Nonprofit financial managers spend their days navigating between a rock and a hard place. Fundraising is difficult and uncertain to succeed, clouding forecasts on the revenue side of nonprofits’ ledgers. On the expense side, managing costs is often complicated by funders’ spending restrictions and reporting requirements. Given these and other constraints, most organizations end up operating on slim margins year after year, with minimal reserves to handle unexpected developments.
To help effectively manage the funds that drive an organization’s nonprofit mission, below is a breakdown of 18 financial challenges and how to solve them.
- A nonprofit’s success hinges on how well it spends its donors’ funds to make a demonstrable difference in its chosen community or cause.
- Nonprofit financial managers provide the critical accounting, controls and reporting to drive success.
- Their challenges arise from such issues as fundraising uncertainty, complex reporting requirements and donors’ restrictions on how their money is spent.
- Integrated business systems can streamline and enhance financial management processes to help financial managers address these challenges.
18 Nonprofit Financial Challenges and Solutions
Nonprofit financial managers must master extraordinary revenue and cost accounting complexity. Here’s a breakdown of 18 nonprofit financial management challenges and how to address them.
1. Limited Funding Sources
The essential challenge nonprofit financial managers face is the need to stretch limited resources to support ambitious goals — with missions ranging from elevating local culture, to advancing social justice, to breaking the cycle of poverty.
Depending on its mission, a nonprofit’s funding may be raised from foundations, individual donors, businesses, government agencies or some combination of these and other sources. But fundraising is unpredictable amid competition for scarce resources, and even when it succeeds, the revenue often comes with strings attached. For example, a foundation grant might support a targeted project but stipulate little to no contribution to administrative overhead, leaving financial managers wondering how to keep the lights on. Each of a nonprofit’s funders may impose different restrictions and reporting requirements. What’s more, there’s no guarantee that they will renew their support at the end of the grant cycle.
The good news is that financial managers have seen some of these restrictions loosening, according to a survey by the Nonprofit Finance Fund (NFF). Over half of survey respondents said funders have become more flexible about how nonprofits use their money since March 2020. For instance, billionaire philanthropist MacKenzie Scott set an example in 2020 by awarding unrestricted multibillion-dollar grants with simple reporting requirements: one three-page letter each year, over three years. In 2023, United Way of Rhode Island extended the length of its grants to three years instead of two, while also removing spending restrictions. But the question is whether practices like these will expand and endure.
In the meantime, nonprofits need to continue honing financial management, starting with budgeting and forecasting. For many nonprofits, this means replacing aging, error-prone methods that waste time and resources with centralized, automated software suites that increase accuracy and streamline processes.
2. Budgeting and Forecasting
A nonprofit’s budget provides the foundation for mobilizing and deploying funds to support its mission. A solid budget should accompany any grant application. It then acts as a tool for spending grant awards effectively, reporting back to grant-makers and other donors, and it keeps the entire organization running efficiently and in compliance with nonprofit tax rules.
While a good budget empowers financial managers to address many of the challenges their organizations face, nonprofit budgeting is not without its challenges. These difficulties begin with forecasting. No type of nonprofit revenue is immune to forecasting challenges, whether the money is being raised via foundation grants, individual donations, memberships, corporate sponsorships, government program or some combination of sources. Applying for a grant can take months — often with little visibility into how the proposal is faring. In fact, only one in seven applications succeeds, according to GrantWatch, a grant funding search engine. Then begins the struggle to secure the funder’s renewed support at the end of the first grant. However, recurring grants made up only 10% or less of total grants for nearly half of respondents to the “2023 State of Grantseeking Report” from GrantStation, a nonprofit membership organization.
Since budgeting determines the operational roadmap for the year, financial managers use various methods to reduce the risk of overly optimistic forecasting of grant funds — especially those still under negotiation. For instance, a revenue scenario planning tool can calculate and plan for best-, moderate- and worst-case scenarios. Anticipated grant funds might be discounted by a percentage representing the probability that the money will arrive. Regular reforecasting throughout the year could involve a separate, revised budget using year-to-date actuals and management’s best estimates for the coming months. When it comes to spending, forecasts regarding demand for a nonprofit’s services should also be regularly reviewed, since economic swings and other factors can cause needs to change dramatically.
