January 03, 2013

How Small Nonprofits Can Improve Their Fiscal Health

Three-quarters of American nonprofits have annual budgets under $1 million, and most are even smaller. What these organizations lack in size, however, they make up for in impact. They respond to local needs, are absolutely critical to community building, and are staffed by people who understand and care about their communities--communities that have been abandoned by countless others.

Yet, we know from our work with small nonprofits (most recently through the Capital and Capacity for Economic Recovery Initiative) that they often struggle with financial challenges that are unique to their size and structure.

Executive directors of small groups often assume leadership through a deep knowledge and understanding of programs and generally have less experience in finance than those of larger ones. On top of that, it can be hard for groups with limited budgets to bring financial expertise in-house. So the executive director often handles finances, relying on part-time bookkeepers who aren’t committed to the organization’s strategic goals. Without financial expertise, staff members struggle to analyze their audit data or ask the right questions, and data-driven decision making is just not possible.

Compounding the problem, small nonprofits’ resources generally go directly into program delivery, so they can’t invest in infrastructure, let alone provide competitive compensation for their employees. They may borrow free space in a basement or operate exclusively with donated (and outdated) computers and servers. The executive director may work nights and weekends to deliver programs, run the organization, raise money, and pay the bills. Supporters encourage and applaud their grantees for such ingenuity, but straining staff and overstretching resources isn’t a sustainable way to run any organization. .

Running lean also means that small nonprofits rarely have a surplus. They also have limited access to credit, which can be essential when managing government payment delays or other risks.

This fragile combination of overworked staff, tight budgets, and less developed financial training leaves small nonprofits deeply vulnerable—particularly in an era of economic uncertainty. But there are ways these groups can improve their financial condition:

  • Pay as much attention to financial practices as you do to mission. If you don’t have adequate resources to develop your own financial tools, borrow templates from a peer organization or bring in board or staff members (or both!) with expertise in nonprofit finance.
  • Recruit board members based on needs. Small organizations often need more than just governance and fundraising support from the board. Put in writing the function that your board is meant to serve, revise expectations as your organization evolves, and work toward specific goals in terms of board composition and purpose.
  • Embrace in-kind donations—but have a concrete plan for replacing volunteer labor or worn-out equipment when necessary. It’s OK to turn down donations that you don’t want or need.
  • Make smart decisions about facilities. We’ve seen organizations jump at cheap facilities and then drown under the costs of upkeep. Depreciation is a very real cost that must be planned for.
  • Remember that growth is not always good. Be wary of mission creep and imbalances that can come from tacking on new programs. Added revenue means added expenses.

Grant makers can help:

  • Support important infrastructure or operating needs like financial-reporting systems, development staff, and improved technology. Returns from these investments can be just as large as those from program grants, because organizations are most effective when they have the appropriate infrastructure.
  • Support what already works, rather than just new or innovative approaches.
  • Encourage long-term planning for facility replacements and repairs by supporting planning and contributing to building reserves. Funding only urgent requests validates an “emergency only” approach.
  • Match requirements to grant size. A $5,000 grant should come with different application and reporting requirements than a $500,000 award.
  • Make payments timely. For many small nonprofits, the arrival of the check is just as important as when the grant is awarded.