Financial Considerations at Each Stage of the Nonprofit Life Cycle

Nonprofits are unique in that they’re launched in service of a mission rather than to grow revenue and turn a profit. But like any ambitious organization, it’s an inescapable reality that earning and managing finances successfully can make or break the mission of any nonprofit.

The specifics of financial management evolve along with the nonprofit. In other words, as your organization grows, your financial situation and your biggest challenges evolve along with it.

This article explores the key financial factors nonprofits should keep in mind at each stage of their development, from inception to established organization.

The Startup Stage

In the startup phase, nonprofits are focused on transforming their mission into reality.

Key financial considerations include:

A Mission-Driven Inception

Every nonprofit begins with a mission to address a specific need in the community. While passion drives this mission, financial considerations are equally important from day one. Why? Because finances go a long way toward determining whether an organization will be able to pursue its mission effectively.

To that end, nonprofit founders should:

• Clearly define the organization’s mission and goals
• Develop a realistic financial plan to support the mission
• Understand the costs associated with starting and running the nonprofit

Consider creating a detailed business plan that outlines both your mission objectives and financial projections for the first few years of operation. This will help you balance your goals with your resources.

Securing Initial Funding

Any startup needs funding to get off the ground — and nonprofits are no different.

In most cases, nonprofits will fund their activities through a blend of:

• Public grants (i.e., federal or state organizations)
• Private grants
• Donors
• Sponsorships
• Revenue from program activities (such as admission to a museum or art gallery)

To nurture these funding sources, you have to stay on top of your terms, obligations and reporting. For example, many private grants operate on one-year cycles and require organizations to reapply to continue receiving funding. Grants typically also carry specific reporting requirements or restrictions on how the grant funding may be spent.

Develop a diverse funding strategy to reduce your organization’s reliance on any single revenue stream. Create a grant calendar to track application deadlines and reporting requirements. And start building a donor database to manage relationships with individual supporters.

Compliance and Reporting

Compliance obligations will be a concern throughout your nonprofit’s entire lifespan. But when you’re first getting started, your priority should be to build strong yet scalable internal controls from the ground up:

• IRS Form 990 filing: This form is required annually, even with zero revenue. Form 990 is typically due on the 15th day of the fifth month after the end of your fiscal year. So if your organization follows the calendar year, that would make it due on May 15. Churches and other religious organizations are exempt from Form 990 filing requirements.
• Basic internal controls: Implement fundamental financial controls from the start. This will help you keep your records complete and accurate, establish a reputation for trustworthiness, and navigate your future audit processes more easily.
• Grant compliance: As mentioned above, grants typically carry unique requirements to remain eligible for funding. This may include reporting obligations, restrictions around how the funding can be utilized, and renewal or re-application processes.

To manage these obligations effectively, consider seeking professional guidance from an experienced nonprofit accountant. They can help you analyze your current situation and establish internal controls and reporting processes to stay ahead. You may also want to invest in nonprofit-specific accounting software to help track and manage compliance requirements.

Other Common Challenges

It’s common for new organizations to face challenges as they build out their processes for the first time. These often include:

• Underestimating compliance requirements
• Focusing on mission at the expense of administration
• Discounting the complexity of grant administration

To avoid these obstacles, allocate time and resources for administrative tasks and develop systems to manage compliance from the outset.

The Growing Stage

As nonprofits move into the growth phase, their organization becomes more complex — and so does their financial management.

Here are the key considerations for organizations in this stage:

Expanding and Diversifying Revenue Streams

As you grow, it’s essential to build on your initial funding sources, for several reasons:

• Financial stability: A more diverse array of funding sources can help limit your organization’s vulnerability to economic fluctuations.
• Increased funding needs: As your organization matures, your operational costs are likely to rise, making it necessary to boost funding.
• Fundraising plateaus: Over time, your donors and grantors may reach the limits of what they are able to contribute, and some may even fall away. A broader funding base can help you overcome this plateau.

To address this issue head-on, diversify your grant sources — ideally using a mix of private, state and federal grants with longer grant cycles. Additionally, building out a more comprehensive donor relations strategy can help you cultivate relationships with new donors and maintain the ones you have.