After forecasting, allocating costs is a particularly difficult accounting challenge because of the requirement to segment spending tied to each grant while also complying with grant-makers’ restrictions on how or where those funds are used. Nonprofits often prefer to receive general operating support from funders instead of money restricted to a particular program. That’s because general operating support is more flexible, not only covering current, mission-driven activities (“direct costs”) but also basic expenses (“indirect costs”) and new and unexpected needs. But funders favor contributing to specific programs that support their own strategic goals. In 2021, about 65% of funders directed their money to specific-purpose grants, according to the Foundation Source, a philanthropic advisory. This segmentation is further complicated by reporting requirements, with some grant-makers even requiring custom formatting so they receive standard reports on program spending from all their grantees.
Accurate, transparent reporting, facilitated by financial management software tailored to the needs of nonprofit organizations, can help pave the way for grant renewals. This is especially true if the narrative accompanying financial reports is used to connect grant-makers’ dollars to outcomes, correlating financial data to service delivery metrics, such as the number of homeless people provided housing or the percentage increase in audiences for cultural events.
3. Cash Flow Management
In a volatile economic environment, nonprofit financial managers see risk on the expense side of their balance sheet as well as the revenue side. Costs are rising for salaries, rent, program expenses and other outlays even as funding remains perennially uncertain. Inflation can swell an organization’s operating costs even as cost-of-living increases may drive up the need for nonprofit services. In fact, 85% of NFF survey respondents said they anticipate increased demand for their services in the coming year. And at any time, demand can spike due to social, economic and environmental urgencies.
By their nature, some nonprofits will have steadier cash requirements than others — for instance, a research organization vs. a disaster relief agency. Some funding sources are more reliable than others — for example, sustaining memberships vs. government agencies that pay only after services are delivered (and then, possibly, with additional bureaucratic delays).
For any organization, the financial realities can be harsh: When you’re out of cash, as the saying goes, you’re out of business. Cash flow management begins with the fundamentals of developing a realistic budget, including cash flow projections that look ahead 12 months. While it’s crucial to closely monitor revenue and costs — especially the timing of receipts and payments — other strategies to avoid budget shortfalls include:
- Diversified funding sources: Relying on a single funder or type of funder can leave a nonprofit exposed. A better mix might include multiple grants, monthly giving and sponsorships. Revenue can be generated by fundraising events and fees for services (for instance, renting out space or charging an adoption fee at an animal shelter). Still, organizations should take care when diversifying, because every revenue source carries transaction costs in terms of money, time and personnel. And the greater the diversification, the more complex financial management becomes.
- Cash reserves: A rule of thumb is to keep an operating reserve equivalent to three to six months’ expenses. In practice, funding constraints, such as restricted grants, make this difficult. Some funders will help with contributions toward an operating reserve. The more typical route, though, is a deliberate process of squirreling away surplus unrestricted funds over time. (Individual donations represent the most frequent source of these funds, according to the Grantseeking report.) An explicit board-level policy should govern how the reserve is spent and replenished. Reserves are designed to solve temporary problems, not structural financial weakness. Notably, four in 10 nonprofits have no emergency reserves, according to the NFF survey.
- Endowments: Funds set aside in endowments differ from cash reserves in that they are designed to generate investment income rather than meet short-term financial contingencies. Endowment policies set by the board usually preclude dipping into the principal.
- Lines of credit: One safety net is a line of credit, secured in advance but used with caution to avoid running an operating deficit while also incurring interest expenses.
4. Economic Downturns
Cash flow management has been sorely tested in the early 2020s, as some nonprofits have seen dramatic shifts in both giving and demand for their services. For instance, macroeconomic trends and pandemic needs drove donors to support more social services organizations over others dedicated to the arts and culture. The forces of inflation and fear of recession have also been a factor. Overall, the Fundraising Effectiveness Project recently reported that U.S. donations have increased 69% in the past decade, but the group forecasts weakening funding in the wake of the pandemic-related surge.
