The term “financial resilience” has proliferated in the capacity-building community as a north star for nonprofit organizations. But how do you get resilient, especially when it comes to your finances?
Based on FMA’s 20 years of supporting small to mid-sized nonprofits around the country in financial management, I’m happy to tell you that it’s no quick fix that only the lucky discover. It turns out that financial resilience — the ability of an organization to address and survive financial adversity — grows out of an ongoing commitment expressed through an organization’s values, practices, and resources.
It Starts with Values
While it may be easier to point to necessary practices or resources, financial resilience actually starts with values.
Over and over, we have seen four values prove critical to an organization’s fiscal wellbeing:
First, a culture of inclusivity, in which financial data is shared with diverse stakeholders and not limited to the executive director and board. Inclusive organizations are generally stronger and more networked. They are not beholden to a single decision-maker, and they have institutionalized leadership across the organization.
Second, a penchant for continuous improvement around processes and systems. What financially resilient organizations understand intuitively is that operational improvements are not a one-time fix. The need to turn a critical eye to process and bring a standard of excellence to infrastructure is never-ending.
Third, an appetite for using data in making decisions. This can be a culture shift for many nonprofits, who are accustomed to relying on mission or gut and not hard data for key insights. While it’s true that data for data’s sake can be a waste of resources, trustworthy, accessible, and relevant data is a goldmine.
Fourth and finally, financially resilient organizations recognize that financial performance as well as the finance team itself are inextricably tied to their mission. The Finance department would have no reason to exist apart from the larger organization. Conversely, strong financial results make mission achievement possible. Resilient organizations consider the Finance team a core partner that helps them realize their missions, rather than a standalone transactional unit.
Practices for the Present and Future
Emerging from these four core values are, of course, the actual practices of financial management. At FMA, we categorize these practices among three key functions: planning, performance management, and operations.
Planning ranges from annual budgeting to multi-year projections that map numbers to the organization’s strategic priorities. Regardless of the timeframe, planning is about connecting program goals to resource decisions.
Performance management is about understanding the financial status of an organization and anticipating future needs. Often, this is relegated to budget-to-actuals monitoring, but financial performance management has the potential to be a much more dynamic endeavor that engages staff across teams, facilitating communication and guiding strategic decisions. Key performance metrics and dashboards can provide real-time information that allows for quick action, and the growing use of these types of tools is a promising trend toward resilience sector-wide.
Operations boils down to the fundamental building blocks of people, processes, and systems. For planning and performance management to happen, operