Stephen King | Nonprofit Hub Blog

Budgeting for Nonprofit Organizations

Stephen King — Thu, 23 Mar 2023 15:00:47 +0000

Are you currently working on creating a budget for your nonprofit organization? Effective budgeting for non profit organizations is essential to achieving goals. Creating budgets for your nonprofit programs in addition to an overall budget for your organization can seem like overwhelming tasks. Budgeting requires careful record-keeping, evaluation of the past, consideration of the future, and a thorough understanding of your organization’s current context.

And here’s the punch-line: you won’t get it right!

The thing is, the purpose of a budget isn’t for it to be right. The purpose of budgeting for nonprofit organizations is for it to reflect your realistic financial goals and plans for the upcoming year. The purpose of a nonprofit budget is to provide your organization with a roadmap that will help you plan, make decisions, and adjust the plan when things don’t go exactly as expected so that you can stay on track as the year unfolds.

Why Budgeting for Non profit Organizations So Essential to Nonprofit Accounting and Operations?

Budgeting for non profit organizations is, perhaps, the most important financial document for your organization because it is a financial management and strategic tool.

As a financial management tool, the budget outlines how your organization plans to use its money, breaking down your anticipated revenue along with forecasted direct and indirect expenses. The budget includes everything: programs, events, fundraisers, employee costs, rent, utilities, and more.

When used as a tool for strategic planning, a budget enables you to do the following:

Coordinate operations around both short and long-term goals
Fine-tune your operational strategy
Make informed decisions
Conduct more productive board meetings
Provide better direction to your nonprofit finance committee
Improve fundraising efforts with better-informed donors
Easily monitor the use of mixed-purpose funds
Make the best use of your funds overall
Stay on track financially

Types of Budgets for Nonprofits: Which Is Best for Your Organization?

Before you start a budget for your nonprofit, you must first understand that there are different types of budgets. Furthermore, it’s important to remember how each type serves a slightly different purpose. Knowing which type of budget you adopt will help you ask yourself the right questions and gather the right information for creating the most accurate budget.

The Incremental Budget

An incremental budget is based on your organization’s financial history. To create this budget, you start with the previous year’s budget and build on it, adjusting figures and adding or removing line items as necessary. With this type of budget, unspent funds are either deleted or reallocated.

An incremental budget requires the least amount of work. However, it can have a tendency to perpetuate financial problems, unproductive programs, and money waste in an organization. This is because it doesn’t require you to really comb through and evaluate each program and expense individually.

The Zero-Based Budget

A zero-based budget starts from scratch with a blank slate every year. While you can (and should) use the previous year’s numbers to estimate upcoming expenses and income, you should carefully evaluate each one. Assess whether the expense is worthwhile, whether the program is generating an acceptable ROI, and whether you can expect to receive similar donations from your existing donors.

With zero-based budgeting, expenses are more carefully evaluated. To earn their place in the budget for another year, costs typically need to be tied to real results.

Additional Types of Nonprofit Budgets

The incremental budget and zero-based budget are the two most commonly used budget types in nonprofit organizations. There are, however, a few other types of budgets that are worth mentioning:

Surplus Budget—Some nonprofits build a surplus into their budget in order to set aside rainy-day funds, pay off debt, or cover an expected upcoming decrease in funds.
Deficit Budget—A deficit budget is one in which an organization plans for its expenses to exceed income. Typically, it is not advisable to operate with a deficit budget. There are a few exceptions, such as if the deficit has a time limit and represents a real investment in the organization like an expansion project.
Break-Even Budget—A break-even budget is one that reflects an upcoming deficit or shortfall in funds. Rather than cutting line items, the nonprofit leaders focus on fundraising to increase funding and address the deficit.
“Known Risk” or “What If?” Budgets—It can be advisable to create a “known risk” or “what if?” budget for the purpose of evaluating potential risks or unexpected costs that could result in a cash flow shortage. Look at the conditions your organization is currently facing and create a budget for a worst-case scenario so that your nonprofit will always be prepared to weather financial storms.

