Four Steps to Find a Sustainable Financial Path
Over the past few months, we have had very similar conversations with multiple clients and partners as they engage in strategic planning. They are all different kinds of organizations. One focuses on human services, another focuses on the arts, a third one does legal advocacy, and another volunteers for a PTA board.
But as they envision the next stage, a similar challenge has emerged:
Many of these organizations brought in a lot of money during the pandemic.
They received state or county funds, emergency pandemic funds, or funding from foundations which allocated additional grants during the pandemic and contributions from individuals who were determined to give more than usual.
Most of these organizations now have a reserve of anywhere from several hundred thousand to several million dollars. For some, it is the first time they have had a reserve.
The emergency of the pandemic is over. Some of the funds that were offered are no longer available. Community needs have continued, possibly even expanded.
The staff of these organizations stepped up and worked hard during the pandemic to support growth. But now, some staff members feel that they cannot maintain the current pace of work. These organizations are all trying to navigate the mixture of great financial reserve with the burden of an increased work load on their staff.
Here are four steps to find a financial path forward:
1) Clarify your organization’s current and past spending.
When we do strategic planning, we do a fiscal review with organizational leaders which includes an analysis of organizational budgets over the past three years. We look at change in expenses and revenue over time. Together, we discuss:
What is the story that the budget is telling about the size of the organization – in other words, how much is being spent each year?
How does this compare with the amount of money coming in? Is there a structural deficit or surplus?
I realize this post is getting a little technical. In simple terms, a structural deficit means you’re consistently spending more than you’re bringing in. It is a risky strategy for operating an organization long-term.
2) Forecast revenue – and get specific
Not long ago, we worked with an organization that said they wanted to “raise more money” in individual contributions.
I asked the Board President how much she wanted to raise. She could not name a number!
I pushed the group to get specific. In the end, they created specific goals, with exact numbers, for different areas of fundraising. Once they had their specific goals, they could make a plan with a few different scenarios for how they were going to accomplish their goals.
3) Create policies that protect the organization
How much can an organization spend from the surplus? To keep the organization healthy, the board should create a policy about this.
One of the board members of a client was sharing his experience with the PTA at his children’s school. With the turnover of board members, there’s a lot of relearning that happens every couple of years (a completely different monster!). The new board found themselves with a sizable surplus and wasn’t sure of the best policy. So, they took it to the community to survey and gather information to discover what was most important to them.
Unfortunately, at the end of the week in which they gave their report, everything shut down due to the pandemic. However, they found that the National PTA recommends carrying a reserve of between 50-100% of their annual estimated budget. They soon found that this recommendation is partially due to events, such as the catastrophic pandemic or the inability to raise funds.
Every organization will be different, but determining a safe buffer that best suits the needs of each nonprofit is important. Instituting a policy such as this can safeguard organizations into the future.
4) Keep coming back to your plan
After you create a plan, the board and finance team should be revisiting it frequently –at every board meeting. Are you on track? What new information has emerged that impacts your projections? Staying with that PTA, they’ve since had a couple of new boards. They’re still figuring out how to establish continuity and a historical understanding to have a balanced approach to finances (and many more topics). Yet they are also able to continue functioning at this point, which has helped as school needs have skyrocketed. The past two years resulted in spending from that reserve because fundraising has not kept up with needs.
This case emphasizes the importance of creating a plan for any surpluses. Holding firm to that rule can be difficult, but it is important for the health of the organization.
If the board and staff follow these four steps, you will be able to address the circumstances that emerge. Many of us come to the nonprofit sector through our commitment to change - or the “program side”. But we all can work towards deepening our understanding of numbers and budgets and taking financial leadership. Understanding these concepts ensures that the budget expresses the organization’s purpose and values, and addresses issues as they arise.
Learn more about nonprofit strategic planning:
How to hire a strategic planning consultant that is an excellent fit
How much does nonprofit strategic planning cost?
Who needs a seat at the table in planning?
Planning Questions: Who are we in the context of our community and environment?
Planning Questions: What do we do best and feel pulled towards?
Planning Questions: Given the questions above, what will we do now?