When a not-for-profit starts up, it is working hard to support its mission with a small budget and a lean team. But as the organization grows and is able to take on more employees and operating costs, it can be challenging to figure out how much money to dedicate to the cause versus how much to pour back into the organization’s operations to ensure even more growth towards its mission.
The nonprofits best postured for long-term success are those that focus on smart financial planning at the outset by embracing a smart allocation of expenses — allocating approximately 80% of expenditures to program-related expenses and approximately 20% to fundraising and general and administrative (G&A) expenses. If a not-for-profit can maintain this allocation ratio as it grows, the amount of money it has to designate to both the mission and operations will increase, allowing the organization to successfully grow its team and serve its community.
But the question is: How does a growing not-for-profit actually maintain that split when both donations and expenses increase faster each year? There are three key areas that not-for-profits should focus on — hiring, revenue sources, and budgeting.
Hiring the right people upfront is critical to future financial success. Many nonprofits initially opt for volunteers in the start-up phase, but it’s often more valuable to strategically invest in the right full-time talent. While the team may be smaller, you’ll have the right people and skillsets in place to successfully get the organization off the ground, conquer the challenges startup nonprofits often face and ultimately run the not-for-profit as a business. As more funding comes in and the organization grows, it’s important to reevaluate the staff and ensure that they can keep up with the new demands, challenges, and requirements that will come in the next phase of maturation. For example, a not-for-profit’s accounting staff often consists of just an outsourced bookkeeper, but as the organization undertakes larger and more complex federal, state or private grants, it may need a full team of accounting employees to keep up with the grant requirements.
It’s also important to have clear revenue streams and goals each year. Focus not only on what the actual revenue sources will be but also how feasible it will be to keep those revenue sources and mix growing year after year. Equally important is budgeting, which many not-for-profits do not focus on in the startup phase to help project for future growth needs. A sound budget is critical to determining how much money a not-for-profit will have each year to fund its cause and how much can be allocated to fundraising and G&A expenses. Not-for-profits should prepare a budget annually, allowing them to reevaluate and reallocate operating and programming expenses as the year progresses.
While it can be challenging for a nonprofit to maintain financial success during a major growth period, keeping a keen eye on employees, revenue and budgeting are critical to successfully funding the organization and ensuring long-term success.