May we all enjoy a prosperous future. For nonprofits, the need to achieve a state of economic well-being, demonstrative healthy growth, and measurable social impact is imperative for their future prosperity.
Taking stock of and monitoring organizational health is a shared responsibility of both professional staff and governance volunteers. It’s been my experience that those teams who have designed and practiced comprehensive monitoring and embrace change are much better positioned to sustain the organization over time.
Nonprofits are working hard to deliver service to their communities, while navigating the tenuous fundraising environment and growing leadership gaps. National trends are showing fundraising pressure tightening placing pressure on operations, and a significant number of executive leaders looking to retire at high rates in this new decade. These trends elevate the need for holding appropriate operating reserves and written leadership succession plans.
Operating (Cash) Reserve
A commonly used reserve goal in the sector is 3-6 months’ expenses that provides for payroll and operational funds to be available in times of unforeseen challenges or opportunites.
In 2018, “almost 50 per cent of nonprofit organizations did not have the bare minimum of three months’ reserve funds – a necessity in a climate where funding can be volatile…” (1). This being the low end of a desirable level, organizations should have enough in reserve to cover at least one full payroll.
Setting a high end goal, an organization’s finance committee might set the reserve to cover the amount of two years’ budget, and structure additional oversight and management of that reserve under an Board appointed investment committee. In a 2019 Ontario Nonprofit Network (ONN) survey, 8.7% of the respondents stated they hold operating reserves of more than 12 months (2). This minority representation is particularly disconcerting given the growing social needs across our communities.
Boards and executive leadership have a strategic imperative laid out in front to define a clear path to achieve strong financial health. For these nonprofits achieving an operating reserve will require a principled, disciplined approach embraced by staff, volunteers, and donor. Two strategies may help them get there:
- As difficult as it may seem, adjusting expenses to free funds to be set aside to build an operating reserve over time is an investment in security. Perhaps starting with a modest 2-5% of revenues to help achieve the desired 3-6 month cash reserve; and
- Examining current donor solicitation to encourage contributions to the future prosperity of the organization’s mission by portioning a percentage of all gifts to the operating reserve.
With so many nonprofits looking to create secure financial futures, it would be prudent to set operating reserve goals based on cash flow and expenses, while having a long-term financial plan in place to achieve and maintain the desired goal.
Staff Development and Succession
For any nonprofit having a written staff development plan, including a leadership succession plan, is a forward thinking exercise. Our sector continues to grow, while challenged with a low national unemployment rate, shortages in emerging leaders, and numerous executive leaders nearing retirement. These conditions underscore the urgency to prepare for anticipated and unexpected changes of leadership at all levels.
“Planning for succession is a critical element not only for good human resource planning, it is also an essential part of good governance … it is of increasing urgency for individual organizations and the sector as a whole…” (3)
66% of nonprofits do not have a succession plan in place, whereas only 16% stated their plans include the top position and other senior position(s) (4). These percentages underscore that most nonprofits are not adequately prepared for leadership disruptions or unexpected change.
Given the strategic nature of recruiting and retaining talent, it is prudent to treat succession planning as a strategic priority across the organization, and should include 5 key elements:
- Assess vacancies,
- Align organization vision with a succession plan,
- Cultivate internal talent,
- Have a written on-board plan for all key leadership roles, and
- Outline an executive search plan.
Nonprofit services have become an integral part of our society and we depend upon their good works everyday. With this in mind, executive leaders and governance volunteers need to dedicate greater effort to improving their organization’s financial health and succession planning. We can all agree, we need healthier nonprofits to help create healthier communities.
Reference (1-4) – Sector 360 Survey (2019) conducted by Ontario Nonprofit Network