For financial managers, economic downturns and uncertainty create budgeting, forecasting and cash flow management challenges. They impact not only funding, investment returns and other revenue streams, but also demand, operational expenditures and other cost factors. Instead of finding themselves entirely at the mercy of economic forces, nonprofits can embrace time-tested risk management and crisis management practices, combined with strong constituent relationship management.
5. Risk Management
A formal risk management strategy can help nonprofits face economic uncertainty with greater confidence and better outcomes. Strategy development should involve top executives and board members and cover a broad range of threats to their organization’s well-being, including reputational or cybersecurity issues, in addition to strictly financial risks. Strategy development involves setting the organization’s risk appetite, its policies and procedures for monitoring and mitigating risks, contingency plans, audits and insurance.
Leading risk practices for financial managers include regularly reviewing year-to-date performance against budget and gauging management’s evolving expectations for the coming months to prioritize and reset the timing of expenditures, if necessary. Global accounting firm PNC also recommends stress-testing forecasts by asking “what if” questions about adverse scenarios. While predictive analytics is a best practice for exercises like this, only about a quarter of nonprofit survey respondents use this technology, according to a 2022 survey by NTEN, a nonprofit technology community.
6. Balancing Mission and Financial Sustainability
Solid financial outcomes are not the foremost measure of a nonprofit’s performance, as they are for a for-profit business. Instead, a nonprofit’s paramount metric is its impact on the communities and causes it serves.
Doing well while doing good can be challenging, but financial and mission-driven goals are actually mutually supportive. Ultimately, a nonprofit’s surest route to financial sustainability is demonstrating two important things to funders: a measurable impact in fulfilling its mission and careful stewardship of funders’ donations. Specifically, this includes:
- Impact assessments: What measurable improvements did the organization make this year, in how many households? This is the kind of indicator that demonstrates impact. Financial managers are often involved with the team collecting such data, analyzing it and tying it back to funding for donor reports. Impact assessments also inform operational budgeting to cut activities that are underperforming and reinforce those that are advancing the mission.
- Reporting: How many people were helped per dollar the organization spent? Reports to donors shouldn’t just provide updates on account balances; they also should connect dollars to outcomes, with a description of the activities their donations funded and what they achieved.
Funders also want to know that the organizations they support are financially healthy, so sustainability also depends on whether a nonprofit operates efficiently. “Mission creep” can be counterproductive in this regard. Nonprofits can be tempted to chase grants that are not good fits for their organization as they search for funding, to the detriment of operational efficiency. Financial managers have to enforce programmatic rigor, looking at every new funding opportunity not only in terms of mission and impact, but also how well it matches current staffing, leverages existing infrastructure and builds on program successes to date.
7. Program Evaluation and Impact Measurement
While nonprofits and for-profit companies share many challenges, social impact is notoriously more difficult for a nonprofit to measure than financial performance is for a commercial business to gauge. A nonprofit financial manager gets involved in tying the two together, aided by integrated business technology.
For instance, an environmental organization may aim to raise awareness and influence behaviors in order to mitigate climate change. In nonprofit parlance, the first two are often considered near-term outcomes while the third is the long-term impact. All three can be difficult to measure, especially impact. Still, surveys and analysis of media coverage represent some of the tools used to provide metrics for the first two outcomes, on the way to producing measurable impact. Then the financial question becomes: How efficiently did the organization effect these changes?
Integrated business systems can correlate programs to financial data, delivering internal key performance indicators (KPIs) for dashboards, scorecards and reports. For example, if a nonprofit delivers meals to seniors, an integrated system can track program donors, staff, beneficiaries and volunteers; the costs associated with preparing and delivering meals; in-kind and cash contributions; the number of meals served; and other related revenue, spending and outcomes.
