5 Key Financial Health Metrics for Nonprofits
Maintaining the financial health of a nonprofit organization can be challenging due to fluctuating funding sources, burdensome regulatory requirements, and continual economic uncertainties. Understanding and regularly assessing your financial health is crucial for ensuring your organization’s long-term ability to execute its mission.
1. Days of Cash on Hand
This metric indicates whether your organization has enough reserves to cover operating expenses during unexpected financial challenges. Best practice is to have 90 to 180 days (3 to 6 months) of cash on hand. This allows your organization to maintain service continuity in the face of short-term pressures. Balances greater than 180 days allow for greater flexibility, risk management, and potential investment in new capacity and other opportunities. Balances below 30 days are cause for an in-depth review of operational cash needs. Ideally, you should structure your budget to slowly build cash balances month-over-month and year-over-year.
2. Revenue Diversification & Sustainability
The constant resource pressure we face as a field means the line between financial success and failure is a thin one. For many organizations, funding can change significantly from year to year, harming their ability to expand, plan, and simply meet their communities’ needs. Having revenue sources that are both diverse and sustainable helps to alleviate this pressure. A diversified mix of fundraising, earned income, grants, and government sources is one part of a healthy resource base. Within this mix, how sustainable is each source with respect to year-over-year stability? Are short-term resources (e.g., time-limited grants) used to fund long-term projects (e.g., permanent staff positions)? Does program expansion rely on fundraising expansion? Each organization’s ideal revenue mix is different, but a diversified and sustainable set of income sources is essential for financial resilience.
3. Budget Preparation and Monitoring
Creating a healthy resource base to support your mission over the long term begins with budgeting. It’s not enough to make sure the budget balances on paper. Are your funding levers (e.g., enrollment, utilization, etc.) being monitored versus expectations set in the budget? Does your budget call for a 3-5% net income margin annually? Do you have a capital budget, and if so, does it draw from operating cash reserves or is it funded from other sources? All of these elements of resource sustainability can be addressed in a reality-based budget process. This approach can – and should – spur difficult conversations and decisions, but your mission is worth the effort.
4. Financial Forecasting
Within a highly uncertain environment, budgeted assumptions are likely to change significantly over the course of the fiscal year. Regular financial forecasting helps anticipate future funding needs and challenges as they emerge versus your budgeted plan. Consistent and comprehensive forecasting, with thorough reviews and proactive adjustments, allows your organization to plan effectively and mitigate potential financial risks.
5. Debt and Liabilities
Evaluate whether your organization’s debt levels are manageable relative to its assets and revenue streams. Because nonprofits operate within thin margins, debt capacity should be used sparingly and wisely, and always within the context of a healthy balance sheet. What is your ratio of assets to liabilities? What is your debt service ratio? Nonprofits often face cash crunches – is your line of credit strictly reserved for managing payment delays? Is your long-term debt building your asset base in a way that furthers your mission by building program capacity? Working with your board, auditors, and finance team to set and monitor debt and liability ratios appropriate for your organization will go a long way toward ensuring a healthy balance sheet.
Ensuring Long-Term Financial Health
By regularly assessing these key elements, your nonprofit can maintain financial health and be better prepared to weather economic fluctuations.
At Mission + Strategy, we understand the complexities of managing a nonprofit’s financial health. With years of experience as thought partners to nonprofit leaders, we’re here to provide insights, resources, and collaborative support to help you navigate these complexities with confidence. Our shared back-office services can help streamline your financial management processes, ensuring your organization remains resilient and focused on its mission.
Whether you’re seeking guidance on financial best practices or exploring new ways to strengthen your organization, we’re here as a trusted partner in your journey toward lasting impact.
Together, we are stronger.
If you’re interested in financial management or need support in balancing your mission and business strategies, we’re here to help.
Mission + Strategy is an invested thought partner to your nonprofit organization. Through our Strategic Advising, Mergers & Partnerships, and Shared Back Office service solutions, we help nonprofits achieve alignment between their mission and business strategies.
