Successful nonprofits are not an accident; They are the result of employee leadership with sound financial management practices. Developing the following seven financial habits will ensure that your nonprofit can successfully fulfill its mission and is a good steward of donor funds. Equally important, developing these habits will allow you to lead with confidence and flexibility knowing that your financial affairs are in order.
Make budgeting a number one priority. Successful nonprofits don’t just put numbers on a page and call it a day. Instead, they think carefully about where the funds are coming from and what they will spend on programming to fulfill their mission. They follow a clearly defined process to ensure that the assumptions used to create their budgets are sound. The result is a budget that serves as a roadmap that they use to guide decision-making throughout the year.
Know the cost of your programs. Successful nonprofits know exactly how much their programs cost. Their accounting systems are set up to allow them to allocate expenses to specific programs so that they can not only make informed decisions about how to operate more efficiently, but can also accurately inform donors how their funds are being spent.
Understand the importance of positive cash flow. Successful nonprofits are not surprised by the lack of funds. They have a good idea of how much cash will be available at any given time to fund not only scheduling activities, but operating expenses as well. They have ample cash reserves for the organization to overcome the ebbs of working capital. When they take advantage of their reserves, they have a plan to replenish them on a specific date.
Reject the notion that “overhead” is a dirty word. Successful nonprofits challenge those who consistently suggest they overhear. Instead, they recognize that overhead operating expenses (competitive salaries, fringe benefits, rent, office supplies, technology, etc.) fund the infrastructure that enables the organization to do its best work. Unskilled labor, operating out of crumbling offices, lacking state-of-the-art technology, is a recipe for disaster. Successful nonprofits recruit and hire the best talent and give them the right tools they need to do a great job. They reject the old thinking that nonprofit means cheap.
Maintain a reserve of operating funds. Successful nonprofits have six months or more of operating reserves available at any given time. They are prepared for the unexpected loss of a major donation or the unexpected need to invest additional resources to achieve a program goal. They have written guidelines on how large your operating reserves should be, when they can be tapped, and if they are tapped, when and how they will be replenished.
Get financial literacy. Successful nonprofits make sure board members and staff are financially literate. While financial education does not have to rise to the level of CPA, the board and staff must understand financial terminology and must know how to read and use financial reports to guide their decision making.
Be a good steward of your donor funds. Don’t guess, I know. Successful nonprofits make decisions based on facts, not hunches. How many times have we heard a staff or board member say “I think we should do x” when what we would rather hear is “I have surveyed our constituents and this is what I found: 93% do not have x and lack the means to do and. Based on this information, I investigated what it would cost us to launch and maintain a program to meet this need. “