It’s only natural that, as a potential donor, you want to understand whether an organization you are considering funding is financially sustainable. By this, we mean, can it reliably fund its core programs and services over time?
Sounds like a simple question to answer, but in reality, financial sustainability is a spectrum and tricky to assess in the nonprofit context. Strong programs and demand for services do not automatically equate with adequate funding—to the contrary, success typically means more demand, so money is often needed. For a mature organization, you’ll be looking for a stable funding mix that isn’t overly reliant on a small number of funders, enough cash on hand to weather an unexpected storm, and robust financial reporting systems that support sound financial management. If the nonprofit organization is less financially mature, you might have more questions than answers. So ask yourself: Do the leaders seem to have a reasonable plan to achieve financial stability (and the necessary capabilities to put that financial plan to work)? Don’t be surprised if you yourself (and your support) are part of that plan.
- How strong is the potential grantee’s financial management?
- Does the financial management team have the requisite experience and judgment?
- Does the organization have systems in place to evaluate its financial progress?
- Does the organization have a solid strategy to raise revenue?
- What percentage of costs is covered by reliable funding sources?
- What restrictions have donors placed on their funding?
- How concentrated are revenue sources?
- What plans, if any, does the organization have in place to become financially sustainable (if it is not already)?
- Does the organization have enough cash on hand to weather an unexpected storm?
Since answering these questions in the nonprofit context may not be simple, it might be helpful to review the following guides on researching a nonprofit’s financials and the table of financial resources.
What do you look for when reviewing a nonprofit’s finances? Are you surprised that there isn’t a question above on identifying how much a nonprofit spends on overhead? If so, read “The Nonprofit Starvation Cycle
” to see why depriving a nonprofit of overhead funding can limit the ability of the nonprofit to get results.
Check in next week for six red flags to look out for when researching a nonprofit’s finances.
This is the latest post in our Nonprofit Due Diligence series. Click on the links below to read previous posts. Join the conversation by commenting below or on Twitter at #NonprofitDueDiligence. You can follow Give Smart updates at @BridgespanGroup.