Nearly 80 percent of Americans say that financial stress keeps them up at night. About half don’t have $2,000 saved for an emergency, and that number jumps to 60 percent among millennials. Far too many of us can’t cover an unexpected life expense.
Nonprofits provide critical support when people experience economic hardship, yet their financial conditions can be shockingly similar to those of the unprepared public. Nearly two-thirds of the nonprofits I encounter have less than 45 days’ worth of operating cash on hand and no rainy-day fund. Under these conditions, an unexpected expense could jeopardize payroll, interrupt services, or even close the doors.
The majority of nonprofits are small with annual operating budgets below $5 million, and many face challenges to their financial sustainability. These small groups tend to have fewer tools, resources, and volunteers than larger charities, and it’s not uncommon for key staff to be undercompensated, living paycheck to paycheck. At the SunTrust Foundation, our mission can be summed up as “lighting the way to financial well-being” for everyone, including our nonprofit partners. We believe that strengthening nonprofits is one of the best ways to improve the lives of people in our communities. Through our Lighting the Way Awards, the foundation recently recognized 36 nonprofits from across the South and Midwest for their community impact and provided workshops on how to improve an organization’s financial stability.
Here are six ways, drawn from these workshops, to make your nonprofit more economically sustainable.
Build up your reserve, adapt your business model, educate yourself on your finances, use technology, find synergies with one another, and tell your story well.
Build up resilience by building up your reserve. Think of a reserve as an economic shock absorber, emergency savings fund, or disaster-preparedness plan. The goal is to make sure you can sustain an unforeseen, but not necessarily catastrophic, financial event.
Determine how much and what kinds of financial reserve your nonprofit needs. For example, if you own your facility or property, you need a maintenance reserve in case of damage. Appropriate insurance is often overlooked: If your offices, vehicles, meeting rooms, or shops serve the public, you need to be properly insured. Otherwise, a personal-injury claim could be unrecoverable.
In addition to financial reserves and protections, think about establishing a talent reserve. If the founder of your nonprofit left unexpectedly, are you prepared for that risk? You need a succession or transition plan, whether it is a second-in-command, an heir-apparent, or a board member primed to step in if called upon.
Emergency savings, insurance, and operational resilience are essential to an economically sustainable and stable organization. These needs usually are not exciting to donors, but that brings us to my next tip.
Reduce reliance on grants — develop ways to earn income. As a nonprofit grows, it should move away from being heavily grant-dependent and aim to get at least half of its day-to-day operating budget from earned income. Create ways to generate cash, and then channel that cash back into your organization and mission.
Nonprofits do phenomenal things that may not be an obvious part of their mission, such as running a thrift shop or a restaurant. A nonprofit that helps individuals develop skills and get jobs, for example, could open a stand-alone enterprise to generate income and create temporary employment opportunities. Or a disaster-relief organization could develop a disaster-preparedness product and sell it to commercial and civil entities. Generating cash from operations is becoming standard.
Understand your balance sheet and cash flow. Nonprofits have unique balance-sheet elements, and many leaders don’t entirely have a handle on their cash flow. Nonprofits often rely on pledged dollars, restricted funds, and other complex forms of financing. Without fully appreciating their nuances, restrictions, and contingencies, you may find yourself with nonbinding pledges and “stranded” assets (cash that can’t be used to pay for general operations) and think you have more available money than you actually do. Take the time to know your numbers.
Modernize to improve your operational efficiency. To stay ahead of the rising costs of goods and services, find ways to lower operating expenses and improve your operating ratio (expenses divided by revenue). Try to achieve a 4 percent to 5 percent improvement rate in efficiency every year. Even if you don’t hit 4 percent, any improvement is better than none.
Take advantage of technology. The goal is to work smarter. Ask yourself a few questions to determine if you’re running a modern enterprise.
- Is our operation burdened by manual work like stuffing envelopes and licking stamps?
- Do we use excessive paper to deliver our service or do our job?
- Do I need a lot of hands and feet to administer what I’m trying to accomplish?
If the answer to these questions is yes, then it’s time to pivot to modern techniques. Technology usually costs more upfront but adds capacity, reach, and speed that ultimately cost less in the end. Twenty-first-century donors will support these efforts.
Collaborate more often with other nonprofits. Too many nonprofits are going it alone when there is so much potential for synergy with other missions. Actively seek other nonprofits that are doing something complementary or parallel. Join forces and combine resources. It can be as simple as sharing ideas, office space, or other scarce resources. Compete against inequity, food deserts, and joblessness rather than competing with each other.
The game-changing aspect of nonprofits supporting one another means hiring each other for services and expertise before turning to commercial vendors. If you need supplies, maintenance services, catering, or scholarship management software, or consulting, seek a nonprofit source first. Remember the second piece of advice — develop ways to earn income. If nonprofits patronize one another when possible, the whole nonprofit world will benefit.
Take advantage of corporate social responsibility and hone your storytelling skills. The public increasingly cares about companies’ social purpose. Young people prioritize impact and relevance over income and assets. They’re willing to take a lower salary to work for a company that is purpose-driven or socially conscious. Increasingly, Americans with disposable income will pay a little extra to support socially responsible businesses. Consumer are using their economic power to choose companies that support the social good.
Therefore, corporations need nonprofits to deliver on the social-citizenship commitments they make to their consumers and employees. Though some large nonprofits are capitalizing on this need, others are missing a prime opportunity. There is corporate funding to be had for community-engagement efforts just like yours. You don’t have to be a big player to make yourself an attractive partner to corporations. How do you become a nonprofit partner to a corporation?
When talking to for-profit companies, articulate why they need you: You are delivering services on the ground and are effective in ways they can’t be. You will have demonstrably relevant outcomes and use their money to accomplish goals. These are some of the most important messages to convey about the value of your proposed partnership to potential funders. They often get left out in favor of a long list of factoids and activities that aren’t necessarily in line with the corporation’s philanthropic or business goals.
You don’t have to be a communications expert to tell your story effectively to corporate donors. For example, Lucy Hall, the founder of the Mary Hall Freedom House in Sandy Springs, Ga., and a speaker at this year’s Lighting the Way Awards workshop, has mastered the art of storytelling. She delivers a simple, specific message with a realistic promise. She can explain the need for her work with sincere passion and an emotional connection.
With wealth, income, and skills gaps widening, a vibrant nonprofit sector is more important than ever. So build up your reserve, adapt your business model, educate yourself on your finances, use technology, find synergies with one another, and tell your story well to corporate donors.
Nonprofits play a crucial role in American society as they champion equitable opportunity for many people in need. To do that work well, your own viability can’t be at risk. Commit to taking these steps to ensure the long-term economic sustainability of your organization.
Stan Little is president of the SunTrust Foundation.