Enhanced Compliance and Reporting

As nonprofits grow, they face more rigorous compliance requirements:

• Grant-specific compliance: Each funding source may have its own stipulations on how funds are received and used. Federal and state grants often come with more complex requirements than private grants and may trigger additional audit requirements, including single audits, depending on the level of funds spent during the fiscal year.
• Donor-specific Considerations: Tracking funds for specific purposes, such as capital campaigns, becomes essential.

Ensure you have the necessary systems in place to track and report on grant expenditures accurately. Develop a system to accurately track and report on restricted funds to maintain donor trust and comply with their wishes. Consider investing in more sophisticated accounting software that can handle fund accounting and grant management.

Strengthening Internal Controls

With growth comes the need for more sophisticated financial controls:

• Segregation of duties: Ensure that financial responsibilities are divided among staff to prevent mishandling of funds.
• Regular financial reviews: Implement a system for ongoing financial oversight, such as a rigorous month-end close process.

As your organization grows, review and update your internal control policies regularly. Consider conducting an internal audit to identify areas for improvement. Train staff on the importance of these controls and their role in maintaining them.

Addressing Growth-Related Challenges

As organizations grow, they must proactively address several challenges:

• Payroll management: Hiring staff involves managing payroll and benefits, which requires careful planning.
• Human resources: As your team grows, consider investing in HR to navigate the complexities of a growing workforce.
• Risk management: Be aware of potential liability issues that may arise as your organization expands.

Many growth-related challenges can be alleviated or avoided with comprehensive policies and an employee handbook. Additionally, consider investing in outsourcing some administrative functions such as payroll and accounting. Some firms, including James Moore, have specialized outsourced accounting solutions for nonprofits. Finally, regularly review your insurance coverage regularly to ensure it adequately protects against risks.

Mature Organizations

Established nonprofits face unique challenges in maintaining stability while planning for the future.

Here are the key considerations for organizations in this stage:

Optimizing Revenue & Compliance

Established nonprofits often focus on maintaining stability through a consistent yet diverse stream of funding while navigating complex compliance requirements. This dual focus is essential for ensuring long-term sustainability and operational effectiveness.

To achieve this, consider the following strategies:

• Pursuing long-term grants and contracts: Multi-year grants may offer greater stability than annual funding for your nonprofit, because they offer more predictability for your financial planning.
• Cultivating a loyal donor base: Develop strategies for donor retention and major gifts. Established organizations often have long-time donors who provide a steady base of support. Implementing a donor recognition program can help acknowledge and appreciate these long-term supporters.
• Administering multiple grants: Create systems to manage various grant requirements efficiently. This includes tracking deadlines, reporting requirements and expenditures to ensure compliance with each funding source.
• Donor fund tracking: Ensure accurate tracking and reporting of restricted funds. Implement accounting software that allows for detailed tracking of donor-designated contributions.

To effectively manage both revenue stability and compliance, it’s important to regularly review your grant portfolio to ensure a mix of short-term and long-term funding sources.

By integrating revenue management with compliance processes, established nonprofits can maintain financial stability while ensuring they meet all necessary reporting and tracking obligations

Advanced Financial Management

With longer grant terms, more diverse revenue streams and a larger organization, your financial management is likely more complex than it was when you started. As your organization matures, ensure your financial management strategies mature with it.

For example, over time you might need more advanced tools to analyze and report on your current finances and forecast your future needs. You may also find it valuable to work with an experienced nonprofit accounting firm like James Moore as you optimize your financial strategies.

Balancing Mission and Administration

As you grow, both your ongoing, mission-driven projects and your administrative needs will also expand. While it’s easy to lose sight of one of these — for example, focusing exclusively on the mission and neglecting administration — maintaining a balance is critical for your organization’s success.

Regularly review your organizational structure to ensure it supports both needs. Consider implementing a program evaluation system to measure and communicate your impact effectively. Finally, develop a strategic plan that aligns your mission, financial goals and operational capacity.

Streamline Your Nonprofit Financial Management with James Moore

For nonprofits, navigating your financial landscape requires careful planning, adaptability and a commitment to best practices at every stage of growth. If you understand and prepare for the financial considerations unique to each phase of your organization’s growth, you can build a strong foundation for long-term success and impact.

While your mission drives your work, sound financial management is what enables you to achieve that mission year after year. Don’t hesitate to seek expert guidance when needed. James Moore’s Nonprofit Accounting services can provide the specialized support you need to navigate the complexities of nonprofit finance, ensuring your organization’s financial health at every stage of growth.

 

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