8 min read
January 21st, 2024
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Every nonprofit leader has a duty to be a responsible, honest, and trustworthy steward of their financial resources.
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Key Takeaways
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They must manage and use their funds in a way that upholds the organization’s values and purpose while furthering the mission. The future of every organization depends on its donors, their trust in the nonprofit, and their approval of how organizations use their contributions. The primary way to build and maintain donor trust is by instilling nonprofit financial practices that align your mission with your financial activities.
Top 3 Strategies for Integrating Financial Practices With a Nonprofit’s Mission Statement
1. Foster Financial Transparency
The need for financial transparency in a nonprofit is paramount. Not only does financial transparency support and strengthen donor trust, but it also creates accountability. When you know that every financial decision you make on behalf of your organization has the potential for scrutiny, you (and every other individual with spending power) automatically become more prudent and aware of whether the money you spend is aligned with the mission or not.
In addition to your annual report, some of the metrics commonly tracked and shared with respect to nonprofit financial transparency include:
- Program Ratio = Program Expenses / Total Expenses
- Reveals the portion of total expenses that have been spent on programs. The higher the number, the better.
- Cost of Fundraising = Fundraising Expenses / Total Contributions
- Calculates the portion of contributions that are spent on fundraising. The lower, the better.
- Operating Margin = Total Revenue – (Total Expenses / Total Revenue)
- This metric shows how much revenue remains after all of your organization’s expenses. The higher, the better.
- Donor Reliance = Total Contributions / Total Revenue
- This number shows how much your organization relies on individual contributions (compared to other types of funding such as federal contracts and grants or earned income).
To see how your organization’s numbers measure up, compare them to the standards set forth by some of the major charity watchdog organizations such as the Better Business Bureau Wise Giving Alliance, Charity Navigator, or GuideStar.
2. Stack Rank Programs
Most nonprofits have limited resources and operate on fairly tight budgets. As a result, it sometimes becomes necessary to pick and choose where you will spend your money and where you won’t. In other words, it becomes necessary to determine which programs you will continue and which ones you will cancel.
Read More: 8 Trends in Fundraising Nonprofit Leaders Should Know
Stack ranking is a standardized method for measuring the effectiveness of every program (i.e. measuring the return on investment each program delivers to your mission). Each program can then be ranked in terms of its effectiveness.
When stack ranking programs, you should be asking questions such as:
- What should this program contribute to our mission, and is the program successfully achieving those goals?
- Does this program improve the quality of services we offer?
- Does the program help to expand your footprint or the number of clients you serve?
- Does the program meet any unique needs that are otherwise unmet by other organizations?
- Does the program generate intangible benefits such as increased well-being or safety?
- Does the program generate additional funds through donations or earned income?
By stack ranking your programs, you can ensure that your nonprofit’s funds are being dedicated to the activities that do the most to further your mission. By stack ranking programs, you can maximize the mission-related return on every dollar spent.
3. Use Strategic Budgeting
Strategic budgeting is a budgeting process designed to help organizations plan their spending and revenue generation around achieving specific goals. Nonprofits can use strategic budgeting to ensure that their spending plans and fundraising expectations are aligned around supporting their missions.
When creating a strategic nonprofit budget, every expense should be carefully scrutinized. You should be able to provide a definitive answer to the questions:
- How does this expense further our mission?
- Is this expense necessary for furthering our mission?
Your budget acts as instructions for spending throughout the year. When you create your nonprofit’s budget, you must consider your mission to ensure that your upcoming financial activities are properly aligned with your larger goals. You must then stick to your mission-based budget to ensure you use your organization’s funds in an appropriate manner that focuses not only on keeping the doors open and operational this month but also on achieving long-term goals that will maximize your mission impact.
10 Best Practices for Mission-Driven Nonprofit Financial Management
Instilling these best practices will help you align your financial strategy with your nonprofit mission.
1. Strengthen Your Financial Acumen for Responsible Financial Management
Mission-finance alignment relies on financial management skills. Nonprofit leaders should continuously improve their financial acumen by learning to read, understand, and use their financial statements in addition to strengthening their forecasting abilities and cash flow management, budgeting, risk mitigation, and contingency planning skills.
