Building a Financial Framework: The Importance of a Strong Operational Core

By April 13, 2020Uncategorized

In our last article, we talked about the importance of building a financial framework or stabilizing your existing one to ensure your nonprofit continues to operate during this time of increasing uncertainty. The COVID-19 pandemic has created an economic upheaval that may make it harder for nonprofits to secure funds. While it’s normal to worry about finances, worrying doesn’t change the situation. Instead, focus that energy on building a financial framework and enacting operational strategies to protect and stabilize your current assets while minimizing expenses. A strong operational core protects the major assets of a nonprofit to enable it to continue its work in the future.

Stabilize the Operational Core

Many nonprofits focus on funding their programs but neglect the operational core. What is the operational core?

Imagine an apple tree. The roots grow deep into the ground while the trunk supports the branches laden with apples. If your programs are the apples, the operational core is the tree trunk. Without a strong trunk or core, the trunk can’t support the branches, the branches can’t support the apples, and the tree dies. A nonprofit’s operational core is the trunk and roots. The branches are its programs, and its work, the apples or the fruit of those programs.

If you cut a tree’s trunk, the whole tree dies or is stunted for many years as it recovers. Cutting back on operating expenses while fully funding programs can slowly starve a nonprofit to death.

What does the operational core include?

  1. Strategy development
  2. Financial management
  3. Human resources management
  4. Supervisory practice
  5. IT and data management
  6. Systems management
  7. Administrative support
  8. Infrastructure

Nonprofits with a strong core can build programs to serve their constituents. Organizations that focus financial resources exclusively on programs starve the core. Yes, it’s possible for nonprofits to “starve to death.” Programs may be well-funded, but the operating core cannot continue without an influx of capital.

To continue operating during and after the COVID-19 crisis, you’ve got to concentrate on funding the core.

Establish Essential Financial Goals

One of the first steps to building a healthy core is to establish essential financial goals. There are four financial goals every organization should strive towards:

  1. Correction of structural deficit
  2. An annual operating surplus (2-5% is recommended)
  3. Developing a 6-12 month reserve to cover expenses during downturns
  4. Diversifying the revenue mix

Correcting structural deficits, ensuring an operating surplus, and maintaining an emergency capital reserve are all positive steps to take to secure the core against uncertain times and economic upheavals.

Diversifying the Revenue Mix

The majority of nonprofits fund activities through a mix of revenues. Revenues may come from membership dues, sales of products or services, grants, donations, or other sources.

Nonprofits run into problems when their revenues depend heavily on one or two sources: the food pantry funded almost solely through community donations; the environment nonprofit funded by government grants. When the economy gets shaky, funds may become uncertain in one area but better in another. Those who put all their funding ‘eggs’ in one basket may find it harder to recover from economic upheavals such as we’re experiencing now.

Diversifying revenues also helps to build a strong financial core. Some organizations find their programs well-funded while their core struggles. This is due in part to restricted funds, which may be applied to specific ‘branches’ of the nonprofit such as programs or activities. A diverse revenue stream that includes unrestricted funds enables you to put income towards infrastructure, for example, an essential aspect of building a strong core or setting aside 6-12 months of operating expenses, another component of building a strong financial foundation.

Embrace the Future – Build a Solid Foundation

The future is uncertain, but when was it ever certain? Nonprofits have gone through rough times before. Now, more than ever is the time to act calmly and logically. Build a solid financial foundation. Manage the resources that you have. Focus on your mission. Make prudent judgments about what you need, what you can delay, and what must go. With the right data, honest discussions among your team, discipline, and resilience, you can survive and thrive in this era of financial uncertainty.

If you’d like some help with nonprofit planning, contact Welter Consulting. Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.