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Financial Challenges Facing Nonprofit Organizations

A recent Nonprofit Quarterly headline caught my eye. It was an article discussing a topic that I know is germane to many nonprofits each year as they move through their annual budgeting process – how much profit does a nonprofit need? This is a challenging question that involves factors such as capital investment and cash reserves (although the article doesn’t directly mention this second part), among other things.

While the article provides a simple formula that may be helpful to some organizations seeking an answer to this question, it raises an even greater challenge. How do you explain complex financial issues to your board (or to fellow board members, if you happen to be on the board because of your expertise in this area)? How do you ensure that decisions are made with an understanding of their financial implications? How do you explain why you need to budget a profit/surplus (or have a contingency, or whatever other tool you may use to ensure ongoing financial viability)?

The article assumes that everyone understands that nonprofit organizations must have a surplus (a profit), which in itself is frequently a topic of discussion, especially for small and mid-sized organizations who may have board members with slightly less experience (and less financial expertise). It then goes on to explain a methodology that is somewhat complex, using terms that not everyone readily understands or is comfortable with — “service delivery model,” “assets to spending ratio,” “profit rate.”

I have spent decades working with nonprofit organizations on finances. As I imagine myself trying to explain the methodology described in this article to any of the small and mid-sized nonprofit organizations (and even some large ones) that I have worked with over the years, the challenge becomes exceedingly clear — how do you describe complex financial issues in a way that everyone can understand? This is the fundamental challenge because, as we all know, board members bear the ultimate responsibility for ensuring that nonprofit organizations remain financially viable. And not all board members are comfortable with even simple finances, much less more sophisticated analyses. That is why you have a Finance Committee, but it is still essential that board members approve the annual budget with a clear understanding of its short- and long-term implications. Raising the level of financial literacy amongst board members is critical to the long-term financial and creative health of the field.

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