2. Board Oversight
Selecting competent, enthusiastic, and dedicated board members is essential to ensuring thorough oversight from your board of directors. Your board should have a qualified treasurer who can help support the financial management responsibilities of the nonprofit and provide valuable insights for aligning your financial strategy with your mission.
3. Explore Diverse Funding Channels
Ask yourself whether your current fund sources are supporting the expansion of your mission. If not, you might consider researching and exploring additional avenues for funding and trying out new donor management strategies.
4. Be Mindful of Investments
If your organization has enough money to generate funds through interest and capital gains, then you should be mindful of where you invest your capital. Your mission should invest its resources in places that are aligned with your mission and core values. Your organization should have written policies regarding investment procedures and requirements.
5. Evaluate Activities and Scrutinize Expenses
In a similar way to creating a strategic budget, you should look at all of your expenses, operational activities, programs, and fundraising efforts to ensure they are justified and aligned with your nonprofit mission.
6. Employee and Volunteer Training
The employees and volunteers who run your organization comprise its very fiber. They’re the ones with boots on the ground who will make real-time decisions on behalf of your nonprofit. It’s vital that they know and understand the organization’s mission and that their own values are aligned with those of the nonprofit. Be sure to provide thorough training to your paid staff and volunteers so that they understand and have clear sight of the goals they are working toward.
Read More: How Much Do Bookkeeping & Accounting Services for Nonprofits Cost?
7. Donor Communications
Your donor communications should help to support financial transparency and also align with your mission. Use your financial data to turn number-based statistics into concrete terms that your entire donor base can easily understand and connect with. For example, let them know what every donated dollar achieves. This enables your donor base to feel truly connected to and involved with your mission and its success.
8. Align Financial Goals With Your Mission
Your organization’s financial goals should be directly tied to its mission. Your organization can start by setting targets for the above-listed metrics such as increasing your program ratio and operating margin while reducing your cost of fundraising and targeting a healthy level of donor reliance.
9. Continuously Measure Performance
Your organization needs adequate financial management systems in place that can automate data collection, data organization, and reporting so that you are able to continuously pull metrics and track your performance. Remember, your organization’s goals are not SMART if they aren’t specific, measurable, attainable, relevant, and measurable.
10. Perform Regular Financial Reviews and Audits
You can improve financial transparency, trust, reputation, compliance, and financial management by routinely reviewing your financial records. Nonprofits can routinely schedule internal audits that are led by the nonprofit treasurer and conducted by their own financial committee. They can also hire external financial professionals to conduct third-party audits for additional accountability and trustworthiness in the eyes of donors and charity watchdog groups.
Additionally, take time each month review your financial activity, comparing your budget to your actual numbers so that you can make adjustments whenever necessary and keep your organization on track for good financial health and successful program facilitation throughout the year.
Mission-Aligned Financial Management for Nonprofits With Outsourced Accounting
Aligning mission and finances is not always a simple task. In addition to direct program costs, nonprofits have overhead expenses, too. They must cover employees, office expenses, utilities, equipment, postage, and more. Although these are not expenses that contribute directly to the mission, they do make it possible for the nonprofit to carry out its mission. So, to ensure financial alignment, nonprofit leaders must find a balance between overhead and direct mission expenses, and they must keep careful track of every penny, being mindful of how every cent is spent.
Nonprofit leaders have a valuable resource at their disposal, and that’s outsourced accounting experts with nonprofit expertise. Outsourcing the back office can reduce overhead costs while also providing the infrastructure and processes necessary for sound financial management and exceptional transparency. Shoring up your financial health and mitigating risk are also essential to good stewardship, and an outsourced accounting partner with nonprofit expertise can help. Plus, outsourced financial experts can work with you to assess your costs, evaluate activities, rank order programs, and put together a mission-based budget.
To learn more about how you can align your mission and finances, maximize impact, and strengthen your nonprofit’s finances for the future, we encourage you to explore the possibilities available with outsourced accounting for nonprofit organizations.
