7 Ways Your Nonprofit Can Build a Strong Financial Foundation in 2023
Working with a lean budget and stakeholders who care about where every dollar goes means that the stakes and expectations for financial management are sky-high for nonprofits. So, when inflation made dollars not stretch as far and staffing shortages shifted more duties to a fewer number of people, many nonprofits found 2022 to be particularly stressful.
From creating a financial cushion to clearly managing your financial reporting, your finance team can create a strong foundation to help you weather whatever the new year has in store. Here are seven ways your team can make sure your nonprofit has a strong financial foundation this year.
1. Create an Operating Reserve Fund (or Review Your Policy)
An operating reserve is a crucial part of creating a strong financial foundation for your organization. It gives your nonprofit breathing room when a problem or a new opportunity arises. Like an emergency fund for your organization, an operating reserve allows you time to make data-driven decisions instead of having to react immediately.
Tip 1: If you have an operating reserve, review your policy. Does it still fit your needs after the past few years? Think through the dollar amount, reasons for use, and repayment schedules. Update the policy based on your current and future needs.
Tip 2: If you don’t have an operating reserve, identify what it would take to make your organization financially stable. How consistent is your income and how much control do you have over it? If a government regulation changed or community preferences shifted, would you have time to react? Knowing that information will help you identify the amount you need to keep in reserve.
If your organization doesn’t have an operating reserve, or you haven’t reviewed your operating reserve policy in a few years, check out the Operating Reserve Toolkit with resources on how to create, launch, and manage your operating reserve fund.
2. Lead a Revenue-Wise Strategy Session
As a financial leader, you touch all areas of your nonprofit organization through budgeting, forecasting, and expense management. With this information at your fingertips, you are best positioned to lead data-driven strategy sessions with your leadership to take a close look at your income streams and decide which ones help you drive impact and which ones don’t serve your organization anymore.
Tip 1: Categorize your revenue types, such as fundraising, grants, and earned income. Identify the top line for each channel. Next, calculate the expenses for each channel. Be sure to include staff time and infrastructure needs, if possible. With these two numbers, you can identify the ROI for each channel.
Tip 2: Gather information on your revenue diversity (do you have different types of income, or does it all mainly come from fundraising, for example), restricted vs. unrestricted balances, profit margin, and months of cash on hand. These numbers will help you make better decisions on any changes that need to happen with your revenue streams.
Once you have this information, it’s time to meet with your leadership. Some revenue sources will clearly be revenue-wise (self-supporting or clearly core to the mission and supported by outside sources), and some will be ready to sunset. To help you work through these decisions, and what to do about the maybes, check out our conversation guide, Aligning on a Revenue-Wise Strategy.
3. Prepare for Your Remote Audit
Having a solid financial foundation means knowing where you stand and where you need to improve. While it can be stressful and time-consuming, your financial audit will help you dig into your financial standing with a knowledgeable third party. With a little preparation and proactive communication, your remote audit can be a smooth process that helps you start the year understanding where you are.
Tip 1: Plan to meet with your auditor bi-annually or quarterly to share updates. Fill them in on your highlights—new programs, funding opportunities, and challenges—and they can share regulations they are watching or new technology they are implementing.
Tip 2: Prepare your fund accounting system for the audit. Review your naming conventions so each journal entry is easily identifiable. Make sure your internal control documentation includes the naming conventions, so your audit team doesn’t have to slow down the process by asking what specific entries are.
For more tips on how to be proactive with your remote audit processes, download our checklist, 11 Tips to Radically Reshape Your Audit Approach.
4. Calculate Your Indirect Cost Rate
Complete and correct cost allocation is key to the financial stability of your organization. If you aren’t including indirect costs—such as salaries or rent—into your funding requests or program planning, you are setting yourself up for stress later in the year.
Tip 1: Identify line items in your budget that cross programs, or are essential for daily operations, including utilities, insurance, bank fees, and marketing costs. Then, looking at your programs or services, decide if these indirect costs apply evenly across all your programs or if certain programs require more or less of those costs. For example, your marketing efforts may support all your programs evenly, or you may need to print flyers for one program while social media efforts work best for your other programs.
Tip 2: Review your upcoming funding requests, fundraising goals, and grant applications to make sure you are including an appropriate allocation for your indirect costs.
To learn more about how to calculate and apply your indirect cost rate to your programs and services, check out our webinar with Dr. Colton Strawser, A Complete Picture: How to Calculate and Communicate Indirect Program Costs.
5. Create Personalized Reports and Dashboards
Having a way to quickly and clearly see your financial numbers helps you make better data-driven decisions. You can identify trends with easily accessible historical data and always know where you are with real-time information.
Tip 1: Carve out 30 minutes to review the dashboards and customized reports in your fund accounting system. Do they give you the information you need? Make adjustments based on your goals for the new year. If you have a goal to bring in an additional $20,000 in unrestricted funding this year, create a chart on your dashboard that shows your progress, so you see it every time you open your fund accounting system.
Tip 2: Review your scheduled reports. Do they give you the information you need when you need it? Are there reports you can schedule that would save you time by communicating key metrics to stakeholders before they ask for that information?
See how reports and dashboards in Blackbaud Financial Edge NT can help you save time and make informed decisions with our datasheet.
6. Incorporate Automated Processes
Time is one thing nonprofit leaders never have enough of. But technology is making it easier to streamline processes and cut down on manual work. Through native tools and API integrations, you can set up a variety of automations in your fund accounting system to save you time and improve the accuracy of your data.
Tip 1: The first step in automating your processes is knowing what your processes are, how long they take, and who is involved. Document any processes you don’t already have highlighted. Review any documented processes to see if there were any updates over the past year.
Tip 2: Most fund accounting systems have tools and integrations that can help with expense management, accounts payable, and even reminders for incomplete steps. Identify a process that is currently being done manually and work with your fund accounting system admin to find a way to automate it.
Want to make this the year you focus on freeing up your team’s time through process automation? Check out our whitepaper, How to Get Started with Automation at Your Nonprofit Financial Office.
7. Accurately Account for Your Leases
With leases now appearing on your balance sheet as part of ASC 842, you need a good way to track and report on them in order to avoid costly issues with your audit. Whether you started incorporating your lease agreements into your financial tracking last year or were able to hold off until this year, it’s important to remember that this isn’t a one-and-done update.
Tip 1: Review your leases and make sure they are all accurately identified and tracked in your fund accounting system. Check service agreements, such as for your copier or servers, to make sure you are including any embedded leases.
Tip 2: Run validation reports in your Chart of Accounts to make sure you have all the appropriate accounts listed on applicable reports.
If you are still familiarizing yourself with ASC 842, check out our quick guide with background information and what you need to know to comply with the new standard. If you want to make sure you are tracking and reporting on your leases in the most efficient way, download our data sheet on the functionality you need in order to comply with ASC 842.
Take Control of Your Nonprofit’s Financial Stability
If you felt like you were always reacting to issues instead of being able to plan for them, take steps today to be proactive. Give your organization some financial breathing room with an operating expense fund and get in front of expenses by asking for the funding you really need instead of just the programmatic costs. Save time and make better data-driven decisions with clear reports and automated processes. No matter what the world has in store for your organization in the year ahead, make this the year you take control of your nonprofit’s financial stability.
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