Ensuring Sustainability Means Nonprofits Need to Act Now
By Jeffrey Cicolini
Although nonprofits cannot control market forces and potential changes in funding, they can take steps to ensure sustainability and greater capacity by broadening the scope of their financial planning process.
It largely boils down to taking steps that address the challenges and opportunities posed by the current economic and funding landscape.
The bull stock market over the past eight years has been good for many, but, as we all know, market corrections inevitably happen. While some nonprofits may have been able to take advantage of that strong market to build up reserves, many may not be optimistic about the funding landscape.
In addition, a change in administrations combined with a changing grant making environment pose challenges, making competition for donor dollars fiercer than ever.
The following actions, which all nonprofits can take now, will help them ensure long-term sustainability.
Jeffrey Cicolini, CPA, CGMA, is a partner at AAFCPAs, a CPA firm known for assurance, tax, accounting, and business & IT advisory solutions to nonprofit organizations. Email to him at email@example.com or call 774-512-4026.
- Budget for the Long Term: Develop a long-term operating budget that extends out for the next three to five years. This budget can be a helpful tool in thinking about your organizations long-term financial plan and should be closely aligned with the organizations strategic plan and mission.
- Budget for a Surplus: There is no mission if there is no margin. Your annual unrestricted surplus should be sufficient to meet debt obligations, fund depreciation, and add to operating reserves. Best to budget for a 3% 5% operating surplus each year, and to have four to six months of expenses in operating reserves.
The economy always naturally fluctuates, and if you incorporate that understanding into a strategic, long-term budget, good economic conditions will allow you to build reserves for times of contraction (recession). Reserves are critical to long term health because they can protect you from downturns in the economy and fund unplanned expenses, and help seed new programs.
- Invest Wisely: Develop a sound approach to investing reserves by defining your nonprofits objectives for investing, identifying your risk tolerance, and adopting an investment policy. Leaders can start by following a bucket system that separates cash reserves into three segments: working capital, stability and other reserves, and long-term investments. These buckets should then be invested with their own customized asset allocation strategies that mitigate market risks.
- Renegotiate Debt: When their financial picture is strong, nonprofits are well-positioned to renegotiate debt with better terms, or apply for a line of credit even though it may not be needed at the time.
- Diversify Funding Sources: Take the time now to understand revenue concentrations and related risks. Funding diversification is a key way to lessen the impact of market adjustments and funding uncertainty. Consider developing new revenue streams, such as new foundation grants, consulting to other nonprofits, or subleasing a portion of your facilities.
- Assess Each Program: Regardless of the economy or funding landscape, look at the financial trends for your programs over the past few years. Determine if each program is covering its direct costs, and then if it contributes to overhead. If a program is not a core mission program and is not covering its direct costs, there should be a serious discussion about the value of continuing the program.
- Boost Your Focus on Fundraising: Take advantage of the link between the economy and charitable giving trends. (American individuals, estates, foundations, and corporations contributed an estimated $390.05 billion to U.S. charities in 2016, up from $379.89 billion the year before, according to Giving USA, which appeared to reflect general economic growth.) Because competition for donors will only increase, nonprofits must find ways to stand out from everyone else. And one way to do that is by strengthening your financial health and then communicating that strong picture in tandem with new approaches to fundraising, which may include more targeted fundraising for specific projects rather than an annual appeal.
- Prepare to Adapt to Changes in Tax Code: Changes in tax policy can impact the level of individual and household charitable giving, and nonprofits need to be able to adjust, which means being able to make their case for continued support even in the face of tax policy changes.