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With recent economic uncertainty and cuts to federal grants, nonprofits may be experiencing a hit to their bottom lines or increased demand for programs. In either case, this can prompt a stress-induced deep dive into nonprofit financial statements. But this doesn’t have to be the case for your organization!

The economy’s cyclical nature, changes in administrations, natural disasters, and other unforeseen events will all cause fluctuations in your nonprofit’s income, expenses, and program activities. And these incidents don’t even encompass internal organizational changes, like staff members leaving or the adoption of new software. It’s practically impossible for your nonprofit to operate the same way year after year.

That’s why it’s imperative to have a plan for your nonprofit to weather the changes, which begins with fiscal sustainability. In this guide, we’ll walk through actionable steps for developing and enacting a financial model and strategic plan that will serve your organization for years to come. 

Establish Your Nonprofit’s Goals

Your nonprofit’s finances should ultimately help you further your mission. When your team begins to tackle sustainability activities, it’s important to be clear about your nonprofit’s goals so you can shape your plans to serve those aims. To achieve your mission-related objectives, you may first need to set some financial goals, so you ensure you have the resources you need to serve your community. 

First, take stock of your current approach to financial management. Consider these questions as a starting point for evaluation:

• What financial policies (e.g., gift acceptance, staff compensation, conflict of interest, expense reimbursement) does your nonprofit have in place presently?  

• Is your nonprofit regularly running a deficit or a surplus?

• Is your organization complying with legal requirements, like filing its Form 990 on time every year?

• What tools are you using to support accounting, and what procedures does your team follow?

In addition to internal review, working with a nonprofit financial expert can uncover opportunities and provide a clear understanding of where your nonprofit stands. 

It can also be helpful to review your program achievements and measure their impact. You can use this data to set future benchmarks and evaluate what’s been effective for achieving your goals thus far. 

All of these data points and brainstorming will lay the groundwork for developing a strategic plan for your nonprofit. Strategic plans are roadmaps that plot out actions and performance metrics over a specified period of time to meet your nonprofit’s goals. A strategic plan should touch all aspects of your nonprofit’s operations, from marketing to infrastructure to finances. 

Take Immediate Action

Once you’re equipped with a plan for making your mission a reality over the long term, your nonprofit is ready to start making changes now for a more secure future. While we’re categorizing these practices as "immediate,” these activities are all steps you can take today that set you up for success in the long run. 

Set an Annual Budget

Perhaps the most foundational step towards sustainability is creating an annual operating budget for your nonprofit. This comprehensive plan forecasts your income and expenses for activities throughout the year, and you should use it to inform your nonprofit’s decisions.

Here are a few tips for nonprofit budgeting:

• If possible, budget for a surplus, so excess income can be deposited in your reserve funds. Building up operating reserves is key for sustainability and growth, because this money can be used to supplement lost revenue in hard times or fund day-to-day expenses while you expand services. 

• Categorize your revenue by source. Doing this upfront will save you time when you prepare reports, tax forms, and other official documents. 

• Evaluate expenses against your strategic plan. If program costs aren’t ultimately supporting your mission or overhead seems excessive by comparison, then maybe that money can be better spent another way. 

• Create supplementary budgets to address specific areas of your nonprofit’s work, like program activities, capital campaigns, and fundraising events. You may also be required to prepare budgets in grant applications to demonstrate how you would use the awarded funds.

Once you’ve set your annual budget and it has been approved by your board, you’re not finished with it. Compare your budget against actual spending and revenue throughout the year, and treat it as a living document to help you stay on track. 

Diversify Funding Sources

Depending solely or primarily on one revenue stream exposes your organization to significant risk. Should that source become unavailable, you’ll be scrambling to compensate for the lost income. 

Any nonprofit, regardless of size or stage, can diversify funding. It will look different for every organization, but weaving this practice into your development strategy from the very beginning will pay off. 

Examples of different nonprofit income streams include:

By exploring additional funding sources, you’ll likely increase your income while reducing your dependence on any one contributor or source. 

Manage Risk Effectively

Goal-setting is one component of nonprofit sustainability, but preparing to manage and mitigate risks as they arise is equally important. Risks your nonprofit may face include fraud, noncompliance, cybersecurity violations, and theft. These situations can be uncomfortable to think about when everything is going well, but being caught unprepared can be devastating for the organization. 

Conduct a risk assessment to identify and understand your nonprofit’s risks. You’ll also want to incorporate a prioritization criterion to capture the likelihood and severity of the risk, both of which should inform your response plan.

Then, work with your nonprofit’s board to develop response plans for the highest likelihood and highest severity risks. Some of these plans may be triggered by the occurrence of the event, but for others, you can take steps immediately to minimize future risks. For instance, a preventive measure against cybersecurity risks could be instituting two-factor authentication for access to sensitive data, like donor addresses and credit card details. 

Once you’ve established a risk management policy, add it to your board’s agenda to revisit annually and ensure it’s been implemented correctly.

Follow Long-Term Best Practices

After you’ve put all of the above into practice, take the additional steps on an ongoing basis to support your organization’s longevity:

1. Consider investing reserve funds. Budget surpluses, as mentioned previously, should be deposited into your reserve funds. Since this money isn’t needed immediately and to protect it against inflation, your nonprofit may choose to invest it in assets that are low risk but highly liquid (such as certificates of deposit or money market mutual funds) in case you need to access it quickly while helping your reserve funds grow. 

2. Analyze data. The operating budget you created, especially when compared to actual numbers, is a valuable tool for understanding your nonprofit’s sustainability. Use each year’s budget—and other financial statements—to inform your financial plans for the next year. 

3. Create a culture of sustainability. Just like your nonprofit’s strategic plan includes more than just finances, sustainability touches more than just the numbers. By building lasting relationships with donors through trust and transparency and supporting your nonprofit’s employees, you’ll create a culture of commitment and engagement that will foster long-term organizational health.

Furthering your mission requires your organization to be stable and functional, and to do the most good, your nonprofit needs to be around for the long haul. Taking steps today to ensure your finances are in good shape and you have practices in place that have an eye towards the future ultimately ensures that your mission can be carried out to the best possible outcome.