Leading a nonprofit organization can be a rewarding experience as you make a positive impact on your community. However, you may face financial challenges, such as ineffective cash flow management, making it difficult to fulfill your mission. In this article, we’ll explore some of the most common issues nonprofits experience and offer strategies for navigating them.
Unstable funding
One of the biggest financial challenges facing nonprofits is unstable funding. Since you’re not generating revenue through sales like a for-profit business, you likely rely on donations and grants to fund your operations. However, fluctuations can happen in your revenue cycle — donors cease their regular contributions, foundations stop making gifts, or the government might cut grants. All these instances can lead to severe cutbacks to your nonprofit operation.
That’s why it’s critical to diversify your funding options as much as possible and not rely on one or two revenue streams. Some examples include:
- Online shopping fundraisers
- Restaurant partnerships
- Product fundraising
- Recurring events (auctions, 5K races, giving days, etc.)
- Matching gifts
- Google Ad Grants
- Monthly subscription model
By diversifying your funding sources, you can help minimize the impact of any one donor or funding source shifting priorities or withdrawing their support.
Managing expenses
When running a nonprofit, you must be strategic about managing your expenses and balancing your mission with financial sustainability. While you may be motivated to make a difference in the world, this can sometimes come at a cost. For example, if your nonprofit focuses on providing services to low-income individuals, you may struggle to charge fees that cover the full price. Additionally, you may have to deal with unexpected expenses, such as equipment repairs or legal fees.
Nonprofits often have limited resources, so you need to be careful about how they spend your money. That’s why creating a budget that reflects your priorities and provides a clear picture of your financial situation is important. Consider working with a financial advisor or accountant to manage your expenses effectively. Nonprofit accounting software is also a wise investment to consider. With the right platform, you can:
- Categorize expenses by fund or program.
- Track budgets by fund or program with donor and grant management, financial reporting, and bank reconciliations
- Create custom reports based on data that matters most to your nonprofit
Staffing
Attracting and retaining talented staff members is another obstacle you might encounter. As a nonprofit, you often compete with for-profit organizations for skilled workers, but you may be unable to offer the same compensation or benefits due to a limited budget. This can lead to high turnover rates, further exacerbating financial challenges.
You need to invest in them to attract and retain talented staff members. Try to offer competitive salaries and benefits packages. However, if that’s not possible with your budget, provide them with an engaging work experience that allows them to focus on your nonprofit’s mission and seize opportunities for professional development and growth. Building a positive work environment can help motivate your staff to contribute their best efforts consistently.
Reporting requirements
If your nonprofit is tax-exempt under section 501(c)(3) of the Internal Revenue Code, you’re subject to specific accounting and reporting standards, such as Form 990. These requirements can be time-consuming and costly, particularly for smaller organizations with limited resources. If your nonprofit doesn’t comply with these requirements, it can result in penalties and damage your organization’s reputation.
To help overcome this obstacle, you must have the right financial systems and processes in place and stay up-to-date on reporting requirements and changes in tax regulations. Using nonprofit accounting software makes it easy to stay compliant with the IRS and instantly create specialized reports — e.g., state of financial position, statement of economic activities, budget vs. actual, etc. — to keep stakeholders informed and prepare for tax filing.
Donor retention
Another nonprofit finance challenge is changing donor priorities. Donors may shift their focus to different causes or organizations over time, leaving your nonprofit struggling to maintain its funding levels. Additionally, reaching out to potential new members and convincing them to commit to your organization can be difficult.
To mitigate this risk, you must stay engaged with your donors and keep them informed about the impact of their contributions. By regularly communicating with donors and demonstrating the value of their support, you can build strong relationships that withstand changes in donor priorities.
Additionally, you should facilitate the donation process with nonprofit accounting software, which can allow you to:
- Easily accept payments from donors by credit card, debit card, bank transfer, or check
- Get mobile app access
- Connect your bank and get instant updates for cash flow and expense tracking.
- Import transactions from other apps — e.g., DonorPerfect and Fundly — and keep all your data in one place by
Competition
Increased competition is another financial challenge that your nonprofit may encounter. With so many organizations competing for limited funding, it may be difficult for your nonprofit to stand out and secure its needed resources.
To address this obstacle, you must differentiate your nonprofit from your competition by clearly articulating your mission, vision, and impact. By developing a compelling story and communicating it effectively to potential donors and partners, you can build a strong brand that sets your nonprofit apart from the competition. Consider investing in an email marketing strategy to help promote your nonprofit and attract prospective donors.
Nonprofits must navigate a complex financial landscape to succeed, from funding and budget constraints to regulatory compliance and risk management. However, by understanding these challenges and developing strategies to address them, you can better position your nonprofit for long-term sustainability and success.