8. Board Oversight and Governance
The CPA Journal recently put a fine point on a growing challenge for nonprofit financial managers, reporting that today, “board members seek updates with unprecedented granularity and frequency.” Nonprofit leaders should help the board strike the right balance, focusing directors more on longer-term strategy, innovation and financial health and less on matters of compliance and administration. That higher-level focus on the part of the board requires confidence in financial management and controls, since directors have a fiduciary duty to ensure effective, responsible use of resources while guarding against misuse.
Advice for reporting finances to the board includes:
- Establish relationships. A nonprofit’s finance team should establish a collaborative relationship with the board’s finance committee, working together on the agenda for the full committee.
- Curate financial reports. Create board-friendly formats, dashboards, summaries and narratives to highlight the big picture. Keep in mind that board members may not be fluent in financial jargon and may even need some training in that department.
- Be prepared to drill down. Depending on whether the board is in planning, evaluation or decision-making mode, a financial manager will need current, accurate numbers to sustain directors’ confidence and support decision-making. At any time, a board and its committees may need the following: budget and controls; updated income statement showing revenue and spending compared with budget; balance sheet, with assets and liabilities; cash flow projections; budget scenarios; program effectiveness benchmarks; trend and risk analysis; IRS Form 990 nonprofit filing; annual financial report; and audit report.
As with every other aspect of its operations, a nonprofit should strive to get the most benefit from its board, as it reviews and approves the organization’s finances. This won’t happen if directors lack confidence in the finances or get mired in compliance details.
9. Compliance and Reporting
Nonprofit compliance and reporting can seem like never-ending obligations. Funders want to receive a cadence of progress, expense and financial reports to see exactly how — and how well — their money is used to produce meaningful outcomes and impacts. The IRS and some state tax departments expect annual financial reports. Nonprofits may need to meet additional state filing requirements triggered by events, such as a significant new donation. Audits may be mandated by some state tax boards, foundations or government funders. And a nonprofit’s board needs transparent financial reporting to oversee compliance as well as to inform its decision-making.
Catering to so many stakeholders and overseers is complicated by issues of timing (if a funder’s fiscal year differs from the nonprofit’s), funding type (grants differ from membership, in terms of revenue recognition), geography (knowing which states exempt which taxes) and other factors. And noncompliance can carry serious consequences. One worst-case scenario is that a funder could require repayment of a restricted grant if the money is not spent as designated. Or an organization’s nonprofit tax-exempt status could be revoked if an annual Form 990 filing is not made to the IRS. Either unfortunate event would have significant knock-on effects on an organization’s operations, reputation and future fundraising potential.
Integrated accounting software and constituent relationship management packages tailored to nonprofits enable out-of-the-box reporting of a range of KPIs and provide tools to create more analytical reports. When it comes to compliance, baked-in controls on expenses represent a leading practice for ensuring that spending stays within grant budgets and complies with funders’ restrictions on allowable spending. Software packages also make it easier to meet stakeholders’ expectations that financial statements comply with Generally Accepted Accounting Principles (GAAP).
10. Tax Complexity
Nonprofits are tax-exempt-ish. As a federally registered 501(c)(3) organization, a nonprofit must file an annual Form 990 to be exempt from federal corporate income tax and, in some cases, federal unemployment tax. But it still has to handle other federal payroll taxes, such as individual income tax and Social Security contributions. The 501(c)(3) federal registration is also used to apply for state and local exemptions, though state and local rules covering sales, corporate income, payroll, property and other taxes differ across the country. And income unrelated to the nonprofit mission cited in a 501(c)(3) registration is taxable.
The IRS evaluates whether a nonprofit organization’s work aligns with its stated mission, and it could raise concerns if too much of its funding is used for other purposes, such as excessive compensation for executives. According to Charity Navigator, which rates nonprofits, seven out of 10 spend at least 70% of their budget on the programs and services they provide. Charity Navigator’s ratings, used by many donors to choose where to make contributions, clearly favor higher percentages for programmatic spending and lower percentages for administrative expenses and fundraising. Nonprofit financial managers also need to grasp tax rules for common fundraising methods, such as accepting in-kind contributions of goods and services or taking “quid pro quo” contributions in which part of a donation might go toward the cost of a fundraising dinner or a prize in a raffle.