12 Nonprofit Budget Best Practices for Better Financial Management

1. Your Budget Must Be Flexible

It’s important to restate that your budget won’t be exactly right. No one can see the future. So, while creating your budget, remember that the numbers you choose to put down represent your best guess and nothing that you put in the budget is set in stone. Pro tip: stay on track by having a helpful Nonprofit Budget Guide handy.

2. Start Early and Follow a Set Process

Although it’s never too late to make a budget, the process should ideally start two or three months before the beginning of your next fiscal year. This allows you enough time to gather all the information you need and to present the budget to your nonprofit board for approval.

3. Work Together

No nonprofit executive director is an island, and this is especially true when it comes to making a budget. Delegate as much of the process as you can to your development employees, program directors, and finance committee members. Having your program directors carefully create budgets for each of their programs will knock out a big portion of the data you need to produce an overall nonprofit budget. You can then focus on the rest of the organization’s expenses and funds.

Making it a team effort will help you create a more accurate budget.

4. Context Is Key

When it comes to budgeting, context is essential when considering every item. Think about where your organization is right now, the current donor climate, and your current expense climate. Do you suspect that your building’s AC unit is about to go out? Or perhaps you have other unusual expenses, fund shortages, or fundraising windfalls that you need to make special plans for.

5. Use Your Numbers

When making a budget, rely on your numbers—not your gut. Historic data is the most reliable information you can use for creating a budget. Just be sure that you’re using timely and accurate historic numbers when forecasting future expenses and revenue.

6. Make Your Budget Realistic

Dreaming is for writing mission statements. When making a budget, it’s okay to be optimistic. But it’s essential that you be realistic, especially when it comes to estimating the upcoming year’s revenue.

7. Sort Your Expenses

Keep your expenses sorted into categories (fixed and variable), and maintain a budget for capital expenditures that is separate from your operational budget.

8. Include Non-Monetary Contributions

Remember to include, record, and track non-monetary contributions with you budget. This might include volunteer hours or non-monetary contributions such as vehicles or other equipment. These are also known as in-kind donations. List them so that the value zeroes out while still being accounted for.

9. Focus on Cash Flow

When budgeting, keep an eye on your cash flow forecasting. For example, if you know that you have a big expense coming in the spring but do not receive the majority of your funds until year-end fundraising, it’s important to realize that you could experience a cash shortage that you will need to plan for accordingly.

10. Take Note of Your Budget Assumptions

If you make any assumptions (and you probably will) while creating your budget, be sure to make note of those assumptions. As a result, you can keep a careful eye on your guesswork. Perhaps some guesses will be little less educated than the other numbers on your budget, so adjust your numbers if needed.

11. Shoestring Budgets Are Risky

Operating with a shoestring budget is risky. For this reason, it’s best to budget with a 3-5% surplus written in. This gives you a bit of wiggle room if your cost estimates came in low or your revenue estimates turned out to be too optimistic.

12. Revisit Your Budget Every Month

Creating and making the most of a nonprofit budget isn’t a one-and-done job. You should revisit your budget every month and compare it to your actual numbers. This allows you to keep a close eye on your strategic plan for the year and where how your nonprofit is actually performing.

Compare Budget Vs. Actual to Stay on Top of Variances

As you go along, don’t be afraid to make changes and adjustments to your budget to better fit the year’s actual numbers. By making continuous adjustments, you can keep your nonprofit on track to successfully complete another year.

Streamline Budget Creation and Budget vs. Actuals Evaluation With an Affordable, Automated Back Office

Many nonprofit leaders assume they can’t afford the type of back-office that’s required for effective nonprofit budgeting and comparing budgets vs. actuals. This, however, is not the case. Like small for-profit businesses with limited resources, nonprofits can also take advantage of the many benefits of outsourced accounting service providers—like GrowthForce—that are highly experienced in and specialize in accounting for nonprofits.

Nonprofits have intricate needs and face unique challenges that most accounting services don’t have experience in. That’s why I created GrowthForce: to help and serve this overlooked group of nonprofits. With over 35 years of nonprofit financial management experience, I’ve single-handedly seen the difference it made when organizations used accounting as a fundraising tool.

