Do you have a business mindset when running or governing your nonprofit organization? While there are definitely some differences between the for-profit and nonprofit worlds, many nonprofits – especially smaller ones – miss the mark as they fail to incorporate some of the standard financial wisdom regularly utilized by those operating in the for-profit space into their operations.
Having a Growth Mindset
In my experience, I’ve noticed that some nonprofits are what I would call “balanced budget focused.” As such, the organization’s leaders are focused on developing a budget in which expenses match revenues. Then they work to meet that financial plan throughout the year.
Having a balanced budget is important, but you cannot make it your goal to spend every dollar each year – especially if you’re hoping to realize ongoing growth well into the future. I would compare this approach to living paycheck to paycheck in your personal life – it is short-sighted organizational management.
Nonprofit does not mean “no” profits – it’s simply a tax designation. A healthy organization actively acquires resources and makes investments that are likely to stimulate growth. Additionally, showing a positive change in net assets year-over-year shows that you are setting aside earnings for future operations of the organization. In this way, leaders are poised to take advantage of future opportunities.
- What is my organization doing to stimulate growth?
Using the Right Metrics
Many metrics exist to help you to assess whether your organization is healthy. These tools provide you with the data to help you determine the aspects that really drive the financial health of your organization. In addition to consideration of the net asset position mentioned above, your organization’s cash position is vital. It’s generally recommended that you have enough cash on hand to cover 3-6 months of expenses.
- How many months of expenses does our organization have in cash?
- Are there any seasonal variations to revenue or expenses and is the organization in a position to weather the lows?
- What potential future expenses do we anticipate and are we ready to meet those obligations?
- What key performance indicators can we monitor as an organization to determine whether or not we are truly healthy from a financial perspective?
Building the Organization
Your organization’s mission is important. After all, you’re likely investing your time and energy into your organization primarily because the cause is dear to your heart. Therefore, we can assume that you want to find ways to ensure the organization is around for many years to come. To be most effective, you must take a step back and look at the entire organization – not just in its present form, but the future goals of the organization as well. From this vantage point, you will be better positioned to align the organization for ongoing growth, sustainability and success.
When you are better able to articulate the organization’s vision for the future, donors (individual and corporate) are more likely to throw their support behind your nonprofit and the initiatives you are looking to accomplish in the years ahead.
- Am I working to make the organization more attractive by making wise financial decisions and improving our position? Or, is the lack of profit or cash in my nonprofit setting us up for future failure?
Profound business questions aren’t just for for-profit business leaders. The questions included in this article will help you adopt a new, more substantial perspective to nonprofit leadership. For more questions or help setting your nonprofit up for ongoing success, email the Rea & Associates’ nonprofit team.
By Mark Beebe, CPA (Dublin office)