nonprofit financially healthy? Are you looking for ways to boost your organization's long-term financial sustainability? If so, you’ve come to the right place. Before we dive into the seven ways to build your nonprofit’s financial health, let’s first discuss what it means to be a financially healthy organization.
What is financial health?
In short, financial health means sustainability. Are we going to be able to do this work next year? What about five or even ten years down the road? Do we have enough financial and human resources to keep doing this work as long as we need to?
And just how do we figure out these things? By doing some math. I know. I know. But stay with me here. I know it’s a chore for most nonprofit leaders, but it is still important to determine our organization’s financial health.
We need to answer these questions:
How much money do we have in the bank?
How long could we operate if no more money comes in the door?
How are we spending that money?
Where's that money coming from?
For all the “math haters” out there, I’ve got something just for you, The Financial Health Checkup. It’s a simple spreadsheet that will walk you through five important financial metrics and give you a crystal clear picture of how your organization stacks up. And the best part is: no math required!
After you’ve answered those questions and tracked the metrics on the spreadsheet, you’ll have your benchmark. Keep in mind a “good” number is going to look different from organization to organization. From here, we can look at ways to build or elevate your nonprofit’s financial health.
Seven things you can do to boost your nonprofit’s financial health
1. Prepare your plan
One crucial thing that is almost always missing from strategic plans is financial management. This can be anything from providing timely analysis and forecasting for better decision-making or building a diverse, durable, and flexible revenue portfolio. Be sure to include specific things inside your strategic plan that are related to financial management. For example: maintain a fully funded six-month operating cash reserve. This is a crucial step because what gets measured gets done.
2. Know your numbers
You may not have a clear sense of your current financial health. Maybe you just know that things don't feel good and you want to be prepared, but you can't pinpoint exactly what to change. That is exactly why calculating and reviewing sets of metrics that are relevant to your organization is essential. It is going to help you understand if you are financially sustainable and build a plan… rather than just crossing your fingers and hoping for the best.
3. Create a cash stash
Building a cash reserve is important for your long-term financial sustainability. If you're living donation to donation or building a zero-based budget every year, it leaves you no money for savings. Before you start building your cash stash, you need to figure out if you already have a policy on a cash reserve and if you are adhering to it. If you don’t have one, talk to your board and think about creating one. A great starting goal is a three-month cash reserve. Create a plan for how you are going to build up your funds and start including savings transfers into your finance routine each month.
4. Check on your bookkeeping
I know that bookkeeping feels like such a boring task that nobody wants to look at or deal with. But bookkeeping is a vital part of the financial health of your organization. You will not understand your financial health if you do not have timely, accurate bookkeeping with checks and balances to review things because it provides important data to drive decision-making.
5. Reinforce your revenue
Understanding your organization’s current revenue diversity is the crucial first step in reinforcing your revenue. From here you can figure out your current risk level and if there are any areas or periods of time that are more risky than others. Once you know exactly where your organization stands, you can create a plan to work on spreading out your risk and diversifying things.
6. Edit your expenses
Analyzing your nonprofit’s monthly expenses to determine what's contributing towards the growth of the organization and what is not, is the first step in editing your organization’s expenses. Look at your expense and fundraising ratios to see if there are any extra expenses your organization isn’t currently utilizing. From there, you can determine if the money can be redirected elsewhere.
7. Review your relationships
Reviewing your relationships comes in two parts, your vendors and service providers along with donor relationships. Assess all of your agreements with vendors and service providers to understand specific contract commitments, fee structures, cancellation policies, and any other financial commitments. Focus on true relationship-building with donors, going beyond asking for money. Cultivating and growing existing donors is less expensive and time-consuming than adding new donors.
Final Thoughts and Resources
We just did a quick breakdown of the seven things you can do to build your nonprofit’s financial health. If you can’t get enough and are looking for even more information on this topic, I have some resources for you!