For a fraction of the cost of an in-house bookkeeping and accounting department, outsourced providers give your organization access to the tools, technology, and experienced teams of accounting professionals who can show you how to leverage your back office and your annual budgeting to take your mission to the next level.

*This spotlighted blog post is courtesy of GrowthForce

About the Author

From tech founder to nonprofit CFO and fundraiser, Stephen King brings a unique combination of vision, foresight, and experience to help nonprofits maximize their cash flow and operational efficiency. He’s been a dedicated board member of many nonprofit organizations – including seven years working for Amnesty International USA – where he was the Director of Development and Chief Financial Officer. His time at Amnesty reinforced Steve’s life-long commitment to giving back to the community through charitable causes. Regarded as one of the accounting industry’s top thought leaders, he’s currently serving as President & CEO of GrowthForce, a heart-centered company with specialized teams providing accounting for nonprofits. Learn more about GrowthForce by connecting on LinkedIn.

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The 2022 Nonprofit Financial Management Checklist

Stephen King — Thu, 27 Jan 2022 16:00:59 +0000

With all the demands of running an organization, executive directors often let their nonprofit financial management go by the wayside. The focus tends to be on the mission, fundraising, education, and other day-to-day management responsibilities, which are all important. Setting aside financial management, however, is a big mistake. This is especially the case when it comes to maintaining the health of your organization. Any successful nonprofit must be run like a successful for-profit, and that means knowing your numbers and using them to run your organization.

If you’re not a numbers person and are new to keeping tabs on your nonprofit’s financials, a good place to start is here. Take a look at the following six essential nonprofit financial management reports. Make sure you’re familiar with these reports and how to read them. By going over them every month, you can use the data for the benefit of your organization and grow your mission.

Nonprofit Financial Management Checklist: Do You Have These 6 Essential Reports?

1. Statement of Financial Position

The statement of financial position (also referred to as the statement of financial condition) is similar to a balance sheet in a for-profit company. The report’s content is based on an accounting formula:

Assets = Liabilities + Net Assets

The document is basically a mirror of a for-profit’s balance sheet. However, in a for-profit, the balance sheet lists owners’ equity instead of net assets. The balance sheet is important because, at a glance, it provides you with a clear view of your nonprofit’s financial health. You can quickly see whether liabilities are overwhelming your organization or if you’re in a stable financial position.

2. Statement of Cash Flow

A nonprofit financial statement of cash flow is also similar to the cash flow statement used by for-profit businesses. It includes financing, investing, and operating activities broken down into categories. This makes it easy to see where the cash flowing in and out of your business is going or coming from.

It’s important to keep a close watch on cash flow statements. After all, these documents show you whether you currently have enough money to cover the expenses currently due. While your budget might be balanced overall for the year, that doesn’t mean the timing of money coming in and going out of your nonprofit will be perfectly timed. Cash flow statements help you keep tabs on the timing of your revenue and expenses, so that you always have enough money in the bank to pay your bills, support programs, keep the lights on, and cover payroll.

Want to know the best way to improve cash flow for your organization? Consider a sustainer program. Sustainer programs not only offer your organization a more predictable revenue stream that makes cash flow forecasting a breeze, but they can also bolster your nonprofit with many other benefits. These include improved budgeting and effective planning.

3. Statement of Activities

A statement of activities is the nonprofit counterpart of the for-profit’s income statement. Like the balance sheet, this report is also based on an accounting formula:

Change in Net Assets = Revenues – Expenses

The statement of activities is important for executive directors to review regularly because it can reveal shifts and trends in your net assets. If they are decreasing over time, this could suggest that your revenue is decreasing, your expenses are increasing, or both. Whatever the reason, any scenario that results in decreasing net assets is cause for concern in a nonprofit. This should prompt careful evaluation, consideration, and action on the part of the executive director and board.

4. Statement of Functional Expenses

In a nonprofit, it’s essential to keep track of expenses for the purpose of budgeting and not over-spending. But tracking expenses is also essential to maintaining a good reputation with nonprofit watchdog organizations and attracting donors.

A statement of functional expenses allows you to meticulously track how your organization’s money is being spent. This helps improve your impact while also operating transparently with respect to the portion of your funds that go to your mission compared to overhead expenses. This statement breaks your nonprofit’s expenses into categories such as programs, direct mail campaigns, education, management expenses, administrative costs, and labor costs. With this breakdown, you can accurately track and report how your organization spends its money.