Given all of the variables, maintaining compliance on an ongoing basis requires diligent and often complex budgeting, tracking and reporting. Adding to their significance, nonprofits’ federal tax returns for the past three years must be publicly disclosed and are available on government and open-source websites for prospective funders and others to review. (Many nonprofits post their Form 990s on their websites.)
11. Staffing and Compensation
Staffing can be a budgeting nightmare for nonprofit financial managers, who often find it difficult to compete for talent with attractive compensation in a competitive job market. This is generally attributable to two main reasons.
- Salaries and training: Nonprofits strain to cover their full staff costs due to restricted grants that cover only certain expenses and often exclude or underfund administrative overhead. Fortunately, there are also funders who recognize this problem and provide for both direct program expenses and indirect administrative costs, such as salaries. Others go further, specializing in providing capacity-building support for staff training and other organizational development needs of nonprofits.
- Budgeting time and resources: Nonprofit employees, including financial managers, may wear many hats in their organization across the functional areas of programs, administrative and fundraising. Financial managers need to carefully divide, allocate and track employee time in each area, and often among various funded projects, for reporting back to donors.
Challenges like these have contributed to the gap between nonprofit and for-profit salaries, alongside public perceptions that nonprofit employees should be drawn to their work out of commitment and not for the level of compensation. Some see this perception changing and the pay gap gradually closing.
12. Capital Investments
The combination of donor restrictions, unpredictable cash flow and slim margins makes it hard for nonprofits to confidently make major, long-term capital investments in the facilities, equipment and technology needed to deliver their services. However, there are ways to access the necessary capital.
- Property: The benefits of owning your own building may not be immediately apparent to every nonprofit. But for most organizations, occupancy is the second-largest operating expense, so some look to protect against the ever-escalating and even volatile cost of leasing. No nonprofit wants to be priced out of the community it serves. Property can also provide other returns on investment — for instance, as it appreciates in value (often tax-free), property can be used as collateral to improve borrowing power and can provide the opportunity to raise revenue by subletting space. In addition to securing a place in the community, the intrinsic value of property ownership includes greater visibility to draw in more beneficiaries and donors. All these benefits need to be weighed against the potential downsides of carrying debt and making regular capital improvements. Taking the major step of purchasing property should involve serious long-term planning, possibly including the launch of a capital campaign — a high-profile, work-intensive fundraising effort.
- Technology: Like any for-profit company, nonprofits can leverage technology to increase organizational efficiency and effectiveness, which makes the limitations of their IT purchasing power all the more unfortunate. Even though funders mainly prefer to finance the direct costs of the projects and services they support, a growing number recognize the need to support indirect administrative overhead, including technology. What’s more, some foundations, businesses and government agencies offer programs specifically designed to help nonprofits technologically transform their operations, through cash or in-kind donations. Other options include TechSoup, a 35-year-old nonprofit clearinghouse of discounted, donated or refurbished servers, PCs and other hardware, software and cloud services.
13. Competition for Funding
Competition for funding is growing, by several measures. It may come as no surprise that the top priority in a recent nonprofit survey by Amazon Web Services involves increasing donations and revenues. And nearly six in 10 nonprofits are applying for more grants than in the past, according to the Grantseeking report.
A nonprofit’s fundraising/development staff and finance teams play different roles in driving fundraising success. While fundraisers might be generating impact metrics, for example, the finance team might focus more on program and organizational efficiency and sustainability. The chances of attracting and keeping funders increase when the two teams work in tandem, using integrated business systems to connect their data points. For example, grant applications and reports to donors can brandish metrics demonstrating both programmatic impact and financial sustainability to show a nonprofit and its work in the best light.
Additional synergies between the two teams can include conducting “reality checks” together against anticipated revenues, improving forecasting with shared knowledge about sustaining member retention rates, collaborating to develop diversified revenue streams and identifying where fundraising campaigns may be overspending or underperforming.
