7 Ways Your Nonprofit Can Build a Strong Financial Foundation in 2025
Working with a lean budget means even the slightest unexpected expense can create a stressful situation. Persistent inflation continues to make dollars not stretch as far while world events and natural disasters increased need across many communities. And there is the potential for changing regulations and new funding opportunities that can come with new government leadership. So many nonprofits found 2024—and planning for 2025—to be particularly difficult.
But there are some constants still in your control. 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. 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 or funding source 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 cost 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 contracts, 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. Make Sure You’re Ready for Your Next Government Grant
Government grants and contracts are a great addition to any nonprofit’s balance sheet. But they often come with many strings attached—such as detailed reporting requirements. If you are not prepared for the requirements, a government grant can create more problems than it solves.
Tip 1: Before applying for a government grant, perform a financial integrity risk assessment. This will help you understand what gaps you may have in skills or resources and give you time to address those before you win an award.
Tip 2: Bring both your program and finance teams into the grant application and award process. Instead of just asking for information, make sure everyone is aware of why you are applying for a grant, what the budget restraints are, and the process for tracking spend. Having everyone working together in the same direction will make reporting much easier.
For more information on getting your organization ready for government grants, check out the blog post from Rachel Werner and James Spencer from RBW Strategy for 13 Tips for Ensuring Government Grant Compliance for Your Nonprofit Organization.
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 the updated Uniform Grant Guidance documentation and make sure you incorporate the new de minimis rate into your government grant application budgets. Don’t have time to review the OMB’s update? Rachel Werner breaks down the key points in this blog post, “Untangling (and Preparing for) the New Uniform Grant Guidelines.”
To learn more about how to calculate and apply your indirect cost rate to your programs and services, check out the Guide to Accounting for the Full Cost of Impactful Programs by Dr. Colton Strawser.
5. Prepare Your Finance Team for AI
AI-enhanced tools are showing up in software across your organization—from AI-generated suggestions for your donation forms to invoice scanning speeding up your expense management processes. These tools, with the right guardrails, have the potential to increase productivity and provide more detailed analysis across your organization—including the finance office.
Tip 1: Review the AI-powered enhancements currently available through your fund accounting system, as well as what is coming. Make sure you understand what data is being used and verify that your data will not contribute to training the large language model in a way that compromises organizational data security.
Tip 2: Make sure your organization has an AI policy in place that represents your mission, incorporates the needs of your staff, and evolves as the tools change. Work with your IT team to get your fund accounting system reviewed and approved so you can take advantage of the AI enhancements. Ensure everyone on your team receives training so they are aware of the risks and benefits of using AI as part of your finance processes.
Interested to see how Blackbaud is approaching AI in our products? Check out our Intelligence for Good page and our latest product update briefing to see how AI will be incorporated into Blackbaud Financial Edge NXT.
6. Incorporate Automated Accounts Payable 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, especially around accounts payable, 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. Review any documented processes to see if there were any updates over the past year, and make sure your AP policies reflect a potential move to automated payments.
Tip 2: Make sure AP automation is right for your organization. Take a close look at how many checks you write each month, how much time your staff spends tracking down updated payment information, and how concerned your leadership is about mitigating fraud. Depending on your answers, AP automation may be able to save your finance team significant time and headache.
A little overwhelmed with this discussion automated accounts payable and don’t know where to start? Check out our whitepaper, A Guide to Understanding Automated Payments.
7. Use a Fund Accounting System Meant for Nonprofits
For many finance professionals, their training on nonprofit accounting fits nicely into one 90-minute class as part of their larger degree. And yet, tracking and managing restricted funding and grants is not something for-profit businesses have to do. Most off-the-shelf or commercial systems do not have a native way to track restricted funds. That’s one of the many reasons why your nonprofit organization needs a system with subfund capabilities.
Tip 1: Review how you are tracking grants and restricted funding. Is your chart of accounts unmanageable? Do you track grants in separate spreadsheets? Does generating key financial reports require a lot of manual steps?
Tip 2: Ask your accounting vendor these five questions. You may learn about functionality you didn’t know was available. Or you may learn that it’s time for your organization to make the switch to a system that better fits your needs.
If you aren’t sure if you need to make the switch to fund accounting software—or need some help explaining to your leadership why it’s important, check out our whitepaper, Why Nonprofits Need Fund Accounting Software.
Take Control of Your Nonprofit’s Financial Stability
If you feel like you are 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 automated processes and stay informed on how AI is being incorporated into your technology. 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.
If your current accounting system is holding you back from reaching your financial goals, join us for a tour of Financial Edge NXT, fund accounting software purpose-built for nonprofits. Watch an on-demand product tour today.
