Guest Blogger – Gretchen Uphol

Myth Busting – Your Path to Financial Sustainability

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​If your organization believes any of the three myths below, you may be struggling financially but you don’t know why.

Myth One: Endowments are the best route to financial sustainability.

Endowments are typically seen as a safe solution for nonprofits looking to bolster financial sustainability. Funds in an endowment are permanently restricted and invested to produce an ongoing income stream for an organization.

Critical Concept

As a general rule of thumb, an endowment only has a meaningful impact if the income from investments is large enough to provide at least 5 percent of an organization’s annual operating budget.  This requires a hefty-sized endowment, usually an amount that is at least equal to the budget size of the organization.

​It may be difficult—if not impossible—for the average community-based nonprofit to raise the funds necessary to generate the required income on an annual basis.  There is a better way.

Alternative strategy

For most small to midsize nonprofits a more realistic and attainable way to boost financial sustainability may be prioritizing the growth of operating reserves.  Operating reserves are liquid and unrestricted net assets currently available for nonprofit use.

These funds can be put in the same accounts and earn the same interest as endowment funds but these types of resources provide more flexibility, which is critical for leaders of ever-changing organizations. Rather than raised in a full scale capital campaign, operating reserves are either built up slowly over time—by generating modest operating surpluses each year—or, increasingly, the result of foundation grants targeted for the purpose of building a reserve.

Myth Two: Nonprofits can’t make a profit

We meet many nonprofit leaders who subscribe to the general sentiment that nonprofits should never make a “profit” on the services they provide.  Not only can nonprofits take in more money than they spend, they must do so to be sustainable over time.

Critical Concept

Without a surplus—some excess in revenue above your actual cost of providing services—there is virtually no way to generate reserves that can carry you over rough patches in funding or help launch new programmatic initiatives.

The first step toward building a financial reserve is to create an organizational culture that accepts and strives to generate operating surpluses. 

Alternative Strategy

Nonprofits can be transparent in their plans to establish reserves by developing a long-term plan that outlines financial goals and clear policies regarding how reserves will be used to strengthen the agency and better achieve its mission.

Myth Three: Building reserves is not a priority for organizations with chronic cash challenges.

For organizations facing chronic cash flow shortages, building an operating reserve can feel not only daunting, but perhaps even unrealistic.

Critical Concept

It is the organizations faced with chronic cash challenges that stand to benefit the most from a culture of financial management oriented towards long-term stability.

It is possible for a cash-strapped organization to come to an understanding of what needs to be done to restore stability and commit to a rigorous financial fitness plan.

Alternative Strategy

Though it may be a slow and incremental process, it is possible for any organization to embark on the path of building financial reserves. What matters most is having the long-term vision, commitment, and tenacity to build and maintain operating reserves, even in the face of other obligations and distractions.

Operating reserves — liquid savings readily available for opportunities and emergencies alike — can be a game changer for nonprofit organizations. ​

Join Gretchen for one or both of her upcoming workshops on March 6, Telling Your Organization’s Financial Story (9:30am-4:30pm) and March 7. Operational Excellence (9:30am-12:30pm). Visit c4npr.org to learn more!

Gretchen Upholt, an experienced staff and program manager, has expertise in training, capacity building, research, and program and volunteer management. Before joining the FMA team, Gretchen served as the head of the Volunteer Department at the Thabyay Education Network in Thailand. In that role Gretchen developed a strategic plan to improve monitoring and evaluation and program management in her department. Gretchen holds a Masters of Public Administration in Public and Nonprofit Management from NYU’s Wagner School of Public Service, where she was a Head Teaching Colleague for the core finance and management classes. ​