Friday, December 9, 2011

Five Keys to Financial Sustainability

As our dismal economic climate continues, focusing on financial sustainability has become essential for nonprofits. This means making sure your organization has the ability to provide services responsive to your community and generate the required resources to fund current programs without compromising the future.

Here are some key elements that can help you achieve financial stability:

  • Nonprofit business model statement: Having an explicit business model statement is a tool for defining your financial goals and strategies. This statement includes both revenue strategies as well as mission impact. Here's an example: We provide after-school enrichment programs for working parents, supported by fees and foundation grants, and supplemented by net income from fundraisers.
  • Diversity of income: Does your organization receive 30-50% of total revenue from one source? Do you have just one or two donors who make significant gifts? Dependence on one or two sources of funding is a dangerous path. Your revenues should include a healthy mix of earned income, contributed income, and grant funding. It is particularly important, given the current political climate, not to be dependent on government grants.
  • Overall profit: It sounds like a contradiction, but nonprofits need to make a profit in order to be sustainable - which means maintaining adequate working capital to do your good work. You may be surprised to know that nonprofits are not prohibited from having a budget surplus, though they are indeed restricted as to what can be done with that money - which is re-invest it in the organization and its mission. Note that it goes with the nonprofit territory that some of your activities will lose money while others will make money, but the system as a whole must be moderately profitable to keep up with cost-of-living increases, maintain competent staff, and allow program growth.
  • Adequate program reserves: Every nonprofit should maintain a liquid program reserve of at least three (but preferably six) months of operating expenses in case of an emergency and/or significant funding cuts. When you end a fiscal year with a budget surplus, plan to set aside a portion of this money to be placed in a designated reserve fund.
  • Active and knowledgeable Board of Directors: It is the job of your Board to see that your agency has the resources (revenue, equipment, facilities, supplies, staff) to do your work. Make sure your Board members know their legal responsibilities, understand agency fiscal reports, and are actively committed to fundraising.

All nonprofits need to make decisions, set goals, and define strategies that balance mission impact with profitability. Your programs are important - and financial sustainability will assure that those programs continue.