Why should we care about financial health?
I’ve had several discussions lately with board members of nonprofits on financial management topics that had an odd, disconnected feel to them that I couldn’t pinpoint at the time. One was about operating reserves and how much was the ideal amount to have in reserve – 3 months, 6 months, or a full year’s expenses? Another was about how to determine the best mix of income sources for a nonprofit that has grants, government contracts, and fee income. In both conversations I asked the board members my favorite question: Why? This is a set up, of course, since I think that reasonable reserves are valuable to have, and that understanding the sources of income is a key to financial health. The “Why” question has to be asked when financial matters are considered without any connection to the nonprofits’ mission – that’s the disconnect. The purpose of these particular queries had more to do with creating a financial model and satisfying the board members’ perception of their role than with improving the nonprofit’s ability to serve its community. Finding the balance is very hard, though, and we have few guides.
Nonprofit Quarterly has been one of those guides recently with their spring issue titled “Revenue is Destiny”. I enjoyed reading a preview of the summer 2007 issue, especially this excerpt from an interview with Richard Brewster, executive director of the National Center on Nonprofit Enterprise. NCNE “helps nonprofits make wise economic decisions”.
NPQ: What should boards focus on if they are concerned about long-term sustainability?
RB: This may be counterintuitive, but the central question is the quality of the program. In other words, the worst threat to nonprofit sustainability is if your program is crap. A nonprofit’s only reason for keeping going is to change people’s lives, communities, the environment, and so on for the better. If a nonprofit is not making the biggest difference it can with the resources available, it is being wasteful. From an economist’s perspective, it is not putting its resources to best use and is inefficient. I’d find it odd to apply the word sustainable in any really meaningful way to such an organization.
I love the directness of this comment. Why should nonprofit directors and board members be concerned about their financial and economic condition? As a tool to deliver good programs to change communities and lives, both today and in the future.