September 21, 2017
 
Your Financial Story Explains the Strategic Choices You Make

By Beth Doreian

Beth Doreian
Many nonprofits leaders use storytelling to enlist volunteers, members, employees, and directors to their cause, but storytelling can be equally compelling in finance – especially when speaking to grant providers and other funding sources.

Articulating your financial story through a thoughtful budget narrative can show how your organization manages risk, learns, and adapts, and makes strategic choices to better its situation. Storytelling appreciates the past and connects it to a strong and compelling future. So how does a nonprofit leader craft this story?

Analyze Your Financial History

An organization’s financial trends reveal themselves by looking at data over time. Gather and organize past, present, and future financial data and any related documents that can add clarity to your financial story and surface hidden patterns. These documents could include audited financial statements, 990s, internal statements, board reports, funder reports, organizational budgets, program budgets, multi-year projections, business plans, and strategic plans.

With the right data, leadership should be able to answer the question, how has my organization performed? To do so, look at trends in five categories:

  1. Profitability and savings: Were costs covered? Were surpluses sufficient to pay for debt principal payments and facility or equipment purchases? Did surpluses build adequate reserves?
  2. Revenue dynamics: Where did your money come from? Did revenue composition change? Were revenue streams reliable or at risk?
  3. Expense dynamics: How did you spend your money? Were expenses predictable? Was management responsive to operating changes and prepared to make difficult decisions?
  4. Health of balance sheet: Are the size, nature, and distribution of assets, net assets, and liabilities appropriate to support the organization’s business and programs over the long term?
  5. Liquidity: Is there enough unrestricted cash available to cover current obligations? How quickly can you convert receivables to cash? How liquid are your net assets?
Understanding and articulating the biggest events or changes (positive or negative) that influenced these trends will help you shape your budget narrative. For example, were they driven by internal or external forces? How did your organization adapt?

Articulate the Business Model

A leader should be able to readily describe the organization’s business model, i.e., how you make and spend money in support of your mission. For example, a simple narrative could be:

“Our after school programming has an expense budget of $1 million with 80% for salaries, 10% for occupancy, and 10% for program supplies. Revenue fully covers expenses (with a 5% surplus to build reserves), with 60% coming from tuition, 30% from foundations and corporations, and 10% from individuals and grassroots fundraising.”

Although most organizations may have a picture of their model based on early business plans, a business model is likely to change over time. Having a clear, data-driven understanding of your financial trends is an important piece of accurately articulating an organization’s current business model, and a thoughtful budget narrative will explain how the business model makes sense in light of past trends and new opportunities.

The following are examples of trends and opportunities...with budget responses:

  • Lost major funder...cut expenses
  • Foundation support becoming less viable...used board committee and consultants to increase individual donor base
  • Bought a building...established a facilities reserve
  • Consecutive surpluses...paid down debt and increased operating reserves
  • Awarded large government contract...increased personnel and working capital
A smart narrative will also highlight your organization’s strengths and address any potential concerns upfront so that when funders and external audiences are reviewing your finances, they have the story behind any unusual or alarming data.

Positive financial indicators to highlight include:
  • Consistent unrestricted operating surpluses
  • Reliable and repeatable revenue streams
  • Surpluses that are sufficient in size to cover the full cost of doing business, including debt principal payments, depreciation, investment in new fixed assets, and contributions to reserves
  • Access to unrestricted net assets not tied to fixed assets
  • Current assets that exceed current liabilities
Red flags to address with explanation include:
  • Operating deficits or steadily declining operating results over the course of several years, especially if these deficits are large in relation to the organization’s operating budget
  • Significant swings in revenue composition from year to year
  • Steadily declining or negative unrestricted net assets
  • Low or declining liquidity
  • Liabilities as an increasing portion of total assets
Advocate for Your Future

Financial storytelling with trends and responses demonstrates your ability to adapt as you steward resources in support of mission delivery. Sharing your true costs without apology is essential for bringing light to the real cost of solving some our society’s most difficult issues. Use your financial story as an opportunity to make the case for the targeted investments necessary to build financial resilience in the nonprofit sector.

Beth Doreian is a senior associate at Nonprofit Finance Fund, a nonprofit that provides tailored investments, strategic advice, and accessible insights to mission-driven organizations. Email her at bdoreian@nff.org.

November 2015

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