Lately, nearly every conversation I’ve been in seems to swirl around money. And, why not. ‘Tis the season for giving, and many organizations are transitioning into a new fiscal year. So here I am—jumping on my money soapbox to reveal a few, important distinctions that have served our clients well as they navigate the quirky mechanics of fundraising, which often get confused with nonprofit finance.
Whether you’re at the end of your fiscal year and getting ready to dive into a brand new budget or simply nearing the halfway mark, it’s a great time to look at your financials. I’m not talking about an audit of last months’ P&L and balance sheet; I’m talking about the core pillars of financial health. These four, simple concepts work together to transform your organization’s financial well-being:
4 Key Criterion for Your Nonprofit Financial Health Check
- Board and leadership commitment to financial health. That is, rather than suffering around money or hand-wringing about whether there’s enough, you are engaged in an ongoing dialogue about your shared COMMITMENT to financial health. Starting with a commitment or intention to be financially healthy can be a game-changer for any organization, no matter how big or small.
- Understand your business and economic model. Do you? Have you mapped your business model and identified which funding models are most applicable to your organization? Often, well-meaning leaders use words like “fundraising” when what they mean is income generation. Your business, economic, and funding models all work in harmony to guide your fundRAISING strategy. All too often, people ask fundraising to do all the lifting. Most of the time, but not always, fundraising is meant to COMPLEMENT other sources of income. Defining your models transforms how you think, talk, and act about the essential role fundraising plays and how your particular approach leverages other income sources to ensure your organization’s financial health.
- Commitment to income-based spending. Usually, the reverse is true. We budget and then spend according to the budget rather than the actual income. This commitment means we won’t spend what we don’t have. It also means we build a budget around certain and probable income, rather than “balancing” the budget with unknown income often labeled as “new grants” or “event TBD” or “major gifts.” Nonprofit doesn’t mean NO profit. Once you start income-based spending, you can plan for a cash surplus—which builds cash reserves and creates board-designated funds, and so on.
- Program-based budgeting. Every time we work with our clients to establish a program-based budget, it’s a little like being in Vegas; lights go off, bells start ringing, and leaders begin to SEE the power of defining the fully-loaded costs for each of their programs. The process helps with financial management, of course. Still, the more significant dividend is a financial planning framework to:
- evaluate your programs’ economic viability
- inform budget for grant applications that are accurate
- set pricing for programs and services
Setting sail into the future
Financial health checks and planning are a cornerstone to intelligent strategy. They go hand-in-hand. Money follows strategy. Once you’ve established your strategic direction—that far off distant shore toward which you are navigating—it’s time to rig your boat so you can sail into the future. Your financial plan is the rigging that will enable your organization to make progress.
Whether you’re a board member or CEO, as a leader, you have both the opportunity and responsibility to ensure you have the proper rigging. And, like any good sailor, to attune your vessel to the conditions, keeping things ship-shape, and maintaining your vision as you sail into the future.
Resources to support your year-end financial health check:
- Budgeting Your Way to Financial Stability – Leverage your budget to its fullest advantage.
- The Two Types of Nonprofit Income – Because “differentiating your portfolio” isn’t just for investors.
- Nonprofit Finance Guide – Templates and tips for budgeting “best practices.”
- Ten Funding Models – Reduce fundraising strategy guesswork.
Friends, may your holidays be filled with meaning and magic. And, Happy New Year!