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These 4 financial threats could sink your nonprofit. How to overcome them
Few would contest that nonprofit leaders face a difficult task. They must retain donors, minimize overhead, improve services, and ensure compliance—all at the same time, and all while facing the condescension of their for-profit counterparts.
A 2018 survey found that nonprofit executives share four top-of-mind financial concerns: financial sustainability, effective funding, unrestricted revenue, and competitive pay.
1. Financial Sustainability
The Bridgespan Group, a nonprofit consulting firm, recently examined five years of financial statements from 300 big-name nonprofits.
Fifty-three percent of the organizations had multi-year budget deficits. Forty percent had less than three months of reserves. Thirty percent had no reserves at all.
Long-term financial planning requires long-term funding. Whether for- or non-profit, the leaders of any enterprise would find it difficult to create accurate multi-year budgets without predictable multi-year revenue.
In other words, financial sustainability is inseparable from the next concern:
2. Effective Funding
The donation landscape continues to shift. This blog has identified two trends in American giving: a) a rise in the total amount given, and b) decline in the total number of givers. In brief: more donations from fewer, richer donors.
Along with these shifts, so-called ‘impulse giving’ has boomed in the wake of mobile and social technologies. Although 85% of givers say they rely on performance data when donating, only 3% actually do; and even deliberate giving is bias-prone.
Nonprofits can attempt to harness impulse giving by using behavioral ‘nudges.’ However, impulse donations can’t provide long-term certainty.
To support long-view planning, nonprofits need predictable revenue streams of the kind provided by multi-year grants. Yet long-term commitments usually come with baggage.
3. Unrestricted Revenue
In the past year, changes to GAAP reporting standards have highlighted a thorny issue: restricted funding.
Only about 20% of giving in the United States is unrestricted. In other words, 80% of all donations come with (often absurdly) specific requirements for how organizations can spend them. Multi-year grants often impose the most restrictive conditions.
Needless to say, most nonprofit leaders prefer no-strings-attached giving. Restricted donations complicates planning, hobbles cash flow, and limits capital investment.
4. Competitive Pay
Recent data indicate that in certain industries, nonprofit employees actually out-earn their for-profit counterparts. These sectors include hospitals, education, and social services.
However, nonprofit leaders still face an uphill battle to hire the right talent. Donor and board scrutiny impose often-unrealistic expectations for payroll and overhead.
This is of particular concern at upper management and C-Suite levels. Not unlike salary-capped sports teams, all but the largest nonprofits must negotiate severe financial trade-offs when hiring for leadership roles.
Too many nonprofits treat these as separate concerns when all four share a common theme: the inadequacy of nonprofit tools for nonprofit tasks.
In today’s world, finance management solutions should serve the unique needs of nonprofits. Nonprofits should have access to advanced tools for budgeting, fund accounting, etc.
Unfortunately, the market for such solutions incorporates a great deal of ‘bizplaining.’ Most products reflect vendors’ belief that nonprofits just aren’t as serious/ambitious/savvy/professional as for-profits.
Yet exceptions do exist.
Xledger equips customers with a broad range of advanced financial management tools united in one finance solution. Nonprofit customers can wield robust functionalities for budgeting, fund accounting, donor management, and payroll administration. With some of the world’s largest nonprofits as customers, Xledger commitment to treat every customer as an equal has earned us the highest customer-retention rate in the financial solution market.
We can’t eradicate the challenges of heading up a nonprofit. But we can equip you to triumph over them.
