Nonprofits can address financial challenges

Charles K. Coe
Charles K. Coe

Charles K. Coe

With continuing high unemployment, withering budget cuts by state and local governments and massive cuts in federal spending, nonprofits can take some basic steps to weather the continuing financial storm.

First they should establish policies.

That means adopting a mission statement and strategic plan, and adopting and following policies to avoid financial conflicts of interest, invest funds, select a bank, select an auditor, and create a financial reserve.

Next, nonprofits can focus on their core mission.

They should refer to their mission statement to make tough financial decisions.

If budget cuts are required, nonprofits should reduce or eliminate the programs that least serve their mission.

And though financially pressed, they should resist the temptation to take funding for programs that are unrelated to their mission.

Nonprofits also should track their performance.

They can use a cash-flow projection, for example, to track receipts, expenses and invest funds.

And they can track measures of financial performance.

Funders are most interested in how much nonprofits spend directly on programs, known as the “program-efficiency ratio;” on fundraising expenses, or the “fundraising-efficiency ratio;” and how much is in a contingency reserve, or the “unrestricted-net-assets ratio.”

Nonprofits should select knowledgeable folks for the finance committee, which should help the whole board to understand the financial picture.

And they should particularly try to maintain their financial reserve because they cannot anticipate the next funding shock.

High-energy costs, for example, may become alarmingly high due to the unrest and uncertainty in the Mideast.

Nonprofits also should be entrepreneurial.

Financially difficult times require creative measures. So nonprofits should renegotiate terms with donors to focus on core programs.

Nonprofits should question long-standing assumptions.

Can folks, for example, be cross-trained to perform several duties?

Can nonprofits use technology to more effectively provide and market services?  A nonprofit, for example, might use a computerized-screening telephone service to help clients access its services more quickly.

Finally, nonprofits should face hard reality.

Laying someone off who is doing a great job is extremely hard.

We know about the person’s circumstances, know his or her family, indeed many are like family to us.

However, waiting too long to face fiscal reality is a big mistake.

The longer a nonprofit waits, the more severe the cuts must be.

Indeed, many have to close their doors because they have been unable to make the hard decisions that would have ensured existence.

Nonprofits should be transparent about their finances.

All along, nonprofits should alert employees to the financial status what cost-cutting actions may be necessary.

Charles K. Coe is a professor of public and international affairs at North Carolina State University. His book, Nonprofit Financial Management:  A Practical Guide, will be published this year by John Wiley & Sons. 

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