The Critical Importance of Financial Strategy, Recession or Not

One benefit of the recession for nonprofit organizations is that they can no longer deny the critical importance of finance in what they do. No executive director would say that fundraising isn’t critical to what they do, but I bet a majority would admit that they don’t have an overall financial strategy for the organization. And in a recession that hole becomes ever more apparent.

In flush times it is a bit easier to refrain from analyzing the financial statements every month, predicting cash flow, making hard decisions about whether to end financially draining programs, creating bold (and potentially risky) revenue streams, and so on. The financial strategy of a nonprofit organization often takes a back seat to program strategy. But the recession makes that stance nearly impossible. Because if you turn away from financial reality for too long, you could be out of business.

Clara Miller of the Nonprofit Finance Fund, has some great insights into how the nonprofit sector should be responding to the recession in terms of better financial management. Among her list of things nonprofit leaders should do to be good financial managers are:

• Create a cash flow forecast for at least a year into the future, conservatively estimating what will happen with each revenue source over time and update it regularly
• Conduct a program profitability analysis, which compares the distinct funding sources to the direct expenses of every program a nonprofit operates. When coupled with mission effectiveness this helps inform decisions about what programs to cut or to increase fundraising efforts for
• Understand the relationship between reliable revenue and fixed costs.  If your reliable revenue, or revenue that you are reasonably certain will come in on a consistent basis, is lower than your fixed costs, you’ve got a serious problem.
• Focus every conversation at board and staff meetings on strategic choices that face the organization and the financial implications of those
• Be conservatively realistic about all of your numbers

But nonprofits need much more than just good financial management.  They need a financial strategy for delivering social impact. They need to understand and analyze how program decisions and strategy affect the financial viability of the organization and vice versa.  The two are inextricably linked. It does no good to make program or operating decisions without really understanding the financial implications.  And it is not sustainable to create a strategic program plan without a corresponding and equally strategic financial plan.

Finance has for too long taken a back seat in the nonprofit sector. Fundraising staffs have been separate (physically and strategically) from program staffs. Strategic decisions for the organization (program expansion, new buildings, etc) have been made without a clear understanding of the current or future financial implications of those decisions.  Program goals have been made without knowing what it will truly cost to implement those goals and where that funding will come from.

Nonprofit leaders need to take a bigger view of how their organizations and missions are financed.  It’s not enough to manage money wisely.  Nonprofit leaders need to create a comprehensive, fully integrated financial strategy for the social impact they want to achieve and then execute on it.

Tags: Clara Miller, Fundraising, Nonprofit Finance Fund, nonprofit financial management, program profitability analysis