5. Annual Report and Form 990

Some nonprofits simply use their IRS Form 990 as an annual report. Using this tax document on its own, however, represents an enormous missed opportunity to highlight your impact, market your mission, thank your donors, appreciate your volunteers, and drum up even more support for the upcoming year.

In addition to including official financial reports, your annual report should tell the last year’s story of your organization. Use the document to summarize the previous year’s happenings. First, outline your mission. Then, list your major achievements, significant donations received, overall impact, the people (volunteers and employees) who made it all possible, and your aspirations for the upcoming year.

6. Nonprofit Budget vs. Actuals

Every month, compare your nonprofit’s budget to your actual numbers and take note of any variances. If it looks like you are spending more or less than expected or generating more or less revenue than expected, you will need to make adjustments accordingly. Making minor adjustments each month—rather than one big adjustment at year-end—helps you to operate with your goals always in sight.

Nonprofit Best Practices for Budgeting

Even though it’s not an “official” report since it reflects projections instead of actual numbers, a budget is one of the most important financial tools in nonprofit financial management. It helps you set goals and stay on track while anticipating and planning for potential problems. One way to stay on top of ebbs and flows this year is using a helpful Nonprofit Budget Guide.

Since budgeting is so important for nonprofits, it’s important that you implement sound processes for putting together your organization’s budget. Some of the best practices for nonprofit budgeting include:

Start early with enough time to gather data, get relevant input from stakeholders, and present your budget for board approval
Develop an official process for budgeting with a collaborative budget workbook and delegation of tasks to key members of your team
Take time to evaluate the current context as well as your historic financial data
Create a separate document where you record the reasoning behind all assumptions you make
Be realistic about the revenue estimates you include and don’t be afraid to contact past corporate donors and foundations to ask about their plans for the upcoming year
Keep fixed and variable costs separated in different categories, in addition to operating vs. capital expenditures
Take time to forecast your cash flow for the upcoming year and consider the timing of incoming revenue and outgoing expenses
Maintain good bookkeeping records for accurate data
Don’t forget to include non-monetary contributions so that your Form 990 is accurate
Take time each month to compare the numbers, as mentioned above

Financial Management for Nonprofits: Always Be Report-Ready With a Back Office Built for Nonprofit Accounting

Accounting for nonprofits does not have to put an excessive strain on your nonprofit’s operating budget. Your nonprofit organization can access the expertise of entire teams of bookkeeping and accounting professionals by choosing to outsource your back office function.

View The Full Infographic HERE.

A team of outsourced nonprofit accounting experts can set your organization up with easy access to QuickBooks reporting for nonprofits. In addition, you can access all the fully integrated tools and technology to help you automate your record-keeping processes. These can include expense tracking, time tracking, funds use, and more.

After working in the nonprofit financial management industry for 35 years, I see a difference when organizations use their numbers to make mission-driving decisions. That’s why I started GrowthForce—to serve the overlooked group of nonprofits. With a powerful back office, you can start learning how to leverage your numbers to make data-driven decisions. These decisions can cut costs, generate the biggest ROI, and lead your nonprofit to a healthier, more impactful future.

*This spotlighted blog post is courtesy of GrowthForce

About the Author

The post The 2022 Nonprofit Financial Management Checklist appeared first on Nonprofit Hub.

Bounce Back From A Nonprofit Budget Deficit

Stephen King — Wed, 13 Oct 2021 10:00:31 +0000

It’s no secret that running a nonprofit is difficult, challenging work. No matter how many regular donors you have, for many executive directors, there’s no guarantee that from month to month your revenue will be enough to further your mission. Costs fluctuate. Pledged funds fall through. Office roofs spring leaks. Nonprofit budget deficits happen.

No matter how well you plan and budget in your nonprofit, you cannot plan for everything. Budgeting perfectly is next to impossible. Some months will end with a surplus while others leave you staring down a bright-red deficit.

