Financial sustainability in non-profit organizations represents a deliberate and strategic approach where efforts within the organization come together to aim for the continuity of important activities despite facing critical issues. Leadership in sustainability relies on a range of methods and tactics, from which four essential traits are formed, which may be supported by actions, as follows:
1- Financial Practices.
2- Development Funding.
3- Strategic Planning and Thinking.
4- Innovation Capability.
First: Financial Practices:
Sound financial practices are the primary and essential condition for financial sustainability. Financial practices are also defined as the routine way in which daily financial activities of a non-profit organization are collected, recorded, and reported, and when necessary, acted upon. These financial practices manifest themselves in three aspects:
A- Financial Goals:
The need for clear short- or long-term financial goals establishes the minimum income and costs necessary to fulfill the mentioned mission. The concept of setting clear short- and long-term financial goals does not merely include identifying minimum expenditure rates and income targets and comparing them, but it extends to providing a detailed budget presentation that makes addressing it a beneficial matter. A well-detailed budget of revenues and expenses represents one of the essential tools available for effectively managing any organization.
Non-profit organizations may lack expertise and financial information systems that enable them to operate using these means. They may also need the will or inclination (motivation) to make stringent decisions regarding adopting practices that often lead to setting financial goals and achieving budget flexibility. Researchers in this field, such as De Waal in 2005, have included some in-depth ideas on how to elevate the budget beyond primitive practices represented by the preparation of financial reports based only on financial forecasts. Here is a summary of some ideas:
1- Set goals related to market conditions, not just history.
2- Make budgeting a continuous and ongoing strategic practice, especially with changing conditions, as the approaches followed can become obsolete.
3- Build proactive systems that look beyond just the financial system.
4- Ensure resources are always available "on demand," not based on historical forecasts but on strong business arguments.
5- Enable easy access to information at all levels of the organization.
While there are many types of budgets, some may offer higher value for non-profit organizations. Item budgets or line-by-line audits are a very common solution, but they aren't highly strategic. In contrast, program budgets pay attention to specific program areas and general expenditures, helping non-profit leaders understand the true costs of programs or services.
A complete understanding of all costs is critical for good financial management, but budgets must be based on accurate information about the organization's programs and services. The budget should include historical information, outline it, as well as identify constrained assets and differentiate assets belonging to programs, providing a realistic picture of financial goals. (According to Kotloff & Burd, in 2012).
Leon suggested in 2001 that the financial sustainability of the organization depends on strategic and financial planning and sound management and financing. In general, organizations should be clear about their financial goals, realizing that financial processes can be dynamic, and have a plan that defines the organization's strategy, priorities, and the costs of implementing actions within it.
How does a non-profit organization develop budgets that support strategic goals and implement them?
So what are the alternatives to budget deficits and revenue shortages?
Answers to this question are consistent across non-profit and for-profit organizations and involve reducing services, cutting staff and resources, or alternative revenue programs.
How then does a non-profit organization balance its budget?
Davidson identifies some basic considerations for government, which include:
1. Enhancements in revenue, similar to mechanisms for generating additional revenue, including diversifying funding programs or social enterprises or purchasing grants for non-profit organizations.
2. Prioritizing services, which includes giving priority to critical services for essential spending in non-profit organizations.
3. Reducing operational costs, which involves cutting services or relying more on volunteers or turning to in-kind donations to offset fixed operating costs in non-profit organizations.
4. Regionalization or consolidation of services, generally referred to as shared services, or enabling non-profit organizations to share resources or spaces or strategies.
5. Long-term financial planning, which means aligning financial capacities with long-term service goals for any non-profit institution.
B- Financial Reporting:
Financial reporting refers to the types of financial information used by non-profit organizations to assist in decision-making. Good reporting practices should extend beyond basic accounting practices, such as deposit and expense records, to include comparisons between actual spending and budgets and prior expenditures. Cash flow statements and various financial performance ratios are also valuable, and understanding program costs and operating or general expenses, as well as distinguishing between them, is very useful.
Allocating programs and trained staff helps reduce deficiencies and generate more accurate and reliable financial information. Organizations cannot provide informed reports without complete information, and their leadership needs to ensure that the resources for reporting or technology or programs or internal skills match the programs and services at the core of their mission or mandate.
Are resources extremely limited?
Is the staffing structure appropriate?
Have programs become more sophisticated, requiring the organization’s management to evolve?
Leaders must ask themselves if they have sufficient internal skill and support to produce important financial reports because limiting this capability also restricts oversight functions and analytical potential. If financial sustainability depends on wise financial planning, how should the financial performance of a non-profit organization be measured and reported?
The answer to this question is that non-profit organizations do not prioritize profit, meaning that typical cost-benefit analysis "is not suitable for assessing an entity that does not aim for profit and has no monitored share price or stockholders," according to Drom in 2007.
C- Financial Transparency:
All non-profit organizations must undergo audits to see how funds are used and distributed or allocated. Transparency refers to the extent to which internal and external stakeholders have access to financial information that addresses their organizational concerns. The efficient and transparent use of funds is at the heart of building a strong relationship with funders, as funders trust not only in the organization's ability to fulfill its mandate but also in the efficient and effective use of money in the process.
This practice helps ensure that actual expenses do not exceed what is planned, thus enabling leadership to make informed decisions regarding budget management and providing programs or services that keep the organization running, while requiring transparency in holding their leadership accountable.
