With more than 1.56 million registered nonprofit organizations in the United States and the unknown total number of unregistered nonprofits, competition for donations, government funding, and grants is getting more and more intense.
Demand for nonprofit services continues to grow. So how do organizations continue to serve constituents and thrive 10 or even 100 years into the future? The answer is by building nonprofit sustainability through three areas: organizational mission, financial strength, and leadership.
1. Staying True To the Nonprofit Mission
A mission is a nonprofit organization’s North Star—it provides a unifying, guiding force that staff and volunteers rely on to design programs and activities. While guarding against “mission drift,” the programs and activities a nonprofit undertakes often must evolve to keep pace with a changing world.
Sometimes organizations fail to recognize that underperforming programs may be pulling resources that could be invested in other programs that are delivering positive results. At the same time, the metrics that the organization uses to measure its progress may also need to evolve. After all, one constant in the nonprofit world is the need to report measurable, positive outcomes to internal and external stakeholders.
2. Achieving Financial Strength
As important as it is for a nonprofit to live up to its organizational mission through quality programs, financial returns are equally important. According to a 2012 research report from RAND Corporation, Financial Sustainability for Nonprofit Organizations, “the goal of financial sustainability for nonprofits is to maintain or expand services within the organization while developing resilience to occasional economic shocks in the short term.” Achieving such financial sustainability requires adequate operating reserves, dependable and diverse sources of revenue, and strong internal controls.
- Operating reserves. Given the public’s intense focus on Form 990, executives and board members often feel pressure to direct all or nearly all of the organization’s revenues into activities that help it achieve its mission. While spending 100% of revenue on its tax-exempt cause is a noble impulse, any organization without a financial cushion will soon run into cash flow issues. Despite the term “nonprofit,” sustainability requires sufficient operating reserves to continue to seize opportunities and respond to unexpected threats while maintaining obligations to constituents. According to a 2018 report The Financial Health of the United States Nonprofit Sector: Facts and Observations, 30% of nonprofits face potential liquidity issues with minimal cash reserves and/or short-term assets less than short-term liabilities and approximately 50% have less than one month of operating reserves.
- Dependable revenue sources. Nonprofits should have a balanced portfolio of funding sources–including contributions and donations, grants, membership dues or program fees, and investment income. The percentage breakdown between these types of revenue will vary according to the type of not-for-profit. However, organizations that generate revenue primarily from one source are setting themselves up for failure.
- Internal controls. Financial stability requires nonprofit executives and board members to stand guard against errors, as well as malfeasance perpetrated by employees, volunteers, vendors, and other parties. Every nonprofit should recruit at least one financially savvy board member and implement internal controls to prevent or detect fraud–such as segregation of financial duties and a whistleblower policy.
3. Building a Leadership Pipeline for Your Not-for-Profit
As Baby Boomer owners and executives prepare for retirement, succession planning is a hot topic throughout the corporate world, as well as the not-for-profit realm. The number of nonprofit organizations grew dramatically during the second half of the twentieth century, and many of their leaders and/or founders are now considering retirement.
This impending wave of transitions represents a critical juncture for the nonprofit sector. Executives and board members should consider the following as they plan their own transitions:
- Evaluate where you stand. Are you still excited about coming to work every day? At what point do you think stepping down will be better for you and the organization? Keep in mind that leaders and their organizations are better off when they execute a transition while they still have the energy and passion to mentor incoming leaders. Consider seeking out valued professional mentors and other counselors to help you make this decision.
- Set a timeline. Once you’ve made the decision to retire or move on to other career opportunities, make it official. As appropriate, inform other executives and board members of your projected timeline so they can start preparing for the transition.
- Seek help. An overworked executive director or board member is not in a position to find his or her own. In many nonprofit organizations, the board assigns a subcommittee to the task of conducting the search and interviews.
- Reassure staff members and volunteers. Performance and morale can suffer when there is uncertainty regarding the organization’s succession plan. Maintaining open lines of communication helps to ensure a more successful transition.
A myriad of challenges make organizational sustainability an elusive goal for many nonprofit organizations. Attention to these three crucial areas—mission, finances, and leadership—can help leaders work toward building an organization that will remain vital and strong for generations to come. If you require assistance, then give CRI’s nonprofit CPA team a call. We’re ready to help you build an even more successful organization.