Addressing funding challenges in the nonprofit sector

Aug 04, 2021

Nonprofit organizations have been forced to pivot their daily operations over the last year or so as the pandemic led to the cancellation of fundraising galas, runs and other events crucial to nonprofits’ revenues. As has happened across most industries, many in the nonprofit sector have had to shift previously in-person services and processes to virtual platforms.

Beyond challenges related to the lack of in-person connections and events, there is growing concern about whether funding provided by governments may become increasingly difficult to obtain as governments address mounting deficits that resulted from pandemic relief programs for individuals and corporate entities.

As a result, boards of directors of nonprofits must now be further mindful of their organizations’ finances in order to ensure that the organization does not become a casualty of COVID-19.

What to do?

It is vitally important that nonprofit organizations proactively get ahead of potential funding issues before they become more significant problems. There are many steps nonprofit organizations can take to reduce their risk and improve the financial stability of their operations.

1. Know your funding model

Nonprofit organizations should review how sensitive their revenues are to changes in economic conditions and/or changes in other factors that drive their revenues. Understanding why revenues have changed historically and how they could change in the future is essential to planning and developing strategies to mitigate risks.

2. Get the financial information you need

Financial issues are often identified by warning signals. Leaders who have the responsibility to review the nonprofit’s financial position should have accurate and timely information and data to enable them to identify short-term fluctuations and long-term trends that could negatively affect the organization. There should be processes in place to ensure that any information of potential concern is brought to the attention of the board.

3. Diversify funding sources

Nonprofit organizations should diversify their funding sources where possible. In particular, organizations that rely disproportionately on one source for a significant portion of their revenues should devote attention to diversification, especially if internal activities don’t generate those revenues. By the same token, nonprofits that rely heavily on government funding may also be at risk.

4. Align cost and revenue risk

While it may be easier said than done, nonprofit organizations should seek to balance the revenue and cost risks they face. Ideally, revenue risk and cost risk would offset each other in full or at least partially, so that an organization can decrease its expenses if its revenues go down. Limiting the number of fixed costs an organization is responsible for could assist in achieving this objective.

5. Assess impact on your reserve strategy

Nonprofits should reassess their reserve strategy to ensure that unrestricted net assets align with the inherent risks of the organization. This requires the organization to assess the impact of future funding pressures on its operations to determine how much should be set aside for a rainy day fund.

6. Make your case

Periodically, nonprofit organizations should review the impact they are having on the community they serve. Being able to demonstrate the organization’s positive impact is important to making the case for receipt of donor and government funding. Presenting this information may require the engagement of third parties to better set out how a nonprofit spends and manages its funds, particularly when there are ever-increasing demands on the nonprofit’s funding sources. It is imperative that nonprofits maintain an open and strong relationship with their funding providers, as those relationships are key to an organization’s long-term viability.

7. Don’t think that problems will solve themselves

No organization, and especially no volunteer board, wants to make difficult decisions. Proactive actions by a board of directors, including the engagement of professional advisors, could help a nonprofit address smaller issues before they have a chance to develop into something more unwieldy.

8. Remember the big picture

Nonprofit organizations need to proactively manage their finances and ensure their long-term sustainability. Board members have a vital role to play and the beneficiaries of the nonprofit’s activities depend on them. 

This article was originally published March 4, 2016 and has been updated.