6 Ways to Improve Your Nonprofit's Financial Health
- Nonprofit Learning Lab
- Apr 3
- 5 min read
Updated: 4 days ago
Ongoing shifts in federal policy have made the future of federal funding for nonprofits unclear while underscoring the widespread need for nonprofit services. Keeping your nonprofit in a sustainable position is more crucial than ever—both for the future of your organization and the communities you serve.
Proper financial management allows nonprofits to pursue their missions confidently, no matter the circumstances. In this guide, we’ll explore strategies your organization can implement to improve its financial health and remain stable.
1. Incorporate financial management into your strategic plan.
Many nonprofits neglect to incorporate financial management into their strategic plans, focusing instead on other aspects of their strategies. However, the most successful organizations unite all elements of their approaches to guide their teams in the right direction.
For instance, you may incorporate financial management into your strategic plan by:
Aligning financial goals with your mission. Part of the strategic planning process involves refining your mission and vision for the future. Doing so allows you to develop well-informed financial goals that support your mission. For example, if your mission is to end food security in your local community, one of your financial goals may be to raise $100,000 over the next year from various campaigns to purchase ingredients and supplies for your soup kitchen.
Integrating financial management with program evaluation. Base your financial management decisions on program impact metrics to allocate resources effectively. Compare the cost-effectiveness of each program to its outcomes to identify programs that need more or less funding.
Building financial performance benchmarks and monitoring procedures. Your strategic plan should include action steps, milestones, and ongoing actions. Work financial management into these sections. For example, if one of your priorities is to improve your donor retention rate, you may assess the effects of your approach on your available resources every six months and reevaluate your budget accordingly.
Since your strategic plan is your organization’s guiding document, weaving in nonprofit financial management will put it at the forefront of your team’s minds and ensure you prioritize financial health.
2. Review financial metrics.
Calculating and reviewing relevant financial metrics helps you understand if your organization is financially sustainable and build a plan to resolve any issues. YPTC’s nonprofit balance sheet guide recommends getting started with the following metrics:
Months of cash on hand. This metric allows you to evaluate your nonprofit’s short-term liquidity. To calculate it, divide your total cash and cash equivalents by your average monthly cash expenses. The result represents how long your nonprofit can cover expenses without additional income. Ideally, you’ll have at least three to six months of cash on hand.
Current ratio. The current ratio also assesses your short-term liquidity by dividing your current assets by your current liabilities. A result greater than one typically means you have enough liquidity to meet short-term obligations over the next year. A ratio that’s too high may mean you should readjust your resource allocation to use surplus funds responsibly.
Months of liquid unrestricted net assets (LUNA). This metric is a bit more practical as it considers net assets your nonprofit can’t liquidate quickly. Calculate LUNA by subtracting your non-liquid assets from your total unrestricted net assets. Then, divide this number by your average monthly cash expenses to discover how long your nonprofit can handle expenses with its liquid assets. Many nonprofits strive to have at least three months of LUNA.
These metrics are excellent for assessing short-term financial health. Other metrics, like operating reserve ratio, fundraising efficiency, and donor lifetime value, help you evaluate longer-term outcomes.
3. Build a financial reserve.
Creating a reserve fund allows you to keep your organization financially sustainable and tap into saved resources in an emergency. Follow these steps to effectively build your financial reserve:
Set aside funds. Determine what percentage of your budget you’ll allocate to your reserve fund. Most nonprofits aim to set aside at least three to six months of operating expenses. Still, every organization’s ideal percentage differs based on size, mission, typical cash flow, risk tolerance, and other factors.
Create access guidelines. Decide who has the authority to unlock reserve funds and in what circumstances. For instance, you may allow your executive director, finance committee, or board to access your reserve during an economic crisis or natural disaster.
Report on your reserve fund. Monitor your fund’s growth and report on it to the rest of your team so everyone knows its progress. Create a timeline with benchmarks to prompt you to check your fund and adjust as needed.
Work with your board to develop a financial reserve policy that includes the fund’s amount, purpose, access guidelines, management procedures, and reporting guidelines.
4. Ensure proper bookkeeping.
While often overlooked, bookkeeping is vital to your organization’s financial health. Accurate bookkeeping with checks and balances provides the data you need to drive decision-making and improve your nonprofit’s financial standing.
Many organizations confuse the roles and responsibilities involved in bookkeeping and accounting. To help you better understand each one, here are the tasks associated with each:
Bookkeeping: Entering transaction data, maintaining organized financial records, managing accounts payable and receivable, allocating resources, processing payroll
Accounting: Reconciling accounts, compiling financial statements, preparing for audits, budgeting, managing grants, maintaining GAAP compliance
Both functions are essential to your nonprofit’s success and financial stability. For best results, consider outsourcing your bookkeeping and accounting to a dedicated nonprofit financial management firm that can help you navigate the complexities of each one.
5. Diversify your revenue streams.
The more revenue streams your organization has, the more resistant it will be to economic changes or funding fluctuations. To keep your nonprofit afloat, diversify your strategy by using a combination of the following fundraising sources:
Monetary donations
In-kind donations
Grants
Corporate philanthropy and sponsorships
Membership dues
Investment returns
Program fees
Consulting fees
Rental income
For instance, your children’s education-focused nonprofit may collect in-kind donations of school supplies, accept monetary donations via its donation page, partner with a local business to host an annual 5K fundraising event, and apply for grants dedicated to expanding education access. That way, if one revenue stream dries up, you’ll still have plenty of resources to pursue your mission.
6. Evaluate expenses.
Analyze your nonprofit’s expenses to determine what's contributing to your organization’s growth and discover if there are any extra expenses your nonprofit can get rid of. For example, you may notice you’re still paying for a subscription for a platform your team rarely uses and redirect these funds to another area.
Then, prioritize expenses accordingly based on what serves your mission. Program-related expenses will typically be the most important part of ensuring you continue providing quality services to your beneficiaries. However, you’ll still need to carve out enough funds for overhead expenses, as they are necessary to keep your organization running smoothly and build the capacity to fulfill your mission.
External circumstances are out of your nonprofit’s control, but your organization still has the power to bolster its financial health through a cohesive financial management strategy. Take the time to evaluate your current processes and work with your team to implement new procedures to ensure financial stability.