In the wake of the most recent recession, many not-for-profits are taking a hard look at their sustainability over the long term to plan for uncertain economic times. After all, an organization in poor financial health may find itself forced to cut programs and services when they’re needed the most. Fortunately, steps you can take now may help reduce such risks while allowing your not-for-profit to fulfill its core mission.
The Challenge of Not-for-Profit Funding
Having a limited number of funding sources is the biggest sustainability challenge for many organizations. U.S. not-for-profits typically receive funds from the government, foundations and individual and corporate donors, and often depend heavily on a few funding sources, such as an annual government or foundation grant.
The danger in such limited reliance was amply illustrated when support from government agencies and foundations dried up during the economic downturn, which in turn caused many not-for-profits to close their doors. These problems compounded for not-for-profits serving low-income populations that could no longer provide any financial support for themselves.
If you don’t have a variety of funding sources, it’s imperative that you branch out. The broader the base, the more stability and protection from economic challenges your organization will have.
Income through Fees
A not-for-profit need not rely solely on outside funders to improve financial sustainability. It might increase revenue by expanding its fee-based service offerings to new locations or populations. For example, an organization that provides services to children with disabilities in schools could also offer the services to children with disabilities in foster homes.
More and more, not-for-profits are pursuing formal partnerships with other organizations, sometimes at the request of funders, to share costs. Through a formal partnership, organizations with similar missions and serving similar populations can collaborate to make better use of limited resources while reducing competition for funding. They can also more quickly scale up high-demand programs or services through their combined efforts.
Rainy Day Preparation
Maintaining an adequate reserve is a key component of financial sustainability, but some organizations still lack the appropriate reserves. It is prudent for not-for-profits to properly establish an appropriate level of reserves, maintain that amount and allocate additional funds when necessary. It is also strongly recommended that the organization establish a formal policy to document the administration and controls surrounding its reserves.
In today’s environment, establishing multiple funding sources is no guarantee of security. Additional strategies that more indirectly affect financial sustainability include the following:
Strategic marketing and branding are key for promoting an organization and achieving stable financial standing, yet many organizations neglect this approach. A brand that clearly communicates a not-for-profit mission and services helps to establish a solid reputation that builds trust among donors. This can be particularly crucial when funding pools are shrinking.
Donors and other not-for-profit stakeholders are showing greater interest in the outcomes of programs and services and other non-financial measures. Often, the number of lives improved by an organization’s programs has a greater impact on funders than the number of dollars spent. Donors want to fund programs that are successful. By evaluating and sharing outcomes with current and potential donors, a not-for-profit can demonstrate value, effectiveness and accountability.
Outcome evaluation also is an essential tool for decision-making. You can use the process to identify under-performing programs and make necessary tweaks to prioritize expenditures if funding declines or additional funding becomes available.
Assess your Financial Standing
No organization can accurately evaluate its financial sustainability without timely, comprehensive and accurate financial reporting. How can a not-for-profit know how much funding it needs to support its programs and services without knowing how the costs of operations?
In addition to providing a current picture of financial standing, financial reports should compare actual figures with historical and projected numbers. Some not-for-profits also are introducing “dashboards” that give real-time financial data, ratios and trends in easily understood graphic form.
Involve the Board
It’s not enough for the board to simply review financial statements before its meetings. Board members must provide true fiscal oversight and not leave major financial decisions to staff, no matter how trusted and loyal.
Every board member should undergo training on relevant financial issues and be able to understand financial statements. The finance committee should report regularly to the full board and engage in dialogue about financial reports and the organization’s financial health. In addition, the board should also be forward-thinking about the organization’s future. For example, it should consider how current trends and developments might affect future plans for funding the not-for-profit’s mission and what can be done now to guarantee the organization’s sustainability years down the road.
Plan for Contingencies
When budgeting, every not-for-profit should take the time to engage in annual contingency planning exercises. How could your organization continue to serve its mission if it suffered a 10% drop in funding? A 20% drop? Evaluating such scenarios in advance can provide valuable guidance and help preserve mission-critical programs and services before a time of crisis.
A Continual Goal
Achieving financial stability is a critical part of sustainability and should reflect both the organization’s mission and its financial needs. Seeking the advice of your financial advisor can help you objectively assess and improve your not-for-profit’s position.
If you need assistance assessing the sustainability of your organization or have questions regarding planning for your not-for-profit’s future, contact Kelly Seames at 312.670.7444. Visit orba.com to learn more about out Not-for-Profit Group.