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Six Signs Your Nonprofit is in Financial Trouble

Posted by Andrew Barnett on January 14, 2015

Nonprofits generally run on lean, overworked staff. Instead, most of the money coming into the organization goes – or at least should go — toward improving society in some way.

But amid trying to change the world for the better, nonprofits occasionally find themselves in financial distress. Many times, the signs of financial problems show up in obvious ways — unsustainable debt, defaulting on payments, staff not receiving their paychecks for months on end, etc. However, more subtle clues usually precede these disasters, indicating the nonprofit’s money management needs a little restructuring.

If you run a nonprofit, remain vigilant for these less obvious signs that indicate financial problems have arrived, or at least are on the horizon.

THE LENDER ISN’T YOUR FRIEND

A lender isn’t a fortune teller, but they all have sophisticated metrics to determine the financial health of an organization to whom they’re loaning money. If the lender tells you to hit the road, or charges you an enormously high interest rate and refuses to budge, this indicates your nonprofit may not be in as healthy of shape as you think. Try to find out why you’re organization was denied that loan and work to correct the problem in a swift yet responsible fashion.

THE ENDOWMENT WON’T LAST FOREVER

If your nonprofit has an endowment, you want to draw down from it responsibly and ensure that, long-term, the money grows faster than your withdrawals. Of course, both the non-profit’s needs and fluctuations in the market mean that withdraw rates may change slightly. But using the endowment as an emergency piggy bank will lead to a less prosperous future for your organization in the years to come.

Note: If money in the endowment has been set aside for a particular reason (a restricted endowment), it needs to be used for that reason unless the donor says otherwise. If you even consider using that money for reasons other than its original intention, that means there are serious issues with your finances. 

TOO MUCH FAT

A key indicator of a well-run nonprofit is the percentage of funds that go toward the mission of the organization. The less an organization spends on administrative costs – within reason – the more an organization can spend to achieve its goals. If the percentage of funds going toward administrative expenses begins to creep up, it may be time to clamp down on costs. Remember, donors don’t give money to pay for lavish salaries and catering caviar for lunch.

MOVING MONEY AROUND

Perhaps project X went over budget, so you’re taking money out of project Y to make up for the shortfall. Then project Y runs over, so why not dip a little bit into project Z.

Unfortunately, this can turn into a vicious cycle that’s hard to break free from. That can lead an organization to make unsounds choices such as using its rainy day fund for non-emergencies, drawing too much from the endowment or taking on unsustainable debt. So if you’re constantly shuffling money around the organization like a game of musical chairs, it’s time to rethink your priorities and spending habits.

THE DREADED DONOR CALL

Normally, big donors don’t pick up the phone and explicitly complain that their money is being spent poorly (and if they do – you’re really in a heap of trouble). But if donors who usually support the mission wholeheartedly begin to call and ask financial questions, or if they express some reservations about giving for no obvious reason, take it as a sign they may be uneasy about the path the organization’s finances have headed.

POOR COMMUNICATION WITH THE BOARD

Uh oh! Fundraising is slow, money is tight and the board of directors wants an update at their meeting next week. This happens all too often, but instead of facing the board head-on about the problem, many leaders try to give the board as little information as possible to try to keep the group at ease.

Expect that to eventually catch up to you. When the board finds out about these issues, not only will the nonprofit’s finances be in ruins, you may find yourself out of a job. If you feel like you might be hiding something with the board, trust your gut. Then report all you can to the board and take a hard look at the problem and find creative solutions to get the issue under control.

FINAL THOUGHTS

If you notice these issues popping up, take them seriously. But understand that many nonprofit leaders have been down this path and have gotten their back to fiscal health. By recognizing warning signs early, you have the opportunity to steer the ship back in the right direction before it veers too far off course.

Want to learn more about how Zobrio can help your nonprofit maintain fiscal stability? Feel free to contact us.

 

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