“No margin, no mission.” That sign hung on the wall in the marketing department of a large New York City nonprofit. It was a constant reminder that, even though the organization was a nonprofit and completely committed to its educational mission, without sound finances, it wouldn’t be able to function.
Nonprofits often deal with lean budgets. They want to put every penny towards their mission. However, with a focus on running lean, the slightest disruption can jeopardize the organization. And let’s face it: the last several years have been nothing, if not disruptive. From the global pandemic to soaring inflation, financial pressures are mounting.
Smart nonprofits have learned an important lesson: building a strong financial foundation is integral to fulfilling their mission. The following ideas will help you create the sound financial infrastructure you need to maintain operations.
Five Financial Steps to Build Your Nonprofit’s Future
There are five financial steps you can take to shore up your organization’s foundation:
- Build a reserve fund
- Calculate indirect costs
- Incorporate AI into finance
- Automate Accounts Payable
- Use a specialized nonprofit accounting system
#1: Build a Reserve Fund
Think of an operating reserve fund like an emergency fund. It gives your team time to adjust and adapt if the funding environment changes suddenly. You’re not forced to make snap decisions but can take a bit more time to figure things out when you have enough emergency cash reserves to continue operations.
To build a reserve fund, identify the amount you might need to keep operations going for 3, 6, and 12 months. Just like individuals are urged to have a cash cushion on hand that covers daily expenses for up to a year in the event of job loss, so too your organization should have a cash cushion. Once you figure out the expenses for each time period, review your financials to see how you can set aside some funds for the operating reserve fund. Blackbaud provides a toolkit to help nonprofits calculate operational reserve funds.
#2: Calculate Indirect Costs
Indirect costs can be tricky. Many nonprofits miscalculate them. To calculate indirect costs, consider expenses spread out over multiple programs or projects, such as rent or utilities. These are expenses incurred by the entire organization, whether a specific program remains or not.
#3: Incorporate AI Into Finance
AI can automate many processes, including common financial processes. Before investing in new platforms, examine your current systems. Many have been updated to infuse AI into existing software. You may have powerful AI-enabled tools available to you now that you can use without buying new software. See if you can use existing AI resources more effectively.
Be sure to review internal AI use policies. If no policies exist within your organization, now is the time to create them. The continued advancement of AI across every facet of business shows no sign of slowing. Make sure your organization is prepared for an AI future.
#4: Automate Accounts Payable
Automation has also been added to many software systems, including accounts payable automation. It’s a time-saving advantage for busy nonprofit accounting departments. Be sure that automation is right for your organization. Examine the time spent manually cutting checks. If it’s significant, automation may speed things up.
#5: Use a Specialized Nonprofit Accounting System
Generic small business accounting software or spreadsheets may be fine to track your finances when you’re just starting your nonprofit, but as it grows, you need a more robust system. A purpose-built, specialized nonprofit accounting system or fund accounting system helps you monitor expenses and income, manage grant-funded projects more easily, and comply with nonprofit accounting guidelines. Speak with Welter Consulting to learn more about whether stepping up to a fund accounting system can help your organization prepare for the future.
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 us for more information.
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