Nonprofit Financial Management: It’s Time for a Paradigm Shift

Nonprofit Financial Management: It’s Time for a Paradigm Shift

Few would deny that we have gone through a tumultuous period with the economy. There is no consensus as to how long the turbulence will continue—certainly for months, perhaps for years, depending upon which analyst you are listening to. However, most of us would agree that economic times are difficult right now, for our NPO, for our members and/or for our stakeholders.

The current state of nonprofit financial management

Sadly, I have noted that many NPOs were not prepared for this major change in the economic environment. They had no plan for a dramatic shift which saw a significant increase in the demand for services. Simultaneously, too often, a significant reduction in their ability to maintain, let alone expand their services.

However, if you reflect on the benefits that most NPOs provide to society, it is just during an economic downturn that those services are most in-demand. If the economy is “soft” and business activity is slowing down, that’s the time when your trade association members need more training in marketing, customer service, and cost containment.

And maybe as a trade association, you have to provide training and/or seminars on those important topics at a fee that is less than what you were able to charge last year or the year before because your members cannot afford to pay the rates they paid during the “good” times. The question is: can your association afford to take a pro-active expansionary approach in these more difficult times?

Similarly, if you run a social service society, your services’ demand will likely heighten as the recession continues. The need is greater—but your revenues are less. The question is: can your society afford to take a pro-active expansionary approach in these more difficult times?

Too often the answer in both of these scenarios is no. Too often at the first sign of an economic downturn, NPOs cut back on their services. The exact same moment when the need for their services takes an upturn.

Why is this?

It’s time for a paradigm shift in nonprofit financial management

In my experience, it is because many NPOs take the term “not-for-profit” literally. Too often, they act as though it is wrong to plan for, and generate, a “reasonable” annual surplus. Often I have seen situations when the Board proudly approves a “balanced budget” that sets nothing aside for “tough” times.

Ultimately, when there is a reduction in cash inflow, the NPO has no financial cushion upon which to draw. NPOs should, in fact, make a profit on every product or service they provide, whenever possible. So that when experiencing tough times the NPO will have a financial reserve that will permit it to maintain, or perhaps even, expand its services.

What’s next for your nonprofit financial management?

It may be too late for this economic cycle, but when the economic fortunes improve for your association or society (and they will look at some point), do your stakeholders, your members and your clients a favour. Plan to generate healthy annual surpluses until you have the equivalent of a full year’s worth of operating expenses salted away in your association’s bank or credit union.

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