14. Donor Relations
Financial managers are pivotal to good donor relations — again, working in close partnership with the fundraising/development team. Here’s how the Association of Donor Relations Professionals breaks down a financial manager’s role, based on four classic elements of donor relations.
Gift acceptance and management: Financial managers must ensure that their organization has policies and procedures in place to assess whether it can fulfill a grant’s terms and, if so, to then intake donations, ensure that they are used according to funders’ intentions and correct any eventual noncompliance with grant restrictions.
- Gift acknowledgment: Nonprofits should send private communications of gratitude to funders, accompanied by a receipt from the financial manager that covers any IRS requirements.
- Donor recognition: Financial managers are involved in budgeting for public expressions of gratitude, such as events or other courtesies.
- Reporting/stewardship: Finally, financial reports demonstrate responsible stewardship of donors’ funds, with quantitative and qualitative descriptions of how their funds are being spent and the impact on beneficiaries and causes.
15. Fundraising Fatigue
Fundraising fatigue rears its head on both sides of the nonprofit equation. For grant applicants, it may manifest as “the feeling of dread over having to make yet another round of asks,” according to The Fundraising Authority, a consultancy. For funders, it goes by the terms “donor fatigue” and “compassion fatigue” — as people lose interest, nonprofits lose their renewed support, and fundraising and donor management challenges continue to mount.
Finance teams can be part of the solution by helping their fundraising and development colleagues convey solid information about tangible results. Finance managers can help teams cherry-pick indicators that tell the best story in terms of dollars and outcomes — succinctly and at respectful intervals. Meanwhile, with access to fundraising data in integrated business systems, finance teams can also remain apprised of any fatigue-related drop-off in projected revenue.
16. Financial Sustainability Planning
There’s an unfortunate term that resonates with all too many nonprofits: the “starvation cycle.” The cycle is triggered by many funders’ reluctance to support organizations’ administrative overhead, as they restrict the use of their gifts to specific program activities. Without essential support for staff, training, technology, fundraising and other administrative needs, nonprofits end up operating at a suboptimal capacity, hardly able to fulfill their mission or even keep their doors open.
In this environment, one of a financial manager’s primary roles is to help drive operational efficiencies. Beyond exercising all the leading practices of budgeting, forecasting and cash flow management, the finance team needs to routinely conduct cost analyses to assess alternative vendors, identify unnecessary spending and set automatic controls on expenditures. They need to support leadership with clear financial reasoning when difficult decisions must be made to cut programs or activities that are no longer mission critical. And when it comes to budgeting, some experts advise against the myth that nonprofits shouldn’t run a surplus, because to ensure positive cash flow, an organization needs to build up reserves over time. Step one toward that goal is to realistically budget revenues and expenses so they result in a surplus.
Financial managers can also provide the ammunition for their organization to persuade funders to cover the full costs — including administrative overhead — of the work done on the funders’ behalf. While many donors are trending toward this approach, inertia is great, according to the NFF, which advises nonprofits to advocate for funders to:
- Provide more flexible funding.
- Understand and support nonprofits’ full costs, including administrative overhead, such as staffing, training, technology and other infrastructure.
- Lose their aversion to nonprofit budget surpluses.
17. Fiscal Sponsorship
A nonprofit that has its own house in order might consider fiscal sponsorship, a collaborative arrangement that can give another emerging nonprofit a leg up. The way it works is that an established nonprofit provides legal and financial management support for an initiative that lacks official nonprofit status. The established 501(c)(3) organization may also provide the conduit for and stewardship of donors’ funding. Both organizations can benefit from such an arrangement if their missions and activities are aligned. Financial upsides for the sponsor may include administrative fees, sharing resources and spreading operational costs for economies of scale.
