There are dozens of reasons for a non-profit organization to exist. What is shared between them is that they do not operate to fill pockets but rather to further their mission. Therefore, finance raised for a non-profit organization is not to benefit owners or contributors but to achieve a bigger cause.
Still, finances are the most significant part of any organization since you need to pay employees. How a non-profit organization manages all this, let’s dig into detail over here.
So acknowledging the fact that the purpose of a non-profit is to feed the homeless, create employment opportunities, or raise money for other public benefits. Despite not being designed to earn profits; they are financially active.
It is even possible for them to grow into big institutions, such as hospitals, shelters, churches, universities, or even political parties.
Advantages of Operating a Non-profit
A non-profit enjoys several benefits. It has its own separate entity status. An NPO can make its own contracts and has limited liability protection.
A huge benefit is that they do not require to pay taxes. For instance, a non-profit museum will not have to pay for property tax, unlike a for-profit museum. That could, yearly, save a small fortune.
Besides that, government grants and employment benefits are available. Typically, board members are also not paid because of which money is saved. Another advantage about board members is that they are usually very experienced, which brings skills into the firm. As a result, it is easy to expand your network.
Difficulties a Nonprofit May Face
Non-profit companies have a lot of duties to fulfill. In order to fund their functions and day-to-day expenses, non-profit organizations have to live up to donor expectations to a great extent. In fact, they survive and grow primarily due to this funding.
However, it is quite a challenge to maintain cash flow in a non-profit. As it depends mostly on donor funds, expenses need to be taken care of. It is essential to know that donors do not expect anything in return, so they have to remain satisfied.
Some of the finance for a non-profit organization is from individual and institutional donors and other traditional sources. Others are from bank loans and foundations.
The reasons why non-profit organizations are more challenging to manage than other types of organizations are the following:
As their income and accounting are different, greater financial management is needed when operating a non-profit. This includes budget creation, measuring results with the budget, and keeping in check the variances required.
Although it is important to raise cash flow for both profits and non-profits, raising money for non-profits is hard. Unlike a for-profit organization, it lacks financial flexibility.
For example, when sales fall, they cannot offer discounts or other benefits. Due to this, proper cash flow forecasting is needed along with proper budget planning. Staying up-to-date with government granting and policies is also important.
As mentioned above, non-profit organizations greatly rely on donors. Money is usually donated if individuals and corporations believe in the cause behind the organization.
It is inferred to spend the contribution the way the donor intended it to be paid, to be able to raise funds successfully.
Rules to Managing a Nonprofit Organization
Good information is needed to carry out financial operations. It is essential for managers to understand their program costs. Decisions about contract terms, program expansion, fundraising needs, and any changes needed rely on your good information about the costs.
In order to support planning, a budget is needed. The managers should utilize the budget as a guide to judge the performance as soon as it is set. It will assist in knowing whether the performance has improved or worsened.
Criteria would be outlined with a proper budget. As a result, management can know whether they need to improve the course of action or not.
A budget should be kept up-to-date with the arisen situations. As a result, the overall performance of the company can be monitored. Adequate budgeting will provide all the financial information needed to support your plans.
It should be kept in mind that an operational budget should be achievable, realistic, and properly planned.
The whole organization shares the responsibility for making financial decisions and carrying them out. Therefore, there should be constant communication and proper authority during the decision-making process.
As non-profits stand at a higher state of integrity, they are expected to show honestly in all of their financial activities. Non-profit organizations hold accountancy for their donated resources.
Thereby, a specific purpose has to be shown to prove that the money was utilized for the acquisition of a better cause.
Mission statements are used to specify this purpose. Sometimes donors contribute for a particular reason as well; it has to be fulfilled. Due to this, the system of funding has been made more complicated.
Aside from having policies, internal controls, and job descriptions, donors demand other methods to maintain integrity. It is essential to know that an NPO is built based on values, goals, and leadership.
Build a Reserve
Prioritize starting and growing a budget reserve to protect yourself from emergencies. Make sure to have appropriate donor contributions, private trusts, government grants, and other non-guaranteed funding sources.
New Federal Tax Law will Affect Your Non-profit
Even though non-profit organizations are tax-exempted. However, some tax issues may still exist that need to be taken care of. For instance, Jobs Act and Federal Tax cuts can affect their own laws and plans.
This is because of the changes you did for state deduction. As a result, your mission and fundraising habits are influenced.
Provisions, such as a new rule, may even directly affect the organization. For example, a change in reporting of income and losses from other businesses can have an impact. Hence, it is vital to keep a check on updated laws in your region.
Having a significant amount of funding will help you thrive the same way your mission will. Sustainability is associated with flexibility, leadership, and planning. This means you do need not only a plan but also an emergency management plan and funding.
Sources for Non-Profit Funding
Non-profits should cleverly seek approaches that mostly suit them according to their needs. There are several methods, but the majority of organizations use more than one way to obtain funds.
Below are a few examples a non-profit organization can use to expand and start their projects:
Typically, a non-profit organization gives priority to government grants the most. Such organizations are constantly researching for government grants that may be available for them.
There are several different ways to go about this, but the two most common options. One is to comply with an existent government program that has already allotted funds.
Alternatively, there are government programs that send you money if your organization impresses them. To be able to earn money through the latter option, your organization should be more innovative and impactful.
There is a grant managing software available too. Additionally, to help you find the best grant for your business, the US government has an online searchable government grant database. However, government funding is not readily available; at least for some organizations, regulations have to be met.
When browsing for opportunities, it is critical to note eligibility requirements. Grant.Gov is one of the funding portals that can be used.
Charitable organizations and individuals like to contribute to an organization whose primary purpose is a public benefit. However, normally, a non-profit gets most of the charitable contribution from individuals rather than other sources.
