Core Strength: The Five Rules for Nonprofit Finances
Blog post by Janetta Cravens, Vice President of Programs
I just joined an exercise group. The kind with a trainer and music and a workout regimen. In addition to my other self-care activities, I decided that core strength would be a good added element. The trainer talks a lot about the strength each of us has at the center of our bodies, our “core strength.” As it turns out, most of our activity from walking, to swinging a golf club, to running and biking, to lifting and holding a child or a bag of heavy groceries, comes from mobilizing our center core. This muscular “spring” coils and releases the energy that fuels our momentum and gives us power. To strengthen the core we do planks, crunches, and poses with names like “superman” and “flutter.”
Nonprofits have their own core strength at the center of all our activities too. The core in our organizational management is how we care for our finances. The activity that stems from our core determines our budgets, wages and staff raises, expansion, and whether or not we can take on the heavy lifting of a new program. To strengthen our core, Standards for Excellence recommends that nonprofit organizations take on 5 disciplines for financial best practices. They may not be planks or crunches but paying attention to these financial “strengths” will ensure that every organization has a strong financial core.
- Spend on programs: The first rule is simple, three out of every four dollars spent should go towards funding your programs. That can include salaries and benefits, direct expenses for the program, and funds to operate, but the total percent of expenses used for program activities should exceed 75% of your total income. A nonprofit can have high administrative costs and still have high quality programming, but since charity watchdog groups, workplace giving campaigns, and the IRS place an importance on this percentage, it needs to be monitored by the Board of Directors. Make sure that your organization devotes more than three quarters of its income to the expenses related to running your programs.
- Keep fundraising expenses in check: The second rule is like the first, only the converse. For every dollar spent on fundraising, an organization should raise 3 dollars. Since there is a tendency in nonprofit organizations to underestimate how much is spent on fundraising, it’s important that an organization track all these expenses. This includes the percentage of staff time (salary) devoted to fundraising efforts, contract fundraisers and grant writers, direct expenses for special events and mailings, postage and printing expenses for mailings, a percentage of your website if you have a “donate now” button, and even phones if you do solicitations on the phone or follow up with donors by giving them a call. Most organizations tend to report these expenses as part of management and general expenses, and not a part of fundraising expenses. “A too-high ratio can convey the message that the organization’s accounting is poor, rather than the fundraising is stellar.” (Standards for Excellence Institute, “Financial Management Best Practices,” 2005-2015)
- Keep some money in the bank: An organization should always operate with at least 3 – 6 months of cash in the bank (60 – 180 days). Don’t spend bank accounts down to $0. If your organization lost its funding, there should be enough in reserves to support operations for three to six months – which includes paying your staff, providing for your programs, and keeping the lights on. Always operate ahead of this amount in your bank account so that you have time to recover if there is a change in your funding sources. Conversely, organizations can also risk having reserves that are too large. Nonprofits are in the business to deliver services in furtherance of their mission, not accumulate wealth, so if your organization finds that there is more than 6 months of operations in reserves and it’s not designated for a purpose like a rainy day fund, it may be time for the Board of Directors to talk about reinvesting in program growth or setting up a permanent fund or investment for the organization.
- Grow what you can spend each year: Like businesses, growth is good. A nonprofit organization should experience an increase in what they can spend each year. This increase in unrestricted net assets allows the organization to expand services and delivery, grant hard working staff raises, and make improvements to their structures or buy a new computer. There should be a growth in these funds every three out of four years. The occasional dip into reserves is acceptable, but a constant pattern of spending more funds than have been received will likely put the organization out of business.
- Keep dipping into reserves in check: Any decrease in unrestricted net assets should amount to no more than 20% of the net asset amount at the beginning of the fiscal year. Larger amounts indicate that the organization failed to react to shortfalls in revenue or overspent.
You can learn more about these five rules in our Standards for Excellence course. OKCNP also offers Financial Services to help organizations create and maintain best practices in managing your finances.