When a nonprofit raises money to fulfill its mission—whether it’s funding research, saving animals, supporting education, or cleaning up the environment—everyone feels good. But all too frequently an organization is successful in raising funds, but less skilled at managing them. Research supports this premise; for example, one study found that nonprofits have a 6.1 percent accounting error rate—roughly 60 percent higher than the error rate for publicly traded corporations.
Managing a nonprofit organization is akin to running a business, with important financial decisions to be made every day, including handling endowments, expenses, and investments; preparing a budget; knowing the rules about restricted gifts; and understanding tax and reporting regulations. As the financial world becomes increasingly complex, it’s more difficult to arm yourself with the skills and tools needed to make sound fiscal decisions
To be a truly effective nonprofit manager or fundraiser, you need a certain level of financial knowledge. How can you plan a campaign’s operating expenses if you don’t know your way around a financial statement? And how can you make a complete case for fundraising without understanding how that revenue stream fits with the organization’s overall financial plan? In fundraising, one size does not fit all. Different sizes and types of charities have different financial needs and issues. In a challenging economy, nonprofits must be able to predict future financial needs, manage risk, and have the skills to navigate across the entire financial spectrum.
Fundraising in all forms is part of an organization’s financial strategy, so the more a fundraiser or manager knows about basic finance, the better able he or she will be to set targets: for instance, what is the organization’s optimal ratio of earned vs. contributed income? An understanding of finance will also enable nonprofit staff to better articulate an organization’s case to prospective donors, particularly those who respond more to a businesslike approach than an emotional appeal.
Financial planning and budgeting are critical elements in launching a successful capital campaign. Many organizations, particularly those with less experience in campaigns and capital projects, fail to anticipate all the costs. There is nothing worse than getting into a campaign and having to tell donors you need additional funds. Commonly overlooked items include fundraising costs, construction financing, contingencies, and allowances for pledge attrition. If it’s a multi-year campaign, there also needs to be a future cost calculation to account for inflation.
Financial literacy plays a vital role in a nonprofit’s sustainability, but those with the knowledge to guide financial well-being should also know when to seek advice. Never forget to advise potential donors to obtain counsel from qualified professionals whenever necessary. You can be comfortable providing advice on a variety of issues as long as you provide this clear disclaimer.