By: Melissa Lagowski
Big Buzz Idea Group
Does your organization have a reserve fund? According to an annual survey conducted by the National Council of Nonprofits, less than 25% of the survey participants had six months of reserves. The majority had less than three months of operating reserves, and 10% had less than 30 days cash on hand.
Many nonprofit organizations have budgets that have them eking through the year with a minimal surplus or worse yet, a financial loss. Why any board member would disregard fiduciary responsibilities and approve a negative budget is beyond me, but that is a story for another day.
We always encourage organizations to budget for growth and stop performing just slightly better than the year before. That is a great model for maintaining the status quo, but how will you ever grow your organization? How would your nonprofit function during an unforeseen economic downturn?
I believe that associations and nonprofits have many lessons to learn this year, but at the top of the list is the importance of strong financial management. It has been heartbreaking to see the number of nonprofits, especially 501(c)6 organizations, that have had to eliminate programming and lay off staff this year with no clear plan for the future or how to create new revenue streams to get back to business as usual.
If you are an organization that is securing plenty of financial support right now, congratulations! But even if you are thriving right now, how do you prepare for the long haul? Regardless of where you fall on the financial spectrum, here are some tips for managing the financial future of your organization.
Know Your Numbers
Many people don’t feel comfortable with accounting so trying to understand the process may intimidate them. It is important that every organizational leader embrace their numbers and get to know them well. Know the amount of the “monthly nut.” How much do you need each month for your basic requirements (rent, payroll, utilities, technology, programs, etc.)? How much revenue does your organization raise in a year, and what percentage comes from each specific source? When tracking the percentages by source, you can better assess which programs could or should get cut and which programs deserve more organizational focus because of the amount of funding it generates. The first step to better financial management is getting familiar with your numbers.
Times like these demand that you examine your profit and loss (P&L) statement line by line. While you should’ve already been operating with a prudent budget, it is important to thoroughly review these numbers with a critical eye to identify where you might be able to reduce some expenses. A few basic examples of financial savings we have been able to secure for our clients recently include the following:
- Reduced rent
- Removal of excess user licenses (email, phones, computer, CRM, etc.)
- Eliminate travel expenses
- Cut all in-person meeting expenses
- Lower utility expenses
- Cancel any subscriptions that you are not currently utilizing
Create Revenue Projections
It is important to review your annual revenue streams and evaluate how likely it is to sustain each stream through these current times. Member-based organizations should evaluate and adjust for the possibility that members may not be able to pay their dues by creating different models to see what it would look like if dues revenue fell by 75%, 50%, etc. And, considering that most fundraisers have been eliminated this year while others are going online, how will you offset or adapt the shortfall? How much do you generally receive from your annual campaign and other donors, and how likely are those to continue flowing in at their usual volume? Do you have grants, program fees, loans or sponsorship? Be sure that they are on your list, too.
Complete a Cash Flow Statement
As you tally up revenue and expenses, the next step is to plug the numbers into a cash flow tool. Quickbooks has cash flow management options or you can use a stand-alone template like this one to evaluate your overall financial health. This document allows you to compare the timing of your expenses against the anticipated timing of receiving revenue to identify if there are any financial gaps in your future. Analyzing this in a 12-month span reveals where the peaks and valleys are, as well as what your anticipated surplus or shortage will be at different points throughout the year.
Analyze the Situation for Additional Action
After creating a cash flow statement, it’s time to assess and identify any gaps. If you notice that the organization is going to be short of funds in three months, then you can start to plan today to manage against that. This will likely lead to some unpleasant decisions, such as cutting hours or cutting staff entirely, but those cuts may help the organization survive the near term and thrive in the long run.
Examining cash flow for the next 12 months allows you to anticipate problems today and provides time to brainstorm solutions. Connect with your financial team, your accountant and your Board to get creative about a plan to navigate any difficult periods. In addition to possible cuts, perhaps you can raise new revenue streams by connecting with potential donors, researching grant opportunities or planning a fundraiser.
Plan for a Brighter Future
As you shore up the finances of your association or nonprofit, start planning now to create a “rainy-day” fund. If the organization can identify a certain amount of money to put away each week or each month, you can start to build up future reserves in tolerable increments. A good rule of thumb is to set a goal to put 5% to 10% of annual revenue in reserves and work up to secure a minimum of six months in your account. This will help put you on better financial footing to prepare for any unexpected events. While many organizations have not traditionally focused on building their reserves, the importance of this has been made painfully clear with the events of 2020.
In navigating these uncertain times, when each day seems more tenuous than the previous, it is crucial that nonprofit leaders know their numbers and learn to analyze the information within. Following this plan and embracing these tools will provide you ample warning to prepare more effectively to strengthen your nonprofit for sustainability – because you are serving a population that is counting on you to succeed.
For anyone who is still not sure how to apply this information or feels overwhelmed by the numbers, please do not hesitate to reach out to us. We would be happy to schedule a consultation and review your numbers with you. We love helping nonprofit professionals develop their toolbox of vital skills needed to manage their organization effectively.