18. Data Management and Cybersecurity
In the current era of digital transformation across all industry sectors, nonprofits tend to lag behind for-profits. In a catch-22, nonprofits are expected to deliver demonstrable impact in achieving their missions in line with their funders’ own charitable goals. At the same time, though, many of those funders fall short of fully funding the technology nonprofits need to operate effectively, leaving organizations operating with inefficient, un-cybersafe legacy systems and processes. In fact, according to the survey by NTEN, 66% of organizations view their current software as a top challenge.
As technology trends, such as cloud computing and application integration, bring IT capabilities more economically and seamlessly within reach of nonprofits, financial managers can gain greater visibility and control of their organization’s revenue and spending. The benefits can include:
- Automating time-wasting manual processes.
- Gaining visibility into a single source of real-time transactional, financial and operational data for better monitoring and analysis.
- Improving accuracy by replacing error-prone spreadsheets.
- Increasing compliance with the consistent application of rules and schedules for controlling donor restrictions, revenue recognition and other financial processes.
One proviso: Nonprofits can also face significant cyberthreats from bad actors who find their often-outdated systems to be easy targets. Cyberthieves may prey on nonprofits because of all the personal and financial information they hold on individual donors. Sometimes cybercriminals target a nonprofit as an entry point into the networks of their big funders. As a result, cybersecurity should be an integral part of any nonprofit’s technology planning and implementation.
Solve Your Nonprofit Financial Challenges With NetSuite
The NetSuite Social Impact program has taken the powerful business software that NetSuite has built for the commercial sector and tailored it to the needs of nonprofit organizations. NetSuite Financial Management software is designed to streamline and speed up everyday financial operations, minimize the time spent on budgeting and forecasting, ensure compliance with donor restrictions and regulations and facilitate better donor reporting. As a cloud-based solution, it provides instant access to real-time insights into financial performance, ranging from individual transactions to consolidated analysis. And by integrating with other essential nonprofit applications, such as constituent relationship management, it enables nonprofit financial managers to efficiently manage across the entire organization using a single system.
Perhaps the Wallace Foundation put it best in its statement of support for building nonprofit capacity: “Organizations with strong financial management are better able to fulfill their mission and deliver high-quality services.” Today’s nonprofit financial manager faces myriad challenges, such as scarce resources, legacy technology and funders’ restrictions on how their dollars are spent. All these and more can undercut a nonprofit organization’s ability to meet stretch goals, whether it’s solving one of the world’s most pressing problems or improving the local arts scene. Better financial management tools are part of the solution, helping nonprofits make headway in challenging times.
Nonprofit Financial Challenges FAQ
What are the biggest challenges facing nonprofits in 2023?
Nonprofits cited their top three financial challenges in a recent survey by the Nonprofit Finance Fund: achieving financial sustainability for the long term, raising enough funds to cover their full costs and handling revenue on which funders place operational restrictions. These challenges are inherently related and can undermine a nonprofit’s operational effectiveness, program impact and long-term viability.
Why is financial management of a nonprofit harder than a for-profit?
Three nonprofit facts of life make its financial management harder than a for-profit’s:
- A nonprofit’s bottom line is its impact in fulfilling its mission, whereas a for-profit’s is a more easily calculated profit or loss. (Consider, for instance, measuring impact in poverty reduction.)
- Nonprofit revenue is not as fungible as for-profit revenue because donor restrictions on funding preclude moving money from where it has been allocated by the terms of a grant into any other line item where it may actually be needed more.
- Cash flow management is particularly challenging for nonprofits because their customers are not the same as their payers, as they would be in the for-profit world. This can create mismatches between the cost of serving beneficiaries and the receipt of revenues from funders, especially given the varieties and uncertainties inherent in the timing and unpredictability of different funding sources.
What are threats to nonprofit organizations?
Nonprofits face the fundamental challenge of maximizing the impact of limited resources to achieve ambitious goals. In one of the biggest threats to nonprofit organizations, known as the “starvation cycle,” nonprofits often find that their funders will support only specific program activities, but not the full cost of administrative overhead, such as salaries, training and infrastructure. Worst case, this can force a nonprofit to close its doors. While funders are gradually coming to terms with the starvation cycle and increasing overhead funding, considerable inertia still exists.