How to Ensure Financial Sustainability In Your Not-for-Profit Organization
For not-for-profit organizations, ensuring financial sustainability is an ever-present challenge. The ability to maintain steady cash flow and fulfill all necessary financial obligations hinges largely on fluctuating donations, government support, and fundraising efforts. The operational nature of non-for-profit organizations is inherently precarious, and today’s dynamic economic climate – encompassing tighter regulatory requirements, cybersecurity threats, greater competition for donor funds and grants and concern over how the recently signed Tax Cuts and Jobs Act will impact charitable giving – is placing heightened pressure on not-for-profits to both attain and effectively demonstrate their financial sustainability.
This environment is coupled with the fact that for the first time in more than 20 years, not-for-profit organizations will be required to present their financial statements differently. Under the Financial Accounting Standards Board (FASB), Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statement of Not-for-Profit Entities, not-for-profits must provide more qualitative and quantitative information about their financial sustainability.
The new ASU is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. NFPs will need to present footnote disclosures – in a qualitative, narrative fashion – related to how they manage liquid resources available to meet cash needs for general expenditures. Additionally, quantitative information communicating the availability of financial resources at the balance sheet date will be required.
While the new ASU is designed to make financial statements more useful to readers and provide consistency in reporting between organizations, how prepared is your not-for-profit to tell its financial story and satisfy the new requirements?
The answer to this question requires assessment of your organization’s financial sustainability – an assessment of the capacity to maintain steady cash flow, fulfill all financial obligations, and achieve your organization’s social mission and core values over the long term. Developing a financial sustainability plan will ensure your not-for-profit organization thrives over the long term.
Essential Components in Developing Your PlanLike any plan, a financial sustainability plan will be an ongoing process, developed by a team of managers throughout the organization, that identifies objectives, strategies, and action plans. A critical component of a financial sustainability plan is an understanding of the past and present and consideration of where you want to be in the long term (say, three years). The team then needs to develop a realistic inventory of available resources and the needs related to programs and administration of the organization going forward, such as:
- Short-term liquid assets available for expenditure
- Availability of long-term restricted assets for expenditure, including consideration of donor restricted assets that are time or purpose restricted and spending policies for endowments
- Calculation of endowment levels based upon projected spending and anticipated investment returns and how this will impact the spending policy amount available to fund operations in the future
- Current liabilities, such as accounts payable and accrued expenses
- Long-term debt, leases, or other financing, including an understanding of interest rates, swap agreements, payment schedules, and balloon payments
- The diversity of sources of support and revenue and future availability of these funds
- Availability and recruiting of qualified personnel and evaluation of the required costs (including salaries, benefits, and ongoing training and leadership development) and consideration of availability of donated services
- Occupancy decisions related to owning or leasing facilities, location of facilities, and the number of facilities required to deliver services effectively and efficiently
- Use of information technology to automate services, communications, and financial reporting
- Identifying and re-evaluating the organization’s goals to keep the core mission relevant to the community, considering successful achievement of past goals, generational changes, cultural shifts, etc.
- Community support related to availability of qualified board members, funding, and volunteers