FinanceLeadership

5 Ways to Increase Nonprofit Financial Literacy

By April 23, 2019 No Comments

By: Steve Zimmerman & Chris Fink

When you think of exciting topics to discuss at a staff meeting, financial statements probably don’t rise to the top of your list. Yet, everyday nonprofit staff are making decisions which might affect their organizations’ financial viability – whether it be meeting potential donors, putting together a budget for a grant proposal, or deciding which vendor to use to provide a critical service. While we might have whimsical quips, like “No money, no mission” the reality is many of our organizations haven’t invested in equipping and empowering staff with the knowledge they need to meaningfully contribute to the organization’s finance health.

Unfortunately, financial literacy among staff is often a low priority, and while nonprofits should focus on accomplishing their missions, a little knowledge can go a long way; engaging everyone in understanding how their actions contribute to the financial health can help maximize the organization’s impact.

We’ve seen financial leaders in organizations – who may also be Executive Directors, CFOs, Development Directors, Program Directors, Board Members or some combination of the above –build financial literacy by committing to these steps:

  1. Share Financial Statements
  2. Structure Financial Statements by Program
  3. Communicate Your Revenue Drivers
  4. Engage Everyone in Budgeting
  5. Have Fun 😊

1. Share Financial Statements

To build nonprofit financial literacy, you have to begin by sharing financial information. Walking through and explaining the meaning of both the income statement and balance sheet with staff and board builds an understanding of the financial health of the organization. In addition to financial statements, simple ratios can be used to provide a snapshot of financial health and to show how the finances are trending.

No matter your specific tactic, practice reading financial statements with colleagues. Finance people may feel like they “just explained this statement”, but that was probably months ago, and others haven’t seen or thought of financial statements since. Few will understand and feel comfortable with them after the first engagement, but the repetition will help crystallize their meaning over time. Providing these learning opportunities as part of the normal course of business will go a long way to developing financial literacy and enabling people to make decisions with finances in mind.

2. Structure Financial Statements by Program

Financial leaders often present expenses by what they are: salaries, travel, technology, etc. If they’re grouped at all, they’re often in categories aligned to specific funding sources such as a foundation or government contract. While structuring the accounting in this way is helpful for reporting to funders, it doesn’t allow people to easily see themselves or their work in the numbers. Presenting revenue and expenses by the programs in which people work will be much more meaningful. Accountants call this a functional financial statement, pictured below. This presentation format also makes financial information more relevant for board members who support an organization because of the programs they operate, not because of the funders. A functional structure enables more strategic discussions around how a program performs overall as opposed to focusing on how much has been spent on printing.

nonprofit financial literacy3. Communicate Your Revenue Drivers

In addition to understanding the expenses for each program, creating functional financial statements allows staff to understanding how each program generates revenue. Often differences exist between how money comes into an organization (ie: foundations, individuals, government contracts and/or fee-for service) and how it spends the money. Functional financial statements allow you and your team to make the connection. Again, if we truly want everyone to contribute to the financial viability of the organization, staff and board should understand from where revenue comes. By looking at trends over time, understanding revenue streams for high-impact programs, and the composition of total revenue for individual streams, the conversation will inevitably turn to how to strengthen your organization’s revenue strategy.

4. Engage Everyone in Budgeting

There is a reason it is a cliché to say, “the budget is nothing more than the numerical expression of an organization’s strategy.” Because it is true. And, just as you wouldn’t engage in strategic planning without engaging the staff on some level, it should be unheard of to go through budgeting without involving the staff. Unfortunately, compressed schedules and a lack of tolerance for numbers often get in the way of involvement.

Overcome these barriers by setting a budget schedule that starts early enough to allow ample time for staff involvement and by partnering a finance person with program staff to help determine the costs of running of their programs. This can be done around the organization’s budget or even on a smaller scale when it comes to budgeting for grant proposals. Participation in this process will help staff understand and support all the costs that are required to run an organization – beyond just direct costs – and builds a foundation from which they can make decisions later on if the budget needs to change.

5. Have Fun

Lastly, we know it’s corny to end a list with this one. It seems like a cop out to get to “five things.” But, as financial leaders, your role in overcoming the fear of numbers is really important. Amidst the dread and often over emphasized “seriousness” of financial information there should be joy. Financial leaders can help others find it! Patience and consistency can empower those above, below, and adjacent to you on the organizational chart. By building nonprofit financial literacy, the team can make collective decisions when things are tough and celebrate financial victories along the way.  And, above all, having strong financial footing can allow the organization to increase its impact and create the communities we’re all striving for.

Implementing these five changes can quickly help strengthen nonprofit financial literacy in your peers and may make shepherding your organization’s finances feel less like being a castaway all alone on an island. By sharing your knowledge and leadership you might even be able to make finances fun. (OK, we won’t push it too far). If you have questions, or need help along the way, don’t hesitate to get in touch.