People with leadership roles in the not-for-profit sector are typically driven by their passion for the cause, rather than an interest in maximizing profits. But operating a not-for-profit is similar to running any sustainable business, and having a financially stable organization is vital to ensuring you can continue to work effectively toward that cause. Unrestricted net assets—assets that can be used in any manner, without restriction from stakeholders, donors or the law—are the key to making that happen.
Here are four things to think about when it comes to optimizing unrestricted net assets.
1. Balance your ongoing focus with individual campaigns
Vince Wesley, senior vice president in SunTrust’s Not-For-Profit and Government Division, says the most effective not-for-profit organizations balance a sense of ongoing purpose with innovative new ways to keep the public excited about their mission.
When seeking out new donors, it’s helpful to be able to point to a consistent impact your organization provides. To do that, identify the group’s mission and purpose, which can include goals you want to reach or programs you want to offer to members and the community.
Then when you’re focusing your efforts on a particular fundraising campaign, Wesley has found bringing in an outside financial consultant to be an effective practice. It’s a short-term expense to reap a long-term reward. “We really like it when we see that a organization has a strong plan and has a dedicated internal resource or consultant who can help them create that plan,” Wesley says.
Additionally, be fully transparent with donors, especially when your campaign’s purpose is to help expand your facilities or bring on new personnel. There’s a tendency for not-for-profits to play down these costs, but if you openly explain how these changes will benefit the work of your organization, donors will have more confidence in your organization’s decisions.
2. Have definite goals for each year
You obviously want to maximize your organization’s impact, but it’s best to continue making that impact over time. Pinpoint your most vulnerable revenue stream, and strive to create a reserve that’s equal to a year’s worth of that revenue.
Plan the specific programs, developments and goals you want to achieve each year. If one year you end up with a cash surplus, instead of exhausting it all, you can stash any remaining funds in the reserve. Then you’ll be prepared for leaner years when the organization’s income isn’t quite as ample.
“You’re always making that tradeoff between investing in your mission and investing in the sustainability of the organization,” says Steve Zimmerman, principal of Spectrum Nonprofit Services, a consulting firm based in Milwaukee. “But I’d say when you’re investing in a reserve, you’re doing both.”
3. Evenly distribute your cash flow
Most organizations host annual events or campaigns that account for a significant portion of their net assets, but payments are due all year long. So Wesley recommends spreading out your cash flow as much as possible, so you have unrestricted net assets available for these expenses at any given point.
This can mean having membership dues due around the time each person joined your organization (rather than all in the same month), or establishing a planned giving system where benefactors donate a smaller amount every month rather than a large one-time sum. Whichever method you select, it’s all about ensuring a steady income.
“There are ways you can organize your finances to avoid [cash flow disruptions],” Wesley says. “You just have to maintain a strong fiduciary focus, by having operational reserves to draw from or working with your lending partner to discuss credit facilities for managing cash flow disruptions.”
4. Keep a close eye on your funds
Finally, it’s important to remain cognizant of your unrestricted net assets. Regular fiscal monitoring by an internal audit committee is essential for planning and decision-making. A standardized reporting cadence can also help ensure Generally Accepted Accounting Principles (GAAP) conformity, prepare organizations for annual tax filings and flag any potential shortfalls in time to determine the best course of action. Think toward the long-term, and use the audit team’s regular analysis to budget effectively and build a sustainable organization.
Some organizations also choose to employ a financial advisor, who will help track cost drivers and offer individualized recommendations for spending unrestricted net assets. “To be successful, nonprofits need to be conscious [of their finances] and they need to have a plan,” Zimmerman says.
Not-for-profit leaders are typically “focused on their mission,” Wesley says. “And their mission could be funded by grants and contracts, but if those grants and contracts don’t cover overhead, from a sustainability perspective they’re not going to operate forever. In essence, no money, no mission.”