If your nonprofit has been in existence for a while, you’ve likely already implemented many of the basics of financial management. You’ve created an operating budget and a fiscal policy handbook that guide your team’s everyday resource use, incorporated financial goals and data into your strategic plan, and filed federal tax returns via IRS Form 990.
While these actions are beneficial to your organization’s operations (not to mention necessary to comply with nonprofit regulations), they aren’t enough to ensure long-term financial success. According to Jitasa, “Effective nonprofit financial management is more than just implementing the right policies and creating compliant reports. It also includes the decisions you make to put your organization on a path to sustainable growth.”
To help you put your nonprofit on this path, we’ll cover four strategies for increasing your organization’s financial stability. Once you lay a strong foundation, you can build on it to expand your nonprofit and make a greater impact on your community. Let’s dive in!
1. Diversify Your Revenue Streams
The first step your nonprofit should take to become more financially stable is to assess its funding model. Make sure you’re bringing in revenue from various sources rather than relying on one or two. If your organization’s annual expenses are higher than expected or a revenue stream falls short of your projections, you’ll need several sources to fall back on to continue funding your programs and operations.
To help you assess your options, here is a breakdown of the five major nonprofit revenue categories and some sources that fall under each one:
- Individual donations: Small, mid-level, and major monetary gifts; event revenue; in-kind donations (i.e., contributions of goods, services, or non-cash assets like stocks)
- Corporate philanthropy: Sponsorships, matching gifts, volunteer grants
- Earned income: Membership dues, merchandise sales, fees for services provided
- Investments: Endowments, money market mutual funds, bonds, treasury bills
- Grants: Federal and state government grants; public, private, and family foundation grants
Use these categories to organize revenue information in your nonprofit’s budget, accounting system, and reports so you have an accurate, consistent record of how much funding you receive from each source.
2. Understand Your Expense Breakdown
Just as you need to understand exactly where your nonprofit's revenue comes from, you also should have detailed knowledge of how your organization spends that money to further its mission. The best way to do this is to categorize your expenses by function in all of your financial documents. This system breaks down as follows:
- Program expenses directly further your nonprofit’s mission, so they vary widely from organization to organization. For example, a hospital would list purchases of medications and medical supplies under their program expenses, while an environmental organization might log costs associated with running beach cleanups and setting up composting stations under theirs.
- Administrative expenses are necessary to operate your organization day-to-day and include costs like employee compensation, utility bills, office equipment purchases, and insurance payments.
- Fundraising expenses are the upfront costs of your nonprofit’s revenue-generating activities, such as event planning needs, marketing material creation, fundraising consultant fees, and specialized software purchases.
In the past, the rule of thumb for nonprofit expenses was to spend at least 65% of your organization’s funding on programs and no more than 35% on administrative and fundraising needs combined. Today, most financial professionals agree that this breakdown will look different for every nonprofit.
Instead of worrying about your organization’s exact expense ratio, focus on ensuring its total revenue exceeds its total spending each year. If you need to cut costs, treat the 65/35 “rule” as a guideline to reduce administrative and fundraising expenses where possible before taking funding away from your programs.
3. Level up Your Financial Recordkeeping
Like with other types of information your nonprofit collects, practicing good data hygiene and maintenance is essential to keep your financial records organized for informed decision-making. However, these practices are even more critical for financial data, since proper recordkeeping allows your nonprofit to comply with IRS reporting requirements, as well as other financial standards like the Generally Accepted Accounting Principles (GAAP).
To elevate your nonprofit’s recordkeeping procedures, make sure to:
- Use the accrual accounting method. In accrual accounting, your organization recognizes revenue when it’s pledged and expenses when they’re incurred, allowing you to effectively track financial commitments as well as cash flow in and out of your nonprofit. (This is in contrast to the simpler but less comprehensive cash accounting method, where revenue is recognized when it’s received and expenses are recognized when they’re paid.)
- Leverage dedicated accounting software. Your organization likely started tracking its revenue and expenses in a spreadsheet, which is effective in the short term. But once your financial data becomes more complex and you have several years’ worth of reports to store, switching to an accounting platform will allow you to track all of this information in a more organized way.
- Appoint or hire a bookkeeper. This individual will be in charge of entering financial data into your accounting software, as well as performing other everyday financial tasks like writing checks and managing invoices. While small organizations often give the bookkeeper role to an existing employee or volunteer, mid-sized to larger nonprofits usually hire a new team member or use outsourced bookkeeping services.
All of these practices promote consistency in entering and storing various types of financial data, allowing your team easy access for analysis and reporting.
4. Prioritize Donor Retention
When your nonprofit is planning for growth, your instinct might be to put as much time and effort as possible into finding new donors. After all, to expand your organization’s operations, you have to expand your supporter base.
But to achieve sustainable growth, retaining your existing donors is just as important as acquiring new ones, if not more so. Donor retention is more cost effective than acquisition—studies show that nonprofits spend an average of $1.50 per dollar raised to acquire a new donor, but only $0.20 per dollar raised to retain an existing one. Plus, as NXUnite’s donor retention guide explains, “Retained donors provide a reliable and predictable source of income, which is better for the long-term financial health of your nonprofit.”
As of 2023, the average donor retention rate in the nonprofit sector was just under 35%. By incorporating retention best practices like sending consistent and personalized communications, demonstrating impact, and boosting transparency into your organization’s strategy, you can meet or exceed this benchmark and secure long-term support for your mission.
As you implement these strategies, remember that every nonprofit’s needs and goals are different, so you’ll likely need to adapt them for them to work effectively for your organization. Additionally, don’t neglect the basic financial management practices you’ve already established—creating budgets, filing tax forms, setting goals, and adhering to fiscal policies—since all of these activities work together to boost your nonprofit’s financial stability.
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