7 Financial Habits of Successful Nonprofits

Successful nonprofit organizations are not an accident; they are the result of leadership employing sound financial management practices. Developing the following seven financial habits will ensure that your nonprofit can successfully fulfill its mission and be a good steward of donor funds. Just as important, developing these habits will allow you to lead with confidence and flexibility knowing that your financial affairs are in order.

Make budgeting a number one priority. Successful nonprofits don’t just throw numbers on a page and call it a day. Instead, they think carefully about where the funds come from and how much they will spend on programming to accomplish their mission. They follow a clearly defined process to ensure that the assumptions used to create their budgets are sound. The result is a budget that serves as a road map that they use to guide decision making throughout the year.

Know the cost of your programs. Successful nonprofit organizations know exactly how much their programs cost. Their accounting systems are set up to allow them to allocate spending to specific programs so that they can not only make informed decisions about how to operate most efficiently, but also accurately report to donors how their funds are being spent.

Understand the importance of positive cash flow. Successful nonprofit organizations are not surprised by a lack of funding. They have a good idea of ​​how much cash will be available at any given time to finance not only programming activities but also operating expenses. They have ample cash reserves to help the organization weather ebbs in working capital. When they draw on their reserves, they have a plan to replenish them by a specific date.

Reject the notion that ‘overload’ is a dirty word. Successful nonprofits defy those who constantly suggest they cut off by chance. Instead, they recognize that general operating expenses (competitive salaries, fringe benefits, rent, office supplies, technology, etc.) finance the infrastructure that enables the organization to do its best work. Unskilled labor, operating in crumbling offices, without state-of-the-art technology, is a recipe for disaster. Successful nonprofits recruit and hire the best talent and give them the right tools they need to do great work. They reject the old thinking that nonprofit means cheap.

Maintain a reserve of operating funds. Successful nonprofits have six months or more of operating reserves available at any given time. They are prepared for the unexpected loss of an important gift or the unexpected need to invest additional resources to achieve a program goal. They have written guidelines on how big their operating reserves should be, when they can be tapped, and if they are tapped, when and how they will be replenished.

Become financially literate. Successful nonprofit organizations ensure that board members and staff are financially literate. While financial literacy does not have to rise to the CPA level, the board and staff must understand financial terminology and know how to read and use financial reports to guide their decision making.

Be a good steward of your donor funds. Don’t guess, know. Successful nonprofits make decisions based on facts, not hunches. How many times have we heard a staff member or board member say “I think we should do x” when what we’d rather hear is “I polled our constituents and here’s what I found: 93% don’t have x and lack the means to Yes. Based on this information, I researched how much it would cost us to launch and maintain a program to meet this need.”