Sound Financial Management for a Sound Night's Sleep

Bonnie McFarlane, Former Director of Fiscal Sponsorship

A Better Handle on Your Financials

When asked what keeps them awake at night, you can be sure that one of the most frequent answers from nonprofit executives and senior managers will be short and simple: money.

Certainly, it’s no surprise to learn that raising money and getting the most bang for the nonprofit buck are challenging in an economy that has never fully recovered from the 2001-2002 recession. But many executive directors and their top managers find handling the finances of a nonprofit on a day-to-day basis just as daunting.

In Daring to Lead, Jeanne Peters and Timothy Wolfred reveal that the majority of nonprofit executive directors have “program” backgrounds, and have less experience with the financial responsibilities of their job than they themselves would like.[1] But according to the Executive Directors Guide, financial management is the foundation of planning and managing every aspect of the organization, including people, programs, buildings, equipment, fundraising, technology, printing and insurance. Thinking strategically when managing money is essential because it is interlinked with every other function.[2]

Macro Level Oversight

Do your funding sources support the program mix you need?

It makes sense to approach financial management at both an operations and macro level. On the macro level, it’s asking yourself if your organization has the right “kind” of money to support the programs that you want to provide. In other words, you need to look at your organization’s funding sources to be sure that your mix of restricted and unrestricted funds, individual (including major) donors, foundation and government funding sources align with your program initiatives. The latter may be direct services, education, technical assistance, outreach or advocacy.

For instance, government and foundation funding may limit the amount of advocacy your organization can do and how you do advocacy. Unrestricted funds from individual donors provide more opportunities for advocacy. Similarly, most grants and even government contracts don’t cover what it really takes to run a program. So you really want to make sure that you have a mix of private and public grant money and other sources of funding to deliver a financially healthy, viable program.

Are you investing in your organization’s future?

Similarly, you want to have enough of an unrestricted fund balance going forward to invest in your organization. For some nonprofit organizations, that may mean improving your infrastructure or increasing your board and staff development. For others, investing in the future may involve adding new programs and/or expanding your constituent base. Still others may want to have enough of a funding cushion so that they can respond to crises or emerging needs in their communities.

Therefore, sound financial management requires that you broaden your focus beyond having a fund balance large enough to finance cash flow (typically three to 12 months of operating expenses is considered adequate for cash-flow management). Your financial plan must include investing in your program’s improvement, expansion and modernization, including keeping up with technology advances, if you are to meet your organization’s long-term goals.

And if you’re always coming in at break even, you’ve got to figure out how to manage self investment, whether through an endowment, a major donor campaign or an annual fund. That will allow you to connect your current situation to where your organization wants to be.

Are you doing enough to build your infrastructure to match what will be needed in the future?

The area that suffers most from underinvestment is “infrastructure,” not just administrative and fund-raising needs but also evaluation, technology and marketing. Most executive directors and their senior team figure out how to strengthen their programs and expand their constituency base. This often results from underestimating the costs of NOT investing in infrastructure. Funders also play a role, hesitating to fund capacity-building, marketing and outreach, staff development and IT. These are all critical for developing a viable program and financial sustainability.

And make sure you understand your balance sheet, known as the Statement of Financial Position in the nonprofit sector. The information on the balance sheet can give you excellent insights on a number of important areas of financial management: cash-flow needs in the short and long term; your organization’s ability to fund expansion; the funding needed to maintain your equipment and facilities in future years; the soundness of your cash-management strategy (or if you need one!); and future debt payment requirements, to name a few.

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