Knowing how to deal with a nonprofit budget deficit, rebound, and prevent them from recurring in the future can mean the difference between calling it quits and pushing your mission’s impact to the next level.

Take Action: What to Do When Your Organization Suffers Nonprofit Budget Deficits

Determine the Type of Deficit

If you find your bottom line in the red, the first step you should take is to look more closely. Figure out why and how you have a deficit. Understanding the type of deficit you have will help you determine how to effectively address it.

Three common types of nonprofit deficits include:

1. One-Time Deficit

This type of deficit happens as a result of an expensive, one-time problem that’s not likely to recur. For instance, a one-time deficit would be one that occurs as a result of pipes springing a leak and your office flooring needing to be replaced. An unexpected expense like this could cause a budget deficit because you didn’t budget for it to happen. Thus, it may expose the need for an emergency fund. Remember that one-time deficits don’t usually indicate systemic problems in your nonprofit’s finances and can typically be resolved quickly.

2. Recurring Deficit

A recurring deficit is any repeated deficit in your budget, whether you’re looking at your organization as a whole or at an individual event. This type of deficit indicates a weakness in your organization, your operational strategy, and your budgeting. Recurring deficits are a symptom of a bigger problem and should be addressed with operational and strategic improvements. They’re also one of the many reasons why you should review your budget forecast quarterly.

3. Residual Deficit

A residual deficit refers to a loss that lingers through a longer-than-ideal recovery period. Significant deficits from which your organization needs time to recover therefore result in residual deficits. They can occur either as a result of one-time deficits or recurring deficits. No matter the cause of a residual deficit, they should be addressed and resolved as quickly as possible. Any lingering deficit weakens your organization financially, leaving you vulnerable to even the smallest hiccups in operations, productivity lags, or cost fluctuations.

Find An Immediate Fix for Your Nonprofit Budget Deficit

Since residual deficits weaken your nonprofit, finding a solution to the immediate problem that will resolve your deficit is important to ensure your organization recovers.

Before approaching your board with the problem, do some of your own research. Explore potential solutions and talk with a trusted advisor. It’s helpful to get a fresh perspective and another set of ideas.

Three quick and popular strategies for immediate action include:

Re-Allocating Core Funds: Look over your current budget for expenses to see if there are any costs that are not absolutely essential. If you find non-essential expenses in the budget, eliminate them for now to cover your deficit. Just be sure you’re only considering expenses within your core funds and not cutting costs that will only free up restricted funds.

Considering a Loan or Line of Credit: If you run into a significant one-time expense or a recurring cost that thrusts your organization into a deficit, you can consider covering these expenses using a loan or line of credit from a lender at a bank or credit union. These solutions, however, must be carefully considered. They come with their own expenses (origination fees and interest) and add a monthly payment to your list of ongoing expenses.

Holding a Special Fundraiser: When your nonprofit’s in a pinch, don’t be afraid to call on those who have supported you in the past with a special fundraiser. You might be surprised how many people and businesses are willing to step up to help you continue furthering your cause.

Solve Your Operational Strategy for Long-Term Recovery

No matter the type of deficit your nonprofit suffers, you need to find and revise your operating strategy. Make sure you have a long-term solution to avoid future deficits. A long-term recovery plan might include the restructuring of your organization, operational adjustments, changes to your fundraising events, and/or budgeting for the creation of an emergency fund.

Keep Morale High and Culture Positive

When the times are financially tough, don’t allow them to also become emotionally tough. There’s nothing worse than letting a budget deficit send your morale into a downward spiral. Keep your spirits high, reassure your staff to maintain their confidence, and use the deficit challenge as a team-building event that bonds you and your staff closer together.

While these are great reactive steps to take after you realize your nonprofit has hit a budget deficit, the more important thing to focus on is: How do I make sure this doesn’t happen again?

6 Ways a High-Powered Back Office Can Keep Your Nonprofit Budget on Track

Luckily, there are ways to help mitigate the risk of your nonprofit experiencing budget deficits. And it starts with getting your back office in order. Data optimization is key to making sure your nonprofit stays on track. This can help you catch an issue before it’s too late.

