Editor's Note: Need help with your organization's financial strategy? We've partnered with Gordon Holley for a free webinar on March 10, 2016 that will outline the four keys to financial success. Whether you're a board member, executive director, or manager, you don't want to miss this session! All who register will receive the full recording, regardless of attendance. Register today!
Many small-to-mid-size nonprofits and charities struggle financially. Either they have difficulty raising the funds they need to achieve their missions or they experience organizational anxiety because they’re not sure if their managing and spending the money they do have appropriately.
Both of these issues can be solved. If boards are clear about what they want, its generally possible to get there.
So you ask...what do we need to do to raise the money we need to achieve our mission and manage and spend our money appropriately? Good question.
We work primarily with nonprofit organizations and charities on their internal financial management. We have seen many organizations struggle with these issues and many of those have mostly - or entirely – been able to overcome them.
There is an article on KnowHowNonProfit.org that sets out four components of good financial management*. Not only do we like their framework, but we have found that, over time working with our non-profit and charity clients, this framework clearly identifies the 4 key things organizations need for financial success, particularly in small-to-mid-size nonprofits and charities:
- A Clear Financial Strategy
- A Plan for Generating Income
- A Robust Financial Budgeting and Reporting System
- An Accountable Internal Environment
A clear financial strategy
Many organizations don’t take the appropriate time to develop a clear financial strategy and align their budget with their annual goals and objectives. This makes it difficult to raise money because funders want to see a return on their investments. If organizations can’t draw a clear picture of how the funds will be spent and the impact of those funds, funders will support organizations that can.
Time (staff and volunteer) and money are the two resources that organizations can “invest” to achieve their missions. But in order to spend their resources most effectively and to get the most “bang for the buck”, they need to know where to invest their time and money to have the most impact. A clear financial strategy is really an investment plan – where do we need to invest our available assets in order to have the most impact?
Investing time and money in specific priority initiatives enables the achievement of those initiatives that are most important to the organization and its stakeholders. The better the planning (vision, mission, long-range strategic plan, annual operating plan), the more clearly organizations will know where to invest to have the most impact.
Funders want to see detailed revenue and expense budgets that are intimately aligned with the organization’s mission and with its annual priority goals and objectives.
So put your money where your priorities are. The key to a clear financial strategy is to use funds to invest in achieving the most important goals and objectives, aligning the budget proportionately to the importance and complexity of achieving each goal. Identify specific priorities for the year, figure out how much funding you need to achieve each goal, and allocate budget appropriately.
In order to become financially sustainable, organizations also need to insure that they are investing appropriately in their organizational development and their organizational capacity. This should be part of every financial plan.
A plan for generating income
If you are one of the lucky organizations with fixed and available funding (e.g. many member-based organizations), you really don’t need a plan for generating income. For everyone else, this is critical.
After creating your financial strategy (where you figured out how much money you need), the next step is to identify the most appropriate funding sources and possible funding activities. Some organizations will go straight to known sources and start fundraising activities. Others will have to invest in a long-term fund development plan. In either case, the holy grail of funding is to develop a sustainable funding plan for the organization. Many organizations will also want to consider hiring a professional fundraiser. These folks can be worth their weight in gold.
One of the challenges that many organizations are having today is that while they can find funding for specific programs, funding for overhead, administration and capacity-building is more difficult to come by. We have seen some organizations solve this challenge in creative ways. Often with a little thought and effort, solutions can be found.
A robust financial budgeting and reporting system
Financial reporting for nonprofits and charities is usually significantly more complex than for similarly sized for-profit organizations. The primary reasons for this are that nonprofits and charities usually have to track revenues and expenses – not only in total – but also for many individual programs and projects and for multiple funders simultaneously. This adds many layers of complexity.
Most small to mid-size nonprofits and charities in Canada use either QuickBooks or Sage 50. The smaller ones are moving to the cloud and using online versions. These bookkeeping and accounting packages have very different strengths and features. Picking the right software that fits your organization and its needs is critical. You will likely be using this software for many years. If you make the wrong choice, your bookkeeping and accounting costs could turn out to be significantly more expensive than they could have been with the right choice. And the effects of this will likely be with you for many years – compounding the problem.
The other challenge that many organizations have is identifying the most appropriate financial positions for their organizations (e.g. bookkeeper, controller, CFO, treasurer) and the skill sets required for those positions. Crafting specific position descriptions that fit the organization's needs is critical, as is knowing how to recruit the individuals who can bring these skills to your organization.
An accountable internal environment
Recent studies have shown that employee theft, fraud and embezzlement are rampant in the nonprofit sector. Over 50% of small to mid-size NFPOs and charities in Canada will likely experience a significant theft or embezzlement in the next 12 months. Many of these stories aren’t reported because of the effect it would have on future funding for the affected organizations.
Most employee theft, fraud and embezzlement can be prevented with appropriate financial internal controls, policies and procedures. Unfortunately, many boards don’t understand the areas of financial risk in their organization and – as a result - give far too much access to cash and bank accounts to bookkeepers and others in the organization without appropriate checks and balances to ensure that no one person can make off with the organization’s cash without someone noticing.
So what’s next?
Our experience has shown that organizations that create a clear financial strategy, have a plan for generating income, create a robust financial budgeting and reporting system and an accountable internal environment are significantly more successful financially than those that don’t. They become financially sustainable and, as a result, deliver on their missions and create more impact.
In fact, there was a recent study in the UK that concluded that underinvestment in the finance function of nonprofits and charities also lead to reduced social impact.
“The minimisation of the finance function in the nonprofit sector – for reasons related to capacity, funding, staff and management skill sets, and even culture, ultimately reduces the organisation’s ability to fulfil its social mission. The two are closely tied, and good financial management enables and preserves the social function.”
The evidence is in. If we want financial sustainability, and to increase our social impact, we need to invest more time and energy in our finance function.
Gordon Holley is the President and CEO of Humanity Financial Management Inc. As a CPA, CA for almost 25 years now, Gordon loves helping individuals and organizations that are trying to make the world a better place.