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Finance matters

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QUESTION

What three steps can nonprofits take to improve their financial stability?

ANSWER

* Create a reserve or contingency fund.

It’s critically important that nonprofits create reserve funds.

They take time to build, but their value cannot be overemphasized – especially as we’ve witnessed with the recent downturn in the economy and resulting changes in charitable giving.

Opinions vary about the size of reserve funds, but anywhere from three to nine months of operating funds is fairly typical.

They require the staff and board to work together to determine a strategy for creating and building them and to determine how they will be used.

* Understand budgeting and cash flow.

In developing a budget, nonprofits should look at previous years’ revenues and expenses and use historical analyses to strengthen future projections.

Budgets should be created by programs and for the organization as a whole and should take into account any new programs and activities the nonprofit plans to pursue.

Paying attention to cash flow is also a key part of maintaining financial stability as it gives both the board and staff a way to check the organization’s financial health and enables them to plan accordingly if there are shortages or surpluses.

* Board and staff must work together and uphold their respective financial responsibilities.

A nonprofit should operate in accordance with an annual budget that’s been approved by the board and give the executive director or CEO authority to make minor changes, such as shifting dollars among line items, without board approval.

Internal financial statements should be prepared and provided to the board no less frequently than quarterly and should identify and explain variations between actual and budgeted revenues and expenses.

— Compiled by Caroline Monday


Trisha Lester is vice president of the N.C. Center for Nonprofits, a statewide network of about 1,600 nonprofits in all 100 counties that serves, represents, and strengthens the state’s nonprofit sector.

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