Successful nonprofits are not an accident; they are the result of leadership that employs sound financial management practices. Developing the following seven financial habits will ensure that your nonprofit can successfully fulfill its mission and be a good steward of donor funds. Equally important, developing these habits will allow you to lead with confidence and flexibility knowing that your financial affairs are in order.
Make budgeting a number one priority. Successful nonprofits don’t just throw numbers on a page and call it a day. Instead, they think carefully about where the funds are coming from and how much they will spend on programming to fulfill their mission. They follow a clearly defined process to ensure that the assumptions used to create their budgets are sound. The result is a budget that serves as a roadmap that they use to guide decision-making throughout the year.
Know the cost of your programs. Successful nonprofits know exactly how much their programs cost. Their accounting systems are set up to allow them to allocate expenses to specific programs so they can not only make informed decisions about how to operate more efficiently, but also accurately report to donors how their funds are spent.
Understand the importance of positive cash flow. Successful nonprofit organizations are not caught off guard by a lack of funding. They have a good idea of how much cash will be available at any given time to fund not only programming activities but also operating expenses. They have ample cash reserves to help the organization overcome ebbs and flows in working capital. When they tap into their reserves, they have a plan to replenish them on a specific date.
Reject the notion that ‘overload’ is a dirty word. Successful nonprofits challenge those who constantly suggest they cut by chance. Instead, they recognize that general operating expenses (competitive salaries, fringe benefits, rent, office supplies, technology, etc.) fund the infrastructure that enables the organization to do its best work. Unskilled labor, operating in crumbling offices without cutting-edge technology, is a recipe for disaster. Successful nonprofits recruit and hire the best talent and give them the right tools they need to do great work. They reject the old thinking that non-profit means cheap.
Maintain a reserve of operating funds. Successful nonprofits have six months or more of operating reserves available at any given time. They are prepared for the unexpected loss of a significant gift or the unexpected need to invest additional resources to accomplish a program goal. They have written guidelines on how large their operating reserves should be, when they can be tapped, and if tapped, when and how they will be replenished.
Become financially literate. Successful nonprofits make sure board members and staff are financially savvy. While financial education does not have to reach the CPA level, the board and staff must understand financial terminology and know how to read and use financial reports to guide their decision making.
Be a good steward of your donor funds. Don’t guess, know. Successful nonprofits make decisions based on facts, not gut feelings. How many times have we heard a staff member or board member say “I think we should do x” when what we’d rather hear is “I surveyed our constituents and this is what I found: 93% don’t have x and lack the Yes. Based on this information, I investigated how much it would cost us to launch and maintain a program to meet this need.”