Here are a few ways a powerful back office can help you avoid a budget deficit…

1. Know Your True Bottom Line

In a nonprofit, the bottom line doesn’t always reflect the money you actually have available to put toward your expenses. In nonprofits, funds are often restricted. Additionally, the lag between when you record funds and when you actually receive funds can create an artificially inflated bottom line. With a powerful back office, you’ll be better able to parse out your bottom line between restricted funds and core funds. You’ll also have a clearer picture of your current cash flow.

2. Allocate Indirect Costs for Reimbursement

If you have a deficit, take a close look at your contracts and grants with the federal government to check the spending rate. A strong back office can ensure you’re properly allocating your indirect expenses to these pools of restricted funds. Oversights or mistakes here can result in shorting yourself (and your budget) when it comes time for reimbursement.

Pro Tip: Properly allocating indirect costs can mean the difference between securing funding for the next year, quarter, or month from government grants, individual benefactors, and corporate donors. Efficient and accurate management reporting is critical in ensuring your financial arm has the ability to accurately track and report indirect cost allocation. Read more on how accurate reporting helped this nonprofit jumped from a $75,000/year grant to a $150,000/ year grant from the same foundation.

3. Identify and Cut Nonessential Costs

Comb through your expenses, looking to cut anything that is not absolutely essential to do your work. For example, you can go green and save on paper, ink, storage, and equipment costs by using digital forms and storing records in the cloud. Although community is often a very important aspect of the nonprofit structure, consider whether your organization could socially afford to decentralize your office. This type of change will eliminate one of your biggest overhead costs (after labor) to free up an enormous amount of cash.

4. Identify Your Most Impactful Activities

Despite the major revenue it generates, could your annual fundraising gala actually be costing you money? With a powerful back office, you’ll be able to look at each of your revenue channels (fundraisers, events, mailers, marketing campaigns, etc.) with respect to deficits and surpluses. By evaluating profit and loss statements by program, you can determine your most and least effective activities. Then you can focus on those that really make the biggest difference to your cause.

5. Improve Retention Rates

A high-functioning back office can help you stay in control of your retention rates. Replacing employees, volunteers, and donors are all incredibly expensive activities. The U.S. continues to face the ‘Great Resignation’ as 95% of American workers are thinking of quitting their job, according to a June 2021 survey from job site Monster.com. Lowering employee turnover should be a huge part of your human capital strategy. A strong back office helps you identify strategies to improve your retention rates all around.

6. Use Nonprofit Budget Surpluses Wisely

Once you’re free from budget deficits, meeting your budget, and even experiencing the occasional surplus, your back office can help you identify the wisest ways to reinvest your cash. You can make data-driven decisions to ramp up your most effective fundraising efforts. You could also try out a new fundraising campaign or tuck away the funds for a rainy day.

Unique Challenges + Going Forward

When you’re concerned about facing budget deficits, the last thing your nonprofit needs is another significant overhead expense. So, it might seem crazy to even consider building up your back office. However, considering the benefits of outsourcing, such as improved efficiency, accuracy, reporting, and reduced cost in comparison to building a full internal accounting back office, it may be worth it in the long run.

Nonprofits are harder to run than for-profits. I can say this with certainty having spent 35 years of experience running both. Nonprofits have intricate needs and face unique challenges that most accounting services don’t have experience in.

That’s why I created GrowthForce: to serve this overlooked group of nonprofits. I’ve single-handedly seen the difference it made when organizations used accounting as a fundraising tool. At GrowthForce, we specialize in nonprofit accounting and financial controller services. What makes our work meaningful is how we can help our clients help more people.

With a group of financial experts that deliver timely and accurate financials, (and virtually by your side to help you read, interpret, and understand your management reports), you can enter your future board meetings with the knowledge and confidence needed to help you bounce back from your nonprofit budget deficit and help you avoid them in the future.

*This spotlighted blog post is courtesy of GrowthForce

The post Bounce Back From A Nonprofit Budget Deficit appeared first on Nonprofit Hub.

How Showing Donors the ROI Will Boost Your Fundraising

Stephen King — Tue, 22 Jun 2021 10:00:39 +0000

This blog was sponsored by GrowthForce

Pop quiz! What accounts for more donations in the nonprofit world: A) larger corporations or B) individual donors?

