Nonprofits rely on funding to sustain their efforts and serve their communities. Money pays for overhead expenses, ensures stability during the ebbs and flows of the economy, and is a critical resource for those trying to make a positive change.
Interviews with three seasoned finance professionals — Douglas Burnet, Cecilia Angat, and Sandra Becker— reveal how nonprofits can find financial resilience.
Where Does Your Funding Come From?
Douglas Burnet, a fractional Chief Financial Officer at CFOs2Go manages finances for nonprofits and brings 20 years of experience in the sector. He highlighted the importance of money, describing how all parts of an organization flow through finance. As a fractional CFO, he keeps tabs on financial health of organizations and works to ensure employees have a fiscal awareness.
Diversity of revenue sources have implications for finance. “How is the money achieved?” Burnet offers as a key question for nonprofits. The answer to this could be fundraising or online asks, for example.
“If we’re looking at an organization and they’ve got just that single granter, and something happens, [like] there’s a new president that came in and ends that program and slashes that budget completely, that is an existential crisis for that organization. Whereas, if they have diversified funding sources that helps them be more resilient,” he shared.
What Operating Expenses Reveal About a Nonprofit
One of the main indicators of financial resilience is the organization’s ability to cover its program expenses. Operating reserves that allow organizations to survive through difficult times indicate financial health.
Burnet suggests calculating cash on hand and overall operating expenses to assess a nonprofit’s resilience. For example, if it costs a nonprofit $50,000 a month for basic payroll and functions, and there is $300,000 in the bank, there is six months of available runway. This is important information to check the pulse of a nonprofit’s finances.
Sandra Becker is the Founder and Principal Consultant at Cycle Advisors and works closely alongside nonprofit organizations to effect change. A resilient nonprofit would ideally have reserves that cover six months of their operating expenses, at a minimum, to survive any unexpected financial trouble, she shared.
Strengthening Financials and Avoiding Damage
The job of an auditor is to find the Achille’s heel of an organization — that is, the weakest part of the nonprofit’s situation. “Finance is regimen. It needs to be accurate and believable. It has to it has to be functional,” Burnet explains.
He also emphasized looking at financial trends over time and dissecting year to year finances. Financial reporting is invaluable because it offers a snapshot into the current status of an organization.
“Those numbers over time tell a compelling story for where the organization is.” He used the example of salary costs as an indication of a nonprofit’s stability, as new roles are often created when an organization has reached a certain level of stability.
Financial stability for nonprofits stems from organization. Burnet prioritizes simplicity of accounting over extreme detail.
“Complex equals cost,” he says. “The simpler the system, the less it costs to implement the system. It just reduces overhead and improves timeliness and makes your auditors happy.” He also emphasized outsourcing where possible with services like Bill.com. Outsourcing promotes scalability, he shares.
Boards and Finances
The relationship between board members and finance teams in organizations is give and take based on what the board requests and what the finance committee can realistically provide, but communication can ensure efficacy here, Burnet explained.
Cecilia Angat works for Baker Tilly as an assurance partner, where she focuses on compliance and best practices for auditing financial statements. She defined nonprofit resilience as the ability for a nonprofit to continue serving their constituents during various changing landscapes.
She also mentioned the importance of boards, highlighting how engagement within a board will help steer nonprofit execution.
Auditing and Reporting to Ensure Efficacy
Angat compared auditing to a routine checkup at the dentist. For her, auditing includes compiling information financial statements about a nonprofit’s funding sources, reserves, and sustainability.
“It’s a little painful to go through, like going to the dentist, but at the end, when you get the results, you know you’re heading in the right direction, or if you identify some things that you need to work on, at least there’s an outside, independent third party being able to provide that service and guidance.”
Angat recommends at least monthly financial reports to the management and to the Finance Committee and the Board at least quarterly to keep track of financial decisions.
When it comes to reporting financial data, Becker outlined three audiences: donors, board, and internal management. Each audience should receive information pertinent to their role: for example, the board may have a dashboard with key indicators to simplify complicated financial information. Financial information targeted towards donors is particularly important for people to understand their impact.
“If a donor has contributed $100,000 they want to know what was the bang for the buck that they contributed this year and beyond just we served 100 people. What did you do for those people? Did you get them out of poverty? Did you find housing for them?” she offered.
Finally, Becker spoke to internal controls to prevent bad actors. Cross checking between the finance committee and someone who works in program, for example can ensure that financial operations are going smoothly.
“Finance is a tool that helps the board and Executive Director execute on their strategic plan, and the numbers are really just the tool that’s reporting back and how that’s going,” Becker says.
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