What is Financial Stability for Nonprofits and Why is it Important?

What is Financial Stability for Nonprofits and Why is it Important?

Nonprofits shape the world for the better. Household names like American Red Cross, Doctors Without Borders, National Geographic, and American Civil Liberties Union were founded on ideals of helping others and bettering the world. Their founders were not savvy businessmen, but the growth and dominance that these organizations have established over the years certainly designates them as successful businesses. 

Nonprofits and financial stability 

According to The Financial Health of the United States Nonprofits Sector: Facts and Observations, which studied the finances of just over 200,000 nonprofits between 2010 and 2014, 50% of the nation’s nonprofits had less than one month’s cash reserves at any given time, and about 30% of nonprofits had lost money in the three year period.

A Harvard Business Review article outlined the difficulty nonprofits face in breaking even, citing many money-management blunders, specifically among the nonprofit sector. If more than half of regular business start ups or new businesses fail within the first five years, the figure for nonprofits that fail is even higher. A simple Google search on why nonprofits fail returns many articles, all of which include in their lists of reasons: poor accounting and money management.

There are many reasons why nonprofits struggle to stay financially stable, but even more reasons they should strive for that stability. If not to continue doing the work of their mission by staying financially sound, two other reasons nonprofits should stay financially stable are to attract and keep donors and to stay in good standing with the IRS. 

Can’t live without ‘em: Donors

Research has shown that nonprofits who handle their money well are more likely to attract individual donors. Though nonprofits vary in income sources, it is vital that nonprofits work to instill confidence in their potential donors. After all, people want to know that their donations are going to support the causes that they believe in.

Many nonprofit directors believe that education on the issue or demographic that the nonprofit serves is often assumed to be the main way to encourage donors. They may also be inclined to tout low costs or spending.

But individuals, corporate partners, legislators, and others that contribute monetary funds want to know that their money is going to a financially sound organization, one that does and will continue to do good work. Showing good numbers and financial competency to any kind of donor helps nonprofits stay financially stable. 

Can’t live without ‘em: The IRS

An organization must go through the many hoops of achieving nonprofit 501(c)(3) status: paperwork, more paperwork, and of course, making sure their paperwork is accurate. And each fiscal year the nonprofit must submit an annual report to the IRS.

501(c)(3) status is important for nonprofits and it incentivizes donors to contribute, since their contributions to qualified organizations become write offs on their personal taxes. But this designation is significant internally, too, when it comes to managing contributions, developing a budget, and allocating funds for various expenses. As a nonprofit, you need to show solid record keeping and manage funds well in order to stay in good graces with the IRS and other oversight agencies.

Can’t live without ‘em: Temple Management

Here at Temple Management, our services revolve around keeping nonprofits financially stable, or returning them to that state if there are problems. As evidenced by the facts and figures on American nonprofits, accounting and money management should be among the top priorities for a nonprofit hoping to grow and succeed.

We know firsthand the challenges that nonprofits face in managing their accounting and want to take on the nitty gritty details of financial record keeping and money management to help nonprofits thrive. Contact us today to learn more about how our services can make a difference for you nonprofit!

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