In 2017, a study from Giving USA reports showed that out of over $410 billion donations in the US, 71% were individual contributors.
In recent years, social media is being used by non-profits as a medium of raising funds. Some websites allow users to search for charitable organizations and their projects.
One of these is GoFundMe that has recently gained popularity. It can be used to collect donations. Most organizations use social media as it can deliver results quite effectively. Moreover, there is almost no cost involved.
Convince donors effectively on social media; you must highlight your purpose and their reason, align together and present your story on not just one but multiple channels and social media platforms.
Crowdfunding platforms have been extremely helpful. After the contribution has been made, you can post updates on your page, which will boost the supporter’s confidence. As a result, they will feel appreciated and contribute in the future as well.
According to Caroline, VP of Patlo Business development, “Investors invest in people first, and ideas second.” Therefore, showing your donor that you are passionate and keeping a relationship with them can help you in the long run.
Program Service Revenue
This is quite like fundraising. It is more like a fun-raising event, according to Layman’s term. Plays, cinemas, concerts, local parties, concerts, and other meetings can be used to collect money for this program. The money collected is mostly dedicated to a particular project.
In order to attract people, advertisements are used. In these, people are made aware of the fact that these events are for a good cause, so that majority of people attend.
However, holding an event is not only costly, it can be risky too; there might be fewer attendees. But the program is still helpful as it still creates awareness. Oftentimes, after the event, individual donations may be made.
These are all the types of foundations:
Although these are private organizations, their boards usually comprise officers. Besides having their own staff that is professionally trained, they have their endowment funds separate from the corporation.
As a public foundation, there are many donors to them. Their aim is to increase grant funding and provide services to donors, which will help the local community. They also award scholarships to students. Recently, they have been quite active in helping purposeful donors.
Most of these donors want to increase donations without setting up their own foundations. Therefore, community foundations assist them. Even giving days are organized by Community foundations to help local non-profit organizations.
They receive funding from families and individuals. Large family foundations existing for years have started foundations in their names. Some of them are the Rockefeller Foundation, the Gates Foundation, and the Ford Foundation.
Although there are such foundations that receive funding in billions, most of the foundations are rather small and are likely to fund locally. These small foundations barely have any professional staff.
There is usually an application and approval process for these donations, sort of a non-profit version of earning a scholarship.
Corporate Matching Programs
The corporate matching program essentially doubles an employee’s initial donation to an eligible non-profit organization.
This source is least known to many small NPOS but actually is a great way to raise funds. Basically, the company donates an amount to your NPO if the company employee donates and successfully submits the proper paperwork to its HR department.
In order to be successful with raising such donations, it is important to tell the donor to inquire and submit paperwork to their company’s HR. Only big companies like Pepsi, Johnson, and Johnson, and Apple can raise funds with this kind of program.
Knowing how successfully large corporations take advantage of Corporate matching programs with such little effort, the practice should be done more frequently.
For corporations as well as smaller businesses, Corporate philanthropy has come to be an integral part. With consumers focusing more on the company’s social responsibility, companies have started giving more priority to CSR.
As a long-term commitment to charities and their purposes, corporate funding can be more market driver and episodic. They work according to campaigns, projects, and events. This is a great way of support, especially for newly made non-profits, special events, and programs.
Corporate partnerships for sponsorships and cause-related marketing are extremely important for non-profits; therefore, they are always looking for such opportunities.
Besides this, companies encourage their employees to give charities as well. Employee volunteer programs are popular. In fact, some grants are linked to employee volunteer hours.
Giving circles, formal or informal, are groups of individuals who give charity. Sometimes members may even get more involved in the non-profit organization than just providing funds. However, mostly, they go as far as donating only.
Sometimes there is a minimum annual donation set by a few circles. Members may pool money from outside sources for the NPO or contribute themselves.
As compared to other funding sources, these are much more crucial to find. This is due to the fact that they are most of the time not publicly known. The majority of giving circles are as small as four people, being run out of somebody’s home. Whereas others can be 100+ with a headquarter.
Others and NPOs can benefit a lot from Investment income if they are managed properly. Bank loans, stock markets, private firms, and many other sources can provide investment. As beneficial as investment incomes are, they are somewhat risky and can result in a company’s financial loss.
However, creating bank accounts and investing money to grow is not that safe, but it is a considerable revenue for NPOs. Even though there are not many risks involved, this is very time-consuming, and companies have to wait for years to generate a good amount.
On the other hand, stock market investment is quite common but may result in losses as there is no assurance available.
Unrelated Business Income
UBI includes income from activities carried out regularly. These are not substantially linked to the company’s exempt purpose and are more like a business. Income from sponsorship and advertising are two examples.
In a Nutshell
In order to run the business, non-profit organizations require enough funding sources. The contributions made act as the organization’s revenue and are supposed to be reported. Nine sources of finance for non-profit organizations mentioned above have clearly been elaborated. In the end, it depends on the NPO itself to decide which one is the best for it.
However, under common law, non-profit organizations are obligated to use the awards for the reasons donors assume. Using otherwise is prohibited, unethical, and eventually will ruin the organization’s reputation.
Restricted gifts should be set aside for an organization to attain this. This is because restricted gifts involve further accounting expenses. If a non-profit is caught up in huge expenses and struggles with growth, it will get all wound up in the starvation circle.
You should have proper knowledge of the costs involved when delivering different services and projects. What is most important is that you should have diverse income streams. Even if you are not a non-profit, it is still essential for you to follow all the rules mentioned above.
In conclusion, only with proper planning, good relationships with the donors, market analysis, and promotion can a non-profit operate in this competitive world. Most of all, your organization’s target will decide whether donors want to donate or not.