Nonprofits are not alone in their struggles through the recent recession and its aftermath.
Their funders – including foundations, corporations, individual donors and the government – have had challenges as well, facing increased demand from grantees, with a declining pool of funds.
As a result, it becomes even more critical for nonprofits to make the case for funding. Nonprofits need to effectively tell their story, connecting mission, capacity and capital.
Not only should they communicate programmatic outcomes, but also specific financial challenges, needs and opportunities that are linked to both individual programs and the organization as a whole.
Nonprofits are adept at telling only half the “story” – what they do (mission), how they do it (programs) and what is achieved (outcomes).
As resources become scarce, funders look beyond pure mission, focusing on strong management and a stable financial base to ensure an organization will be able to deliver in the long-term.
Nonprofits that demonstrate their understanding of the impact programmatic decisions have on enterprise-level stability, as well as a thoughtful and pragmatic long-term plan for financial sustainability, are in a better position when being considered by funders.
So what do nonprofits need to tell in the financial half of their story?
A financial story describes where you have been, where you are right now, and where you plan to go in the future.
This means not only explaining financial activities (indicated by your income statement or annual budget), but also reflecting how the organization is positioned for long-term sustainability (depicted on the balance sheet).
Nonprofits should look for trends and turning points, both positive and negative, in their most-recent three to five years of financials and ask themselves the following questions:
1. How has revenue composition grown over time? Has it changed?
Communicating revenue trends can demonstrate diversity of revenue sources and how revenue has grown from different places.
Alternatively, it can show an over-reliance on one particular source and a need to diversify.
2. How have expenses grown? What has led to this growth? Most nonprofits spend 60 percent to 80 percent of budget on personnel. Does your organization fall in this range? If not, does that mean the organization is doing more with less?
Showing how you spend your money, and how you don’t (for example, no investment in fundraising staff, yet rapid programmatic growth) creates a basis for conversations around what type of money is most needed and why.
3. What are your assets and liabilities? How has their composition changed over time? Do you have a facility? If so, have you made capital expenditures to improve or renovate in recent years? What percentage of facilities is depreciated (total property, plant and equipment divided by accumulated depreciation)?
These balance-sheet questions get to the root of an organization’s capital structure, which indicates financial stability and long-term sustainability.
It’s important to understand not only the size and nature of debt (liability) and facilities (an asset, but not always!), but also the true cost of maintenance (for example, principal payments and renovation costs). These “costs” do not show up on your income statement, but are cash outlays nonetheless, and come out of unrestricted cash.
4. How much of net assets is unrestricted? Have unrestricted net assets grown or been depleted?
Unrestricted net assets are likely the most important line item to look at in your balance sheet.
The portion of unrestricted net assets available to use (which can be determined by subtracting out any property or equipment that you own debt-free from total unrestricted net assets on the balance sheet) is the most reliable indicator of liquidity for a nonprofit.
There is often a very fine line between a cash flow issue and an actual cash issue. Monitoring levels of unrestricted liquid cash can prevent nonprofits (and their funders) from being surprised by any liquidity shortfalls.
5. How many months of expenses can be covered by the cash on your balance sheet? Can you cover three to six months of expenses or less? If less (which is typical for many nonprofits), what is your back-up plan if cash flow is tight in a given month? If more, how are you managing reserves? Are they board-designated for specific purposes?
Communicating your cash flow and ability to cover expenses provides the comfort that many funders look for in knowing that an organization has the financial stability to be solvent going forward.
Organizations can indicate thoughtful planning by detailing specific purposes for a variety of board-designated reserves (for example, facilities reserve, strategic-plan reserve and growth capital).
Those that can answer these questions in a clear, organized way will increase a funder’s confidence that the organization is financially sustainable and mindful.
At a time when nonprofits around the world are finding it harder to raise funds, being able to effectively communicate your financial story can make all the difference when it comes to obtaining support.
Shilpi Shah is associate director of the Midwest Region for the Nonprofit Finance Fund.