As a nonprofit leader, financial sustainability is always on your mind. After all, ensuring that your organization has adequate resources to achieve its mission requires careful planning and management. But what is financial sustainability, and how can your organization achieve it?
Financial Sustainability Defined
Financial sustainability means a nonprofit can maintain the resources it needs to develop, deliver, and expand on its mission over the long term while minimizing financial risk and maintaining autonomy. Ensuring financial continuity allows your organization to deliver its services and programs without interruption.
This usually involves establishing diversified funding to minimize financial risk and strengthen autonomy. This includes diversifying funding sources, reducing expenses, and developing reliable revenue streams. By implementing these strategies, organizations can weather economic fluctuations and sustain their operations.
Start with Three Big Questions
NGOs need to invest time and resources in three strategic questions:
- Where are we now? Conduct a financial analysis of your organization’s SWOT, risks, situation, and stakeholders. This will help you understand your current financial situation, identify potential risks, and figure out what your stakeholders expect from you.
- Where do we want to go? Define your desired funding mix and reserves target. This means figuring out what kinds of funding you want to pursue (e.g., grants, donations, corporate sponsorships) and how much money you need in reserve in case of unexpected challenges.
- How do we get there? Develop financing policies and fundraising strategies that your Board approves. This requires developing a plan to build relationships with your stakeholders, increase your visibility, and diversify your funding sources. This strategy should be presented to and approved by their Board to ensure everyone is working towards the same goals.
Answering these questions helps the NGO decide on its objectives for the next few years (three years is the common sector practice). This includes looking at current challenges and opportunities, working with local communities to identify their priorities, and identifying the resources needed to deliver the plans.
A financing strategy is an integral part of an organization’s strategic plan. The financing strategy sets out how an organization plans to finance its work to meet its objectives. It is created by following the same three strategic planning questions shown above but focusing on financial resources.
Many organizations spend time and effort crafting an impressive strategic planning document but fail to put a financial face to their plans. However, financial sustainability does not happen by accident—we have to plan for it.
Four Fundamentals of Building a Financially Secure Organization
Here are four fundamentals your NGO needs to put in place.
- Strong stakeholder support: A crucial characteristic of a financially sustainable NGO is positive stakeholder relationships. Communities are the lifeblood of NGOs, and building and managing these relationships is critical. Consulting with communities, listening to their priorities, and involving them in decision-making processes is key.
- Diversified income: Relying on one source of income is risky. An organization needs the safety net of other income to be financially secure, including income-generating activities, local businesses, government grants, and public donations. For example, an NGO focused on women’s empowerment might generate income by selling handmade crafts made by the women they serve, while also seeking government grants and partnering with local businesses to provide training programs.
- Unrestricted funds: Unrestricted funds can be used for any purpose within the organization’s mission. On the other hand, restricted funds may only be used for specific projects or activities. For example, donor funds tend to be restricted, which means there is little flexibility in how the money is used. Regular, unrestricted funding is essential for an NGO’s financial sustainability. The more unrestricted funds an NGO has, the more flexibility it has in responding to changing circumstances. This gives the organization leeway in choosing and changing the projects that it wants to run and can cover costs that donors are reluctant to fund, like core costs.
- Reserves: Reserves are financial resources that an NGO sets aside to meet unexpected events in the future. This can include a delayed grant or an unforeseen expense. Without reserves to fall back on, the organization is in a vulnerable position. NGOs build up reserves over time from surpluses of unspent, unrestricted income.
What if a grant is restricted and there are unspent funds? In this case, the leftover funds cannot be put in reserves. This means the organization cannot keep those funds and use them in other ways. If funds are left over from a restricted grant, the organization must either give the funds back to the donor or get the donor’s permission to use the funds for another specified activity.
Common Challenges and Myths
Common sector myths risk undermining an NGO’s financial security. A prevalent myth is that financial sustainability only applies to for-profit organizations. This misconception disregards the importance of long-term financial planning and sustainability for nonprofits.
Another misconception is that unrestricted funds are a luxury or unnecessary; however, they are crucial for financial stability. They allow organizations the flexibility to change projects and cover expenses that donors may be unwilling to fund.
Despite the critical role that fundraising plays in securing long-term sustainability, some organizations are hesitant to invest in this area. Additionally, investing in staffing, technology, and infrastructure may be considered unnecessary expenses, even when they are essential in ensuring an organization’s effective operation.
The Bottom Line
By focusing on the four key fundamentals of a financially secure organization and overcoming common myths and challenges, NGO leaders can ensure that their organization has the resources it needs to achieve its mission both now and in the future. Stay tuned for part two, where we’ll take a closer look at the best financing practices, explore how to effectively leverage technology and innovation to increase transparency and accountability, and share additional tips for ensuring the success and longevity of your NGO.
Want to make sure your nonprofit has a strong foundation for financial sustainability? Humentum can help! From training to consulting – our team has got you covered.