Good, thoughtful planning is essential when it comes to the non-profit sector. That means preparing for the possibility that things will not go as planned. But when they do, how will you ensure financial sustainability for your organisation?
The goal is to build a strong organisation. One where the core work can still be done in some way even if a big part of your funding goes away.
The guiding question here is this: Can you continue to support your beneficiaries when times are tough?
Here’s what this article covers:
How to make your NPO financial sustainable
There are six key indicators you can look at to determine your organisation’s financial sustainability:
- Stakeholder relationships
- Diversified funding sources
- Cash reserves
- Risk management
- Awareness of overheads
- Cash flow health
However, for small organisations, sustainability can come down to a question of capacity, especially when there isn’t a dedicated financial resource on the team.
Other obstacles to building a sustainable NPO include insufficient detail in financial records, poor impact reporting, and a lack of planning. All of these factors impact your NPO’s transparency and accountability, as well as its ability to secure critical funding.
Cloud accounting software can banish manual inefficiencies and take the stress out of the financial management of your NPO, clearing the way for better, more impactful decisions.
However, you will still need a keen understanding of the context in which it is being applied.
Here are seven tips to increase your NPO’s sustainability:
1. Know where your money is coming from
While this may seem like the obvious place to start, it’s often overlooked.
To continue providing critical services, non-profits must be able to rely on a certain level of income to cover operating expenses. These funds can come from many places, including trusts, public fundraising, authorities, investments, and trading.
The method you choose to raise funds from each source should be supported by marketing activities targeted at the appropriate audience for that source. Complement these efforts with plans tailored to put you in the best possible position to connect with supporters, donors, and funders.
2. Measure your impact
You must bring in money, but that is not the end. You must also ensure that the sources and amount of income you generate are consistent with the overall vision of your NPO. This will depend on what you want to achieve, the impact you want to have, and the outcomes you are working towards.
Find out if what you’re doing has made a difference compared to what might have happened if your NPO had not been active in the last six to twelve months.
Is your work in sync with what’s going on in the industry? Does it supplement, complement, and improve on the work that other organisations are doing?
Without sufficient impact, it’s unlikely you’ll be able to sustain the income generation required to fund non-profit activities. It is, therefore, critical to be able to review and highlight that impact through accurate reporting.
3. Align your financial strategy with your mission
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 brought them to their role. This is crucial; it gives an organisation its unique perspective on the world and its approach to making 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 to achieve. To do that, NPOs need clarity on what they want to achieve and how.
This will give the organisation and its employees and volunteers focus and direction, helping the NPO work smarter with the available resources.
Align your strategy with the organisation’s mission and stay the course.
4. Create a business plan
Business planning is part and parcel of strategic planning. Together, these help you build a solid strategic foundation for achieving your NPO’s mission. But business plans aren’t just about the financials.
A comprehensive business plan will outline key future objectives and activities and the actions required to achieve and fulfil them. It also identifies the necessary resources (particularly people) and facilities needed to support these activities.
This should be supported by a financial plan, which will outline the costs of activities and the income needed to cover them.
In addition to assisting you in planning for big costs (such as building renovations or new vehicles), budgeting makes it easier to control general costs by providing a framework within which to measure them. Speaking of costs…
5. Stay on top of costs
At a basic level, you need to spend less money than comes in. But as NPOs grow, cost structures develop and become more challenging.
Smaller organisations may begin by living hand to mouth, earning some money and then spending it on getting by from week to week. However, once you hire employees or have fixed overheads to consider, you must have a proper plan to manage 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 a business plan will help with that. However, you should constantly focus on weeding out waste and streamlining your spending wherever possible.
Remember to stay flexible. Being too strict with your controls could mean falling short in critical areas, undermining service delivery and negatively impacting your fundraising activities.
6. Watch your cash flow
Cash flow issues have been the downfall of many businesses, but that doesn’t have to happen to your NPO.
With that in mind, balancing costs and earnings annually is essential. 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 if the impact and allocation on your financial statements are spread over a few years.
Grants might be paid in arrears, and delays in commissioners paying invoices could build up.
This can significantly impact cash flow and may result in an NPO running out of cash and therefore becoming insolvent.
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 funding source.
This has been made abundantly clear throughout the pandemic when face-to-face events and physical fundraising activities were halted overnight.
While there is no hard and fast rule, the consensus is that an NPO should receive no more than 20% of its funding from any single source.
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 build a resilient organisation that’s more sustainable when it comes to the financial side of things.
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