The phrase “financial sustainability” in the context of nonprofits generally refers to an organization’s ability to sustain itself over an extended period of time in support of its central mission. To be a sustainable organization, its leaders must know how to deliver affordable programs and services in alignment with the enterprise’s fundraising revenue.
Yet, a nonprofit’s ability to make direct improvements to its financial sustainability can be limited, particularly because each organization must navigate the opinions of multiple decision-makers. According to a 2018 report on the financial health of America’s nonprofits, many organizations are facing major financial crises.
The data revealed that 7 to 8 percent of nonprofits in the U.S. are technically insolvent, with liabilities exceeding assets. Moreover, a significant 50 percent of nonprofits are operating with less than one month’s cash reserves, and another 30 percent have reportedly lost money over a three-year period.
These statistics should act as a wake-up call to nonprofit leaders, who, in addition to prioritizing risk management strategies, can make a more concentrated effort to improve financial sustainability by coordinating efforts.
Nonprofits, regulators, policymakers and funders must work to incite constructive planning in the name of sustainability. The following three actions may help to make your nonprofit more sustainable now and in the years to come.
1) Seek funding alternatives to cover overhead
Most nonprofits depend on government funding to cover program costs. However, many government grants and contracts do not provide coverage for the overhead that is incurred during regular operations, such as the indirect costs of delivering services. Regulators, policymakers and funders may need to seek alternate funding sources for overhead costs.
2) Create a reserve or rescue fund
Your nonprofit’s policymakers and funders should designate a reserve of funds to protect against risks or other downturns. When creating a reserve or rescue fund, consider how these funds can be used, and write policies outlining the parameters. Another option is to designate a grant that is restricted to rescue situations. Doing so will significantly decrease risk and add to the overall financial sustainability of the organization, acting as a viable backup plan.
3) Consider Whether Restructuring May Be In Order
Given economic and financial pressures from increased competition, nonprofits may need to consider fundamental, strategic changes in their organizational structures to remain sustainable. While it is ultimately the responsibility of a nonprofit’s trustees to discuss whether a merger, acquisition or divestment is financially sound, the restructuring process can be streamlined with the oversight of regulators, policymakers and funders. Working together, they can set aside dedicated funding and provide technical assistance for restructuring transactions, moving the approval processes forward.
Nonprofits that are dedicated to improving their financial sustainability will readily consider the ways in which all decision-makers can assist in coordinating strategic efforts. With input from their stakeholders, organization leaders can make informed decisions that promote the longevity of the nonprofit’s mission and the financial viability of its programs and services.
Questions? If so, consult with your ALL tax advisor or contact us below.
About ALL CPAs
ALL CPAs is a full-service certified public accounting and business advisory firm located in Chestnut Hill, MA. We specialize in tailoring services to suit the needs of individuals and their families, closely held businesses, business owners and entrepreneurs as well as high net worth clients and nonprofit organizations. In addition to our accounting, audit and tax services, ALL has a niche in business valuation, and provides valuable ideas and assistance in the areas of business consulting, estates, trust and financial planning, personal financial administration and strategic growth management and consulting.
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