Be Measurably Strong

A nonprofit solves a pressing problem for its clients and community through its services. That wonderful process strengthens the community. It also means that the community needs the nonprofits to continue for as long as there are problems to be solved.

Does your nonprofit have the strength to survive as long as it is needed?

For a long time we thought nonprofits with an income stream (fee for services, tuition, products to sell, etc.) should have a minimum reserve of three months of revenue and all other nonprofits should have a nine-month reserve. For three reasons we now recommend reserves be nine and 18 months:

Speed of Change – The rate of change in our society is accelerating. Smaller reserves provide nonprofits with too little reaction time.

Donor Response Time – The competition of donors is intensifying. Therefore, it takes longer to find donors who will respond to an urgent plea for help.

Complexity – Interconnectedness is increasing. Therefore, it is more difficult to know which are the early indicators of change. If it is easy to miss the early signs, one must have larger reserves.

Contingent plans are helpful when one is responding to an internal event. Most of the time, the only response to an external event is to dip into the reserve while adjustments are being made. A spike in demand is also typically part of the external event, which draws on the reserve. Your nonprofit’s  response demonstrates the strength of your nonprofit, its sustainability, and its value to your community.

Before a crisis tests your nonprofit’s reserve, there are other indicators that will help you to measure the strength of your nonprofit.

Reserve Growth – Your nonprofit’s reserve should be growing each year. If your nonprofit is like most, there is an increasing demand for your services. If your reserve is growing faster than the demand for your services and the rate of inflation, your nonprofit should be financially sustainable.

Operating Surplus – Ending each year with an operating surplus is another sign of strength. Positive cash flow will build the reserve. An operating surplus indicates that your nonprofit is becoming more efficient. In addition, failure to have an operating profit implies that your nonprofit is stretching the goodwill of its donors, which undermines sustainability.

Donor Generosity and Growth – When the number of donors and the generosity of the average donor are growing, it indicates that your supporters see the growing relevance and value of your mission and services. Donor growth and generosity are important sustainability indicators.

Demand for Services – Any increase in demand for your services indicates that the effectiveness of your services is growing and your clients understand and appreciate your mission’s impact on their lives. Besides helping to build your reserve, it helps to increase support from donors, volunteers, referral sources, and advocates.

Next Step:

Ask your finance committee for a statement of your nonprofit’s health and its strength as part of the financial reporting at each board meeting

Review the trendline for the three to five most important health and strength indicators at each board meeting

Dive deep into the strength indicators during each annual review

Here is a yardstick you can use to measure your nonprofit’s strength:

Is your financial reserve greater than the past 9 or 18 months of expenses?

Is your financial reserve growing faster than your expenses?

Were all of the last 12 months profitable? (If it is a seasonal business, like a school, were the primary months profitable?)

Does your nonprofit have a cash plan and does it show that the year will produce positive cash flow?

Is your number of donors growing each year (increasing donor loyalty)?

Is income from your average donor growing each year (increasing donor generosity)?

Do you have statistics that prove your mission effectiveness is growing each year?

Does your nonprofit serve more clients each year?

Do more of your clients experience a meaningful, measurable, and durable change in their lives each year?

Is staff turnover rate below the national average?

Have you had two or fewer executives leading your nonprofit in the past five years?

Strong nonprofits have growing donor and community support. Make your nonprofit’s five-year goal to be the strongest nonprofit in your community.

Take It Further:

Set annual goals for improving each of the strength indicators and hold your board responsible for attaining the goals

Compare your nonprofit’s strength with the strength of some of the big names in your nonprofit’s segment

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