If you answered A, you are not alone. One of the biggest misunderstandings is that larger corporations are the biggest givers to nonprofits. In reality, it’s the complete opposite—over 80% of donations come from individual donors.

Donors give for a variety of reasons, like a personal connection to an organization. They may give because of a foundation’s proximity, or because they feel moved by the cause. Perhaps they donated because of a unique marketing strategy. However, there is one underlying theme when donors give more consistently: when they are made aware of the exact, potential impact their dollars will have.

It’s evident that when you can show a donor the tangible return on investment (ROI) of their gift, you get a higher average gift and more frequent giving.

As you know, improving donor relations is a critical component in every organization’s strategy. If you aren’t using your numbers to help strengthen this relationship, you may be missing out on some big opportunities (and money!).

First Things First: Get The Data

The secret to successful fundraising lies in knowing your numbers.

Having your fingers on the pulse of your nonprofit’s financial data has many benefits. The transparency of this information allows everyone in your organization to stay on the same page—management, development directors, program directors, the board, etc.

To get started, have your bookkeeper set up your accounting system to show Development Profit & Loss as a separate cost center.

Why is this important? It allows you to see which fundraising activities provide the highest ROI and contribute the most to your fundraising goals.

This information is a game-changer. It enables you to show donors and the board how much money gets spent on programs versus administrative costs. Best practices are to spend 12¢ per dollar to raise $1. Donors want to know their money is furthering your organization’s mission, and this is the tangible way to prove it.

When you show the donors the tangible results of their gift—aka the return on investment to their contribution—they are more inclined to give more knowing more specifically how they are helping.

Review Important Nonprofit Metrics

Once your books and chart of accounts are set up properly, you’re ready to analyze key metrics to help drive outcomes. For example:

Program Efficiency

How can you calculate this? Program Efficiency = Program Expenses / Total Expenses

What will this tell you? Calculating program efficiency helps you assess how efficiently your organization is fulfilling its mission statement. It also gives you a powerful tool to show your donors how effectively your organization operates (i.e. how much of their donation will go toward good deeds rather than administrative costs).

How can this help your nonprofit? Donors want to see exactly how their dollars are being spent. Measuring this will help your donors determine which program they will want to contribute the largest amounts to. These are usually the programs with the most tangible results. The more you demonstrate to a donor how their contribution makes an impact, the more money you can raise.

Bottom line: Often, nonprofits believe events are their biggest fundraising activities. This is rarely the case. Having visibility for the economics of each of your programs allows you to see the value of each output. The programs with the highest efficiencies are the programs you want to focus your fundraising efforts around—the ones with the highest outputs. You know these will have the highest impact that you will be able to show donors.

Donation ROI

How can you calculate this? Donation ROI = Total Fundraising Costs / Total Dollars Raised

What will this tell you? Use the donation ROI equation to determine how much your organization spends to bring in donation dollars.

How can this help your nonprofit? Using this metric, you can determine your most successful events, fundraising channels, and donor types. You can see whether any fundraising channels are costing your organization more money than they’re generating. This information will help you strategize which channel to target.

Bottom line: You can use this metric both organization-wide, and as a closer look at fundraising event, campaign, donor type, or channel. For example, look at the donation ROI for a silent auction event, a direct mail campaign, funds raised through your website, or a social media campaign.

Persons Served

How can you calculate this? Beneficiaries Served = Number of Beneficiaries / Period of Time or Program

What will this tell you? Calculate the number of people served over a specific period of time or program to compare different outreach efforts and to see how your impact grows.

How can this help your nonprofit? To know your impact, you need to find out how many people your organization has reached. This will help you see if your efforts are reaching them enough to achieve the nonprofit’s intended missions. Plus, this will give you a nice number to be able to share with donors. That way, they have a tangible number on how many people they have reached from their gift.

Bottom line: Measuring these outcomes will help your nonprofit determine which programs you should allocate more of your fundraising budget to in order to increase your impact.

3 Ways to Show Donors the Impact of Their Donations

Now that you know what numbers have weight behind them, the next big question is what to do with this data?

