For many nonprofit organizations, the inability to identify upcoming financial challenges mean they are in a constant struggle to fulfill their mission.
Early identification of a problem is usually the most efficient way to galvanize an organization’s resources to address it. Undetected and unaddressed, the challenges can grow, and solutions become more costly and time-consuming.
For many organizations, the reason problems go undetected can be traced to a few common mistakes which are easily corrected.
1. Failure to Analyze Financial Information
In many organizations, accounting is viewed as “bean counting” that is simply being completed for an outside party. Although it is true that other parties may need access to the financial statements of an organization, financial information is an important resource for those inside the organization. Organizational leaders who do not view their financial statements as a management tool are missing an important part of their overall responsibilities by not using the information to detect potential problems on the horizon.
Beyond using financial statements to determine whether the organization is financially sound, statements should be examined to determine how specific areas of the organization are performing. Regular review can identify unexpected and unbudgeted changes, such as downward or seasonal trends in contributions or small increases in operating expenses that add up over time. As soon as changes are identified, further investigation is needed to resolve the problem. There are always uncontrollable events, but regular review can allow for course correction when unavoidable events happen.
2. Not Using Projections Properly
Failing to prepare realistic projections is a common mistake made by many organizations. Without a clear plan of how the organization should be operating financially, it is easy to miss subtle clues that things are off-course. An equally costly mistake occurs when projections are prepared and then allowed to collect dust in a drawer. When projections are watched closely, management has the opportunity to make small adjustments to keep the organization on track.
3. Not Understanding Cash Flow Needs
A common causes of crisis in an organization is a lack of adequate cash flow. Without realistic cash flow projections, avoiding this crisis is nearly impossible. To identify future cash flow problems, an organization should prepare two sets of projections. The first should project cash flow needs over a period of at least one year. This information allows the organization to plan for long-term needs. Also, a short-term projection is needed for the next four to six weeks, which is updated at least every two weeks.
If a problem is identified, donors or lending institutions are often willing to help, provided that adequate time is given to address the problem. Many cash flow problems can be avoided if adequate time is available.
Avoiding these common mistakes can mean the difference between fiscal success and failure.
The small investment of time necessary provides substantial rewards, allowing the organization to focus on fulfilling its mission with the knowledge that it is also maintaining good stewardship of its financial resources for the future.