Successful non-profits are not an accident; they are the result of leadership that employs sound financial management practices. Developing the following seven financial habits will ensure your non-profit can successfully fulfill its mission and that it is being a good steward of donor funds. Equally important, developing these habits will enable you to lead with confidence and flexibility knowing your financial affairs are in order.
Make budgeting a number one priority. Successful non-profits don’t just throw numbers on a page and call it a day. Instead, they carefully think through where funds are coming from and what they will be spending on programming to fulfill their mission. They follow a clearly defined process to ensure the assumptions used to create their budgets are sound. The result is a budget which serves as the road map they use to guide decision-making throughout the year.
Know the cost of your programs. Successful non-profits know exactly how much their programs cost. Their accounting systems are set up to enable them to allocate expenses to specific programs so they can not only make informed decisions about how to operate more efficiently, but so they can also accurately report to donors how their funds are being spent.
Understand the importance of positive cash flow. Successful non-profits are not caught off guard by a lack of funds. They have a good idea of how much cash will be on hand at any given moment to fund not only programming activities but operating expenses as well. They have ample cash reserves to get the organization through ebbs in working capital. When they tap their reserves, they have a plan for replenishing them by a specific date.
Reject the notion that ‘overhead’ is a dirty word. Successful non-profits challenge those who constantly suggest they cut overheard. Instead, they recognize that general operating expenses (competitive salaries, fringe benefits, rent, office supplies, technology, etc.) fund the infrastructure that enables the organization to do its best work. Unskilled labor, operating out of offices that are falling apart, without state of the art technology is a recipe for disaster. Successful non-profits recruit and hire the very best talent and provide them with the proper tools they need to do great work. They reject age-old thinking that non-profit means cheap.
Maintain an operating fund reserve. Successful non-profits have six months or more of operating reserves on hand at any given time. They are prepared for the unexpected loss of a major gift, or the unexpected need to invest additional resources to achieve a program goal. They have written guidelines for how large their operating reserves need to be, when they can be tapped and, if they are tapped, when and how they will be replenished.
Become financially literate. Successful non-profits make sure board members and staff are financially literate. While financial literacy does not have to rise to the CPA level, board and staff need to understand financial terminology and they need to know how to read and use financial reports to guide their decision making.
Be good stewards of your donors’ funds. Don’t guess, know. Successful non-profits make decisions based on facts not hunches. How many times have we heard a staff member or board member say “I think we should do x” when what we would rather hear is “I surveyed our constituents and this is what I found: 93% are without x and lack the means to do y. Based on this information, I researched what it would cost for us to launch and sustain a program to meet this need.”
John Thew is President of CRUNCHING NUMBERS, a company founded to help organizations create and manage effective accounting systems. He has over 30 years of experience working with companies in the for-profit and nonprofit sectors helping them to grow top and bottom line revenue.