Nonprofit organizations face significant challenges each year with rising costs and uncertain giving. While these circumstances can’t be fully controlled, nonprofits can take action to maintain financial stability. In this article, we share a handful of key financial tips for nonprofits. Implementing these tips should remove some of the stress of day-to-day financial matters and allow for greater focus on the organization’s mission.
Tip 1: Create a Reserve Fund
2020 featured a sharp economic decline and record unemployment. Though giving to some organizations actually increased, the reminder to have reserve funds was still present. A nonprofit financial services firm can make recommendations specific to your organization, but a reserve representing three months of operating expenses creates financial breathing room. Retaining additional reserve assets establishes an even wider safety net. Just as reserve assets are typically used in challenging economic times, reserves are best built during strong fundraising periods.
Tip 2: Budget and Benchmark
Budgeting provides insight into future expenses and is a tool supporting financial discipline. A common way to budget is by starting with the expenses of one or more prior years and then applying an increase or decrease. While this budgeting method can be effective, we offer a different approach as a tip for nonprofits. Nonprofits should also consider zero-based budgeting. Zero-based budgeting generally disregards past levels of expense and instead assigns only the level of cost truly needed in a particular area. Regardless of the method used, implement seasonality when breaking down annual budgets to the quarterly or monthly level.
Benchmarks can be useful both in preparing budgets and in reviewing actual expenses. While each nonprofit is unique, comparisons to peer organizations provide insight. Nonprofit financial services firms may be a resource for obtaining benchmarking tools. One example is the Data Warehouse, a service provided by CapinCrouse. The Data Warehouse is a repository of information about many higher education institutions in the U.S. and Canada, including information about finances, endowment, compensation, staffing, physical plant, and much more. More information regarding the Data Warehouse may be found by emailing email@example.com.
Tip 3: Be Aware of Tax Law Changes and Economic Conditions
Tax changes can have significant impacts on charitable giving. For example, the Tax Cuts and Jobs Act of 2017 raised the standard deduction and thus impacted the tax benefit of many charitable gifts. By staying current on tax-related news, nonprofit organizations can offer a valuable service in notifying donors of upcoming tax changes. Leveraging a nonprofit financial services firm represents an easy way to obtain news and commentary.
It is also important to be aware of economic conditions when interacting with donors. Individuals are more comfortable donating when they feel confident financially. Approaching potential donors at a time when asset values have recently increased is more likely to be fruitful than contacting donors in down markets.
Tip 4: Build an Endowment
Endowments are funds designed to last in perpetuity. The recurring amounts distributed from an endowment should be sustainable with the endowment’s inflation-adjusted investment return. Many organizations focus on raising money to be immediately deployed into mission. While this approach is often necessary, an endowment can provide recurring cash flow. Nonprofit financial services firms focused on the investment field can assist with policies, spending rates, and the investment allocation for endowments.
Tip 5: Be Open-Minded When Fundraising
The final tip for nonprofits is to be flexible in the type of gifts raised. As mentioned above, most organizations focus on current gifts of cash. These gifts are necessary for a nonprofit’s success, but organizations should also focus on larger gift opportunities. For example, consider gifts of non-cash assets such as stock and real estate. Additionally, consider planned gifts such as charitable trusts or charitable gift annuities. Bequests can be particularly impactful. Donors with high capacity may be fits for layered gifts, meaning a combination of current, planned gifts, and estate gifts.
Creating and maintaining a solid financial foundation is a daunting task for many organizations. We hope that these tips for nonprofits generate some thinking and action within your organization. While many of these ideas are simple in concept, implementing them may be difficult.