How Nonprofits Can Improve and Protect Their Financial Health

Recent years have highlighted the significance of the work nonprofits do to connect donors to causes and beneficiaries to resources in times of hardship. During the COVID-19 pandemic, many nonprofits benefited from record rates of charitable donations and an injection of federal aid.

However, economic volatility, labor shifts, donor fatigue and dwindling federal funding present challenges for nonprofits. Fortunately, there are steps nonprofits can take to improve and protect their financial health. present challenges for nonprofits hoping to maintain this momentum in 2022 and beyond. Fortunately, there are several steps nonprofits can take to improve and protect their financial health.

Reevaluate Reserve Policies

Pandemic uncertainty and economic volatility highlight the important role reserves play in nonprofit operations. Though the amount of diversity within the nonprofit sector makes it impossible to offer monolithic advice, it’s best practice for nonprofits to maintain liquid, unrestricted net assets to cover at least six months of operating costs, such as payroll, programming and typically recurring monthly expenses. While an influx of federal stimulus funding may have helped organizations pad their reserves this past year, it’s important for organizations to make sure they continue to have financial flexibility, so they’re prepared to sustain themselves and their missions no matter the challenges ahead.

With this in mind, nonprofits should evaluate not only the size of their reserve but also their approach to its governance, including the board’s part in management. Nonprofits should seek out board members who are passionate about the organization’s mission and who have the financial expertise needed to consult on matters related to financial governance and risk mitigation.

Rethink Budget Priorities

Boards can also advise on budgetary matters as nonprofits strive to close the gap between resources and operational expenses through the adoption of technology. Nonprofits that prioritize digitalization can save time spent performing manual processes and compensate for staffing shortages that may have resulted from pandemic-prompted workforce shifts.

In addition to seeking board guidance, nonprofits might want to consult a third-party adviser on the adoption of technology. A third-party adviser can help nonprofits select tools and systems that fit their budget and goals for long-term return on investment (ROI).

Diversify Funding Streams

Many nonprofits saw an increase in reserves last year, but stock market losses and rising inflation threaten to end this streak as operational costs escalate. A healthy variety of funding streams can help nonprofits stay afloat this fiscal year.

Revenue diversification will vary for different types of nonprofits given the breadth of organizations within the industry. Some nonprofits may benefit from revamping their investment strategies, while others may want to rethink their membership dues. Organizations may also consider conducting prospect research to broaden their network of donors, refining their grant application approach, and exploring corporate giving opportunities to diversify funding streams.

Optimize Fundraising Campaigns

Nonprofits might want to assess the framing of donor campaigns in particular. More than two years into the pandemic, it’s important for nonprofits to engage donors without relying on COVID-19 as a call to action.

Nonprofits can combat pandemic-related donor fatigue by refreshing and optimizing their outreach campaigns. To this end, content should aim to make donors feel connected to the organization’s mission and compelled to give now. Showcasing impact, whether through data or compelling case studies, can help.

The last few years have impressed upon nonprofit leaders the importance of the board’s involvement in reserve management, the diversification of funding streams, the value of technological innovation, and the power of donor contributions. Nonprofits that factor these lessons into operational plans and budget allocation are well-positioned to overcome obstacles stemming from a tumultuous market, labor shortages, changing donor priorities, and decreased federal funding in the coming months.