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Nonprofit Financial Health and Sustainability: Pillar 4

By Nell Edgington



FLYToday I am continuing my on-going blog series on the 7 Pillars of the Performance Imperative. The Performance Imperative was released last year as a north star for the nonprofit sector by the Leap Ambassadors, of which I am a member. Pillar 4, about sustainable financing, is obviously my favorite since I am arguably obsessed with nonprofit financial sustainability.

You can also read about Pillar 1: Courageous, Adaptive Leadership, and Pillar 2: Disciplined, People-Focused Nonprofit Management, and Pillar 3: Well-Designed and Implemented Programs.

I believe it is absolutely critical that a high-performing nonprofit organization have a smart strategy for attracting and employing money effectively. Because without a sustainable financial model there is nothing else — no mission, no performance, no social change.

You can download the detailed Performance Imperative here, but here are the highlights of Pillar 4: Financial Health and Sustainability. In a nonprofit that exhibits financial health and sustainability, the board and staff:

  • Take charge of their organization’s financial destiny. They articulate the value they deliver and develop overall financing strategies, tightly aligned with their mission, to support and sustain it.
  • Establish strong systems for financial stewardship and accountability throughout their organization.
  • Build and participate in budget processes that are oriented toward achieving results.
  • Share their financial results transparently with key stakeholders regularly.
  • Treat fund development as a strategic function that requires focus, management, capital, and specialized skill sets.
  • Operate with margins that allow them to build their balance sheet.
  • Understand their organization’s cost structure.
  • Use financial models to make clear and transparent the organization’s financial condition and predict how it will end the year.

In other words, high performing nonprofit leaders understand, embrace and use money as a tool to achieve social change. They create a robust financial model that articulates true costs and creates a strategy to attract enough and the right kinds of money, engage board and staff in making that model a reality, is transparent with outsiders about the model, and above all uses money strategically. In short, a high-performing nonprofit finances, instead of fundraises for, the social change they want to create.

I want to be very clear, however, that financial sustainability does not mean, as some people sometimes confuse it, that a nonprofit moves away from philanthropy and toward earned income, which is somehow more sustainable. This is a fallacy in thinking that nonprofits can somehow be market-driven. Because nonprofits exist to remedy a disequilibrium in the market economy they will always have to be at least somewhat subsidized, by government, philanthropy, or both. Therefore, financial sustainability in the nonprofit world means creating and executing on an overall financial strategy that allows a nonprofit to effectively deliver on outcomes.

FLY (Fresh Lifelines for Youth), a nonprofit that works with teens in the juvenile justice system to break the cycle of violence, crime, and incarceration, is an example of Pillar 4.

Here is their story, as Christa Gannon, FLY’s Chief Executive Officer & Founder explained it to me:

 

Three years ago we were extremely fortunate to be a grantee of Edna McConnell Clark Foundation’s PropelNext initiative to help organizations prepare for growth and scale. At the same time as a grantee of our local and sophisticated foundation funder Tipping Point we participated in a comprehensive training on ensuring that our financial and development practices were aligned and consistent with best practices.

Through these two initiatives we had the privilege of learning a great deal and working with outstanding consultants who created the space for us to step back and productively ask ourselves what was working and what could work better for us as we grew. We brought these findings to our board, worked with the consultants to update and refine our practices, created new dashboards, and brought consultants to board meetings and committee meetings to help us elevate our line of sight and institute new ways of being.

We began these efforts with the help of a long-time employee who helped lead our financial efforts for over 7 years (now going on 10 years!). We elevated his role (creating a position for a Director of Finance and Operations), had our consultants provide some coaching and guidance and invested in his capacity to learn, grow, and lead. Additionally, during this time we brought on a new COO with a great deal of financial acumen who helped this process a great deal. It allowed me to take a critical step back from finance to allow new approaches to take hold and grow.

We revamped our monthly financials, our CEO dashboard, and our dashboard for the board. Additionally we created a new budget-building process which includes a multi-year budget (expense and revenue) forecast and straw budgets. We also changed our internal practices for how we managed temporarily restricted net assets. In previous years when we received grants/gifts off fiscal year cycle (and many are) we would hold those funds and spend them down in the latter half of their cycle, which often meant the grants spanned two fiscal years. This created a great deal of extra work and challenges for our team. We modified this process, which has resulted in an increase in net unrestricted assets available to us as we grow and scale.

One challenge we’ve realized in this process is that we have been so extremely cost conscious and frugal that we have unintentionally built a financial model that relies on staffing structures that cannot be maintained as we grow and scale while ensuring the highest quality services that our clients and community deserve.

As these challenges became apparent to us, we have taken critical steps such as reducing case-load ratios for line staff, adding critical positions to support talent recruitment and development, finance, fundraising, evaluation and learning, etc.. To support this capacity building we are investing in our fundraising ability, engaging our board even more in their role to help garner financial resources, and allocating more of my time to strategy, fundraising, and board development.

We have always felt incredibly grateful for the opportunity to help steward the generosity and strategic thinking of our investors, foundation and corporate supporters, and government partners into the world. As our systems for how we tackle financial management have changed and improved that attitude of gratitude has remained.

What has changed for us, however, is a desire and intention to simplify how we think about and manage our funds such that our processes are clear, straight forward, and understandable by all involved without undue explanation or re-education in meeting after meeting (both board and staff). Our efforts to be cost-conscious, thoughtful, and prudent inadvertently led to systems and processes that made our work more complicated and time consuming than it needed to be. In part this reflected my mindset and efforts as founder. It required me to let go and not white-knuckle our financial approach; trust the team, systems, and consultants; and realize that the approach that got us to this point in the organization’s history would not be the best approach to get us to the next milestone.

We are very mindful that the work we do and the population of young people we serve is not a top priority for many philanthropists. As a result, we take every investment very seriously and are very clear that it means a kid gets a chance to become so much more than their past mistakes.

For us, financial investments are life changing for our clients. We may be the only chance they get, so we want to ensure we deploy each resource to its highest and best use.

Photo Credit: FLY

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About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.


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