W Hossli on Financial Management
Financial Management of CED Organizations
Summary
Unlike a private business, a nonprofit usually incurs expenses after it secures revenue. Without that revenue, even the best ideas can’t go forward. What’s more, most revenue must be used as the terms of a contract prescribe. So what’s the biggest financial challenge that we nonprofits face? To generate undesignated revenue that we can allocate strategically, without first having to convince a funder.
To do this, follow four steps: 1) cost properly, 2) build surpluses, 3) build reserves, and 4) recognize how essential sound financial management is to your organization.
When costing, include a 15% fee to cover core staff costs. Never pay staff less than professional salaries. Target funders who are committed to growing the nonprofit sector. To build surpluses, compete for outcomes-based contracts. Build into your estimates a “risk fee.” It rewards the nonprofit if specific outcomes are achieved in addition to outputs. To build reserves, spend less than you budgeted. Then negotiate with funders to defer unspent revenue to the next fiscal year. Suggest different ways to spend it. When building reserves be sure to specify the purposes which they are to serve.
Finally, spend time, effort, and money on financial management. Hire qualified financial officers and pay them well. Look for the financial implications of your decisions. Make financial management daily fare for senior staff, board members, and program managers.
If you take these four steps over the long term, your organization will be able to achieve performance and independence at no cost to its spirit or passion.