FUNDING BIAS
Nonprofit donors have been traditionally reluctant to fund overhead. They feel better when their funds go to feed the hungry or house the homeless rather than supporting unpopular “administrative expenses” that, if truth be told, they often see as a management ripoff or gross inefficiency. It isn’t like donors don’t realize that the organization that actually executes the nonprofit’s mission has a generic cost that fuels the mission itself. They just feel that it should be almost zero, or, at least, none of their funds should be wasted on the office and salaries.
A HEALTHY BALANCE SHEET
Because of the unwitting donor bias against funding “overhead” or “administrative expenses”, nonprofits rarely include the importance of a healthy balance sheet in their fundraising efforts. The specifics of the nonprofit’s mission paint a dramatic and compelling picture, while “We made the grantee’s balance sheet look better” isn’t the kind of outcome statement that gets trumpeted in a foundation’s annual report. Without the nonprofit organization and the tools it needs to feed the hungry or house the homeless, however, the nonprofit mission would disappear. Just like any business organization, a healthy balance sheet is the foundation that supports the long-term viability of a nonprofit’s mission.
CURRENT RATIO
Given the revenue volatility within which many nonprofits operate, cash reserves can be a critical source of financial security, literally the difference between sustainability and collapse. On the nonprofit balance sheet, such resources are represented as unrestricted net assets, (available for use at the discretion of organizational leaders). But be careful when considering this number as an indication of viability or sustainability. Unrestricted net assets include buildings, property, equipment, furniture, and other illiquid assets. It is more accurate to use the “for-profit” balance sheet entry, current ratio, to indicate the amount of liquid unrestricted net assets. In the world of for-profit finance, the current ratio has always been one of the most important metrics because it reveals a company’s ability to survive normal business cycles intact.
CULTURE SHIFT
Liquid unrestricted net assets is a critical metric that should not be overlooked in a nonprofit’s fund raising campaign. What is needed is a “culture shift” by both donors and grantee's that builds a mindset of financial saving and thinking beyond the current year’s programs. This refreshing new outlook in the universe of nonprofit would begin to eliminate constant cash-flow challenges and the financing costs of carrying debt on an ongoing basis.
SUSTAINABILITY
A healthy balance sheet is just as important as expanding a nonprofit’s mission. Nonprofit organizations must begin to see and sell to donors the sustainability of their organizations.
The term, “financial sustainability” should become a proud line-item in the funding documents of all nonprofits.
