Improving nonprofit financial health requires strategic budgeting, clean bookkeeping, diversified revenue streams, and strong compliance practices. These seven proven strategies will help your organization build financial stability while maximizing your mission impact.
Because you joined a nonprofit to make a difference in the world. As noble as that mission is, achieving it requires a lot of heavy lifting and solid financial operations. Yet too many nonprofit leaders spend sleepless nights worried about funding gaps or compliance issues instead of focusing on creating change.
Keep reading to learn exactly how you can improve nonprofit financial health and get back to doing what you do best – transforming your community.
Why you need to strengthen your financial operations
You might be thinking, “We’re getting by just fine” when it comes to your finances. But why would you want to settle for “just fine”? Do you think potential donors or volunteers feel much confidence in “just fine?” No.
The stronger your nonprofit financial health, the better you can:
- Prove effective leadership — Demonstrate the people you have in charge know how to properly run your nonprofit.
- Increase transparency — Show donors and agencies you’re making good use of the money you receive.
- Heighten compliance — Be completely in line with IRS and other regulatory agency requirements.
- Strengthen risk management — Develop proactive strategies that limit financial and compliance risk.
- Enable better long-term planning — Build out a financial growth plan and future fundraising tactics.
Now, nonprofit accounting can be a bit more complicated, given the various aspects that go into it—making it all the more important you know your stuff.
Seven ways to improve your nonprofit's financial health
You don’t have to move mountains to give your financial health a boost. There are plenty of ways smaller nonprofits can rethink your accounting approach and make the most of your financial resources.
Here are some nonprofit financial health tips to follow.
1. Simplify your budget
As a smaller nonprofit, you’re likely working with a tighter budget, which means you can benefit from a simpler budgeting process.
Key steps to simplify your nonprofit budget:
- Use accounting tools to track income, expenses, grants, and donations
- Focus on main categories: programs and administrative costs
- Group expenses into broad, manageable categories
- Create clear financial overviews for easy monitoring
(Psst! Need help getting things started? We have a template for you.)
2. Focus on core programs
It’s easy to want to launch lots of programs, but smaller nonprofits are often better off focusing on their core work.
When you focus on core programs, you can:
- Build real expertise in key areas
- Boost credibility with donors and stakeholders
- Make bigger impact with limited resources
- Avoid spreading yourself too thin
3. Maintain clean books
Clean, accurate bookkeeping is essential for improving your nonprofit financial health. This means having access to:
- Real-time accounting data for better decision-making
- Accurate financial records for reliable reporting
- Proper categorization for nonprofit chart of accounts o
- Full confidence in financial data integrity
By having real-time accounting data right in front of you, you can see where you need to make improvements and make better decisions that support your overall mission.
4. Be strategic about grants and donations
While you can approach grants and donations like larger nonprofits, it’s smart to be a little more selective.
With limited resources, it’s better to focus on donors and grantmakers who truly align with your mission. Building strong relationships with them can lead to lasting support, saving you time and effort in the long run. After all, donor retention rates typically hover around 40-45%, so there’s always room to improve those figures.
5. Increase volunteer opportunities
Volunteers can be a huge asset for smaller nonprofits, helping to fill staffing gaps and keep things running smoothly.
How volunteers improve financial health:
- Fill staffing gaps without adding paid positions
- Bring valuable skills in marketing, finance, and program management
- Expand organizational capacity for more projects
- Provide in-kind contributions that reduce expenses
6. Stay on top of compliance
Good compliance and reporting are essential for any nonprofit, but they’re especially important for smaller ones. It will:
- Protects your organization from legal issues
- Builds trust with donors and stakeholders
- Opens doors to more funding opportunities
- Demonstrates strong financial management practices
7. Prioritize strong financial management
Smaller nonprofits usually don’t have big accounting teams, but that’s okay—hands-on, outsourced nonprofit financial management can be a great fit.
You still get expert support without the extra cost and complexity. Having direct oversight helps you stay on top of income, expenses, and budgets, making sure every dollar is used wisely. It’s a smart way to keep your finances aligned with your mission.
Okay, but how exactly do you know how good or bad your financial operations currently are?
The signs of financially healthy nonprofits
If you’re wondering where you stand on the financial health scale, there are a few signs you’re doing better (or worse) than you think.
1. Diverse revenue streams
You shouldn’t always rely on charitable giving. A healthy nonprofit will ensure you have multiple ways to bring in revenue—from grants and corporate sponsorships to membership dues and in-kind donations.
You also need a way to categorize and track your revenue streams and determine a plan for diversifying them.
2. Efficient fundraising
While you should always be fundraising, you need to work smarter, not necessarily harder. Compare how much you’re spending on fundraising efforts to how much you’re raising.
If the first number is significantly bigger than the second, you need to rethink how you fundraise to become more efficient with the money you have.
3. Strong cash flow
Do you have a way to monitor cash flow from your operating activities, financial activities, and cash equivalents? If you have a strong balance of cash coming in versus cash going out, you’re probably in a good place. If not, it’s time to reevaluate your financial operations.
4. High donor engagement
Break down each donation you receive based on who gives it to you and how often. Look at how long you retain donors and the entire lifetime value of each person or entity. If you’re struggling to keep people on board, consider tactics for boosting donor engagement.
Empower your nonprofit to make a difference
You took on a beautiful mission within your nonprofit, one that enables you to make a difference in the world and support your communities. To achieve that, you need a strong foundation built on strong financial operations.
Our team at Hiline understands the unique challenges that nonprofits face and is there to help you every step of the way. From real-time financial tracking and grant management to budgeting and compliance reporting, we work right alongside you so you can focus on creating change, knowing your finances are in order.
Schedule a free consultation to discuss your nonprofit's financial health assessment.
Frequently Asked Questions About Nonprofit Financial Health
Q: What are the key indicators of a financially healthy nonprofit?
A financially healthy nonprofit typically maintains 3-6 months of operating expenses in reserve, has diversified revenue streams, spends less than 25% on fundraising costs, and demonstrates consistent cash flow with strong donor retention rates above 40%.
Q: How often should nonprofits review their financial health?
Nonprofits should conduct monthly financial reviews for cash flow and budget tracking, quarterly assessments for program effectiveness and donor engagement, and annual comprehensive financial health audits including compliance checks.
Q: How can small nonprofits improve cash flow management?
Small nonprofits can improve cash flow by implementing monthly financial reporting, creating cash flow forecasts, establishing emergency reserves, diversifying revenue sources, and considering outsourced accounting services for better financial oversight.
Q: What financial records do nonprofits need to maintain?
Nonprofits must maintain detailed records of all income and expenses, donor information, grant documentation, board meeting minutes, tax filings (Form 990), and supporting documentation for at least seven years to ensure compliance.
Q: How much should nonprofits keep in reserve funds?
Financial experts recommend nonprofits maintain 3-6 months of operating expenses in unrestricted reserves. Organizations in volatile funding environments may need 6-12 months of reserves for adequate financial stability.
Q: What are the most common financial mistakes nonprofits make?
Common mistakes include poor cash flow management, inadequate financial reporting, over-reliance on single funding sources, insufficient reserve funds, and neglecting compliance requirements that can jeopardize tax-exempt status.
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