Donations to your organization cultivate an ROI that extends beyond the monetary funds. The cumulative impact of any single nonprofit’s efforts is powerful enough to change the future. Here are three ways you can show donors the potential impact of their donations.

1. Data Storytelling: Tell the Story About Donation Dollars

Storytelling is essential for a nonprofit. Using your numbers to level up your storytelling will transform your narrative to make a more powerful impact.

When you tell stories about the impact that donations have on the people you serve, you connect your donors to the intrinsic reward of supporting a good cause.

The proof is in the numbers: Studies show that storytelling plays a significant role in two key areas: memorability and persuasiveness. A study from Stanford professor Chip Heath found that 63% of participants could remember stories, but only 5% could remember a single statistic.

In another study, researchers tested two versions of a brochure for the Save the Children charity organization. One of them featured statistics on the plight of African children and one was a story of Rokia, a seven-year-old from Mali, Africa. The story-based version outperformed the infographic version by $2.38 to $1.14 in terms of donations per participant.

Every nonprofit has these types of stories to tell. Regardless of your mission, you have the immense power of storytelling that can inspire your donors to give.

2. Attach Each Gifting Amount to an Outcome for Donors

With good expense allocation, you can determine the exact cost of all the services you provide. This will let you connect different levels of giving with the specific services those dollars will help you provide. This transforms your donation ROI from abstract numbers into concrete narratives.

For example, a nonprofit that provides shelter might be able to advertise that with just $6,000 in donations, ten more people can be removed from homelessness. Perhaps they can say that $36 equals one day of programs for adults with disabilities, or that by giving 10 cents a day, you can feed a hungry person.

You could advertise that $22 provides a day of meals to a community, $25 funds a day of education, $50 supports community maintenance, $100 supports staffing, and so on. When soliciting donations, this allows you to outline various levels of giving and what each means to your nonprofit.

By connecting different donation tiers with specific short-term outcomes, you can inspire new and repeat donors to continue and/or increase their gifts.

3. Create (or Improve) Your Donor Stewardship Program

Donors want to know their gift is making a difference. The number one reason why donors leave an organization is that they fail to understand if the organization is accomplishing its mission. One way to hold onto your donors is through nailing your donor stewardship.

Donor stewardship focuses on communications and relationship-building that take place after a gift has been received from a donor.

This is where donor stewardship programs are key. Creating a systematic process to recognize donors after they make their gift will improve your donor retention rate. In addition, making sure no donor falls through the cracks will yield a higher gift.

Here are three key factors for your donor stewardship program:

Segmentation: Segment your donors. This can be done by many different thresholds (examples: gift size or geographic area). Once your donors are segmented, this will help you set guidelines on how to recognize and tailor your message.
Communication: Create a communication schedule. This is arguably the most important piece of donor stewardship. Communications should be personalized based on each segmentation. While these efforts should be consistent, they should not be overwhelming.
Feedback: Following up on your communication strategy, consider including a feedback portion. Check-in with the donor to see how they are feeling. This will let them feel like a valuable part of your organization and increase their engagement.

Keep track of each donor’s ROI on their gifts, and make a point to include the information in each donor’s personalized hero story that you include in your follow-up donor messaging.

How a Robust Back Office Can Help You Serve More People (and Raise More Money)

With an outdated bookkeeping and accounting system, calculating your donors’ ROI cannot be easily or accurately done. Attempts to track metrics related to your nonprofit’s impact and ROI without a system of robust, streamlined accounting tools will only serve to strain your already limited resources.

After working in the nonprofit financial management industry for 35 years, I saw the difference it made when organizations used accounting as a fundraising tool. Nonprofits are harder to run than for-profits. Having done both, I know the important advantages of looking at the numbers.

I started GrowthForce to continue to honor my commitment to philanthropy. At GrowthForce, we specialize in nonprofit bookkeeping and accounting. What makes our work meaningful is how we can help our clients help more people.

Partnering with a team of accounting professionals enables nonprofits to leverage a powerful back office. That means you can focus on what matters: serving more people and raising more money. If you are struggling with financial management or not getting actionable insights for your board to make smarter decisions, have a conversation with one of our nonprofit performance specialists.

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