When it comes to the non-profit sector, sustainability is all about good, thoughtful planning.
And that means planning for the possibility that things might not go to plan, too.
The key to doing that is simplifying your processes – and confidently using the latest digital tools is the way to go about it.
But what does sustainability look like on the financial side of things?
In a nutshell, it’s about building a resilient organisation. One where core work can continue in some capacity even if a major element of your funding disappears.
Think about those non-profit organisations (NPOs) that weathered the storm of multiple lockdowns, for example.
The guiding question here is this: can you continue to support your beneficiaries when times are tough?
Here’s what this article covers:
NPOs and financial sustainability
There are six key indicators you can look at to get a sense of the financial sustainability of your organisation:
- Stakeholder relationships
- Diversified funding sources
- Cash reserves
- Risk management
- Awareness of overheads
- Cash flow health.
For small organisations, however, sustainability can come down to a question of capacity, especially when there isn’t a dedicated financial resource to own that finance function.
In the UK, a significant 38% of staff involved in the finance function of NPOs said they didn’t feel confident in all areas of finance. That, in turn, corresponds closely with relatively low levels of Organisational Financial Literacy.
There are a few things that can get in the way of building a sustainable NPO.
From insufficient detail in your financial records to poor impact reporting and a lack of planning, these area all factors that affect transparency and accountability for your NPO and its ability get that all-important funding.
Now, cloud accounting software can banish manual inefficiencies and take the stress out of the financial side of your NPO, clearing the way for better, more impactful decisions.
But you’ll still need a keen understanding of the context in which it is being applied.
But enough about that. We’ve put together seven top tips to help your NPO be more sustainable:
1. Look at where your money is coming from
While this may seem like the obvious place to start, it’s often overlooked.
To continue providing crucial services, NPOs need to be able to count on a certain amount of income to cover running costs.
These funds can come from loads of different places, including trusts, public fundraising, statutory authorities, investments, and trading.
The way you decide to bring in money from each source should be supported by marketing activities aimed at the right audience for that source, with plans tailored to give you in the best possible position to connect with supporters, donors, and funders.
2. Assess the impact of that income
You need to bring money in, but that’s not the be all and end all of it.
You need to make sure the sources and amount of income you generate needs to align with your NPO’s wider vision.
What do you want to achieve?
What kind of impact do you want to have, and where?
What outcomes are you working towards?
Find out if what you are doing has made a big enough difference compared to what might’ve happened without your NPO’s activity over the past six to 12 months.
Is what you’re doing in sync with what’s going on in the sector? Does it complement and enhance what other organisations are offering?
Without sufficient impact, it’s unlikely you’ll be able to sustain the income generation required to fund non-profit activities.
Being able to review and highlight that impact through accurate reporting is therefore essential.
Though it’s worth remembering that some metrics for doing that are a bit easier to work with than others, such as quantifying the Social Return on Investment (SROI) your NPO represents, for example.
3. Rethink your strategy
For real financial sustainability, you need to look at income and impact in the context of your wider strategy.
For most working in the sector, passion for a particular cause is what brought them to their role. This is crucial; it’s what gives an organisation its unique perspective on the world and the approach it’s taking to make it better.
But passion alone won’t fuel financial sustainability in the long term. It needs to be brought into a strategy built around the impact you want your organisation to have.
To do that, NPOs need clarity on what they want to achieve and how.
This will give the organisation and its employees focus and direction, helping the NPO to work smarter with the resources available.
Align your strategy with the organisation’s mission and resist any temptation to drift away from that.
4. Dive into business planning
Business planning is part and parcel of strategic planning. Together, these help you build a strong strategic foundation to achieving your NPO’s mission.
Business plans aren’t just about the financials.
A comprehensive plan will outline key future objectives and activities, and identify the actions needed to achieve and fulfil them, as well as the resources (particularly people) and facilities required.
This should be supported by a financial plan, which will outline the costs of activities, and the income needed to cover them.
As well as helping you to plan for future major costs (building refurbishment, new vehicles, etc), such budgeting makes it easier to control general costs by providing a framework within which to measure them.
5. Stay on top of cost control
Let’s talk about costs.
At a very basic level, you need to spend less money than you’ve got coming in. But as NPOs grow, cost structures develop and become more challenging.
Smaller organisations might start out working hand-to-mouth—finding some income and then spending it to keep things going from one week to the next.
Once you’ve got regular employees or fixed overheads to think about, you need a proper plan to keep up with those costs.
Simply put, bills need paying, regardless of how much you’ve got coming in. If your income takes a hit, you’ll need to reduce costs quickly.
Having an effective business plan to hand will help with that. But you should still keep continuous focus on weeding out waste and streamlining your spending wherever possible.
Don’t take a one-size-fits-all approach to cost cutting, though.
Some areas might need a bit more cash than others.
Remember, being too strict with your controls could mean falling short in key areas which can undermine service delivery and negatively impact your fundraising activities.
6. Keep an eye on cash flow
Cash flow issues have been the downfall of many a business but that doesn’t have to happen to your NPO.
With that in mind, balancing costs and earnings annually is important. But that’s not enough to keep things running smoothly from month to month.
Take capital expenditure, for example.
This can eat into your cash reserves, even when the impact and allocation on your Statement of Financial Activities (SoFA) is spread over a few years.
Grants might be paid in arrears, and delays in commissioners paying invoices could build up.
This can have a major impact on cash flow and may result in an NPO running out of cash and therefore becoming insolvent.
Having a well-thought through and regularly monitored financial plan will make cash flow management easier.
7. Diversify your funding sources
Take a tip from the ‘eggs in one basket’ metaphor and avoid relying too heavily on any one source of funding.
This is a point that has been made pretty clear throughout the pandemic, where face-to-face events and physical fundraising activities had to stop essentially overnight.
While there’s no hard and fast rule here, the general view is that the maximum amount of funding an NPO should get from any one source should be around 20%.
Are you overly reliant on a single source of funding? Take a look at how you can reconfigure costs quickly, and go on the hunt for new funding, just in case.
To sum up, using digital tools such as cloud accounting software will help you to simplify your processes and make better decisions.
In turn, those decisions will help you to build a resilient organisation, one that’s more sustainable when it comes to the financial side of things.
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Organisational Financial Literacy Hub
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