Organizational procedures must produce clear indicators of financial status, alerting account holders and stakeholders to deficiencies, and reporting must be clear and easily understood by non-financial readers, allowing all levels of the organization to participate and take responsibility or show reluctance toward maintaining targeted revenues and expenditures.
Second: Development Funding:
Non-profit organizations depend on funds from a wide array of sources, which include individual donations, corporate support, government and institutional grants, contracts, engagement fees, and selling goods and services. Moreover, the mix of funds varies from one organization to another and based on the activity area or sector.
Active development funding, therefore, is another essential condition but a basic requirement for financial sustainability.
I define development funding as:
A- Revenue Generation
B- Revenue Diversification
C- Private Income
These three categories of development funding components are not mutually exclusive:
A- Revenue Generation:
Revenue generation is an ongoing priority for the organization and is supported by a suitable level of resources, like all income-generating strategies that a non-profit organization may use to generate the financial resources necessary to implement its mission.
The expert Simone (in 1997) states in this regard: "Non-profit organizations need to take their revenues seriously and treat it like a business."
Generating funds requires investments in income-generating ventures, and according to Setty and Ziccoli in 2012, revenue generation planning can help identify maximum costs while fundraising. Organizations also need to consider funding limits imposed by donors in transferring assets and resources to fundraising initiatives. Therefore, each institution is likely to have a different approach and a different set of values. At the very least, revenue generation should be an active priority supported by adequate and appropriate resources from the organization.
According to Walters in 2006, revenue generation has two dimensions: it depends on both donor sponsorship and donor retention, as organizations actively invest in both activities.
According to Moore in 2000, a fundraising plan clearly considers all the following goals: short- and long-term objectives, overall orientation, positioning, supported cause, financial goals, budget, and monitoring or financial guidance considerations, serving as a valuable tool for aligning operational and strategic plans within non-profit organizations to reach a specific source of income.
Moreover, a fundraising plan is inherently connected to value-driven production, differing from companies relying on customers and clients, as non-profit organizations depend on donors, members, and volunteers who contribute a mix of charitable contributions in money, time, and resources.
Development funding activities operate on multiple levels within the organization and are fundamentally related to the external concepts of the organization that fundraisers work to shape, needing development funding to focus on donors' interests and needs.
B- Revenue Diversification:
This refers to the need for diverse income sources and a multi-faceted approach to development funding. According to Leon in 2001, best practices regard that at least 60% of an organization's budget should come from at least five different sources.
Setty and Ziccoli state that multi-sector targeting is a diversification approach requiring a focus on a wide range of donors, where tactical plans consider individual donations or major gifts, corporate sponsorships, or private sector grants. Generally, fundraising methods can be categorized in two ways: the first is donations or agreements and the second is transactional exchanges and discounts or gifts.
C- Private Income:
Many non-profit organizations explore their own forms of income generation alongside fundraising to invest in their growth and development. Private income generation describes the type of unrestricted revenue that the organization can achieve.
Examples include endowment or trust fund contributions, general donations, sales of goods or services, social enterprises engaging in mission-related work, and financial management, which means strategic management of assets for performance and partnerships with companies and sponsorships or marketing related to specific issues.
In general, approaches will vary among non-profit organizations, but it is wise for these organizations to consider future funding models to include "a range of optimal funding sources" that align with their needs, some of these opportunities may include "social alliances" where non-profit organizations seek to expand sources for solving a social problem, and partner with companies eager to enhance their brand or image.
These three features of development funding enable the organization to operate effectively and flexibly, as effectiveness is the second main component of financial sustainability.
Third: Strategic Planning and Thinking:
Non-profit organizations must spend their money efficiently and align financial resources with sensitive goals of financial sustainability. Strategic planning and strategic thinking encompass a clear mission, vision, goals, and means to drive results toward the desired target, achieving and measuring them effectively.
Strategic thinking is the mental process of determining how to succeed in achieving sustainability, while strategic planning identifies the critical steps necessary to achieve it. Each of these concepts helps the organization develop the foresight capability to explore all potential future contracts.
Strategic planning and thinking consists of the following interrelated elements:
A- Strategic Clarity:
The need for financial sustainability to be a methodical and strategic approach by the Board to consider fulfilling the mission alongside ensuring revenues.
B- Leadership and Control:
The need for strong and effective leadership and an effective governance model, matching the organization’s conditions and culture;
C- Structural Components and Planning Tools:
The need for clear strategic and operational plans with continuous monitoring and analysis of performance, as these features of strategic planning and thinking serve as a means to demonstrate credibility: the third main component of financial sustainability.
Fourth: Innovation Capability:
The capability to innovate is the distinctive characteristic of an organization that is prepared to be responsive and adaptive to all internal and external pressures and changes, as financial sustainability depends on the organization’s ability to innovate, meaning consistently meeting new and changing needs, addressing problems, and embracing challenges through proposing creative solutions.
According to Moore et al. in 2007, the term "innovation" refers to seeking creative, unusual, or new solutions to issues and needs.
Bowman in 2011 indicates that the organization must act sufficiently to seize opportunities and respond to unexpected threats in the context of financial sustainability, which directly leads us to the organization’s creative and innovative capabilities.
There are three important aspects of the creative innovation of non-profit organizations:
A- Sector Ambiguity and Adaptation: Extracting benefits and warnings from entrepreneurial methods and profit strategies.
B- Community Collaboration: Community collaboration as a means to address constraints.
C- Social Capital: Knowledge management and thinking in systems to gather social capital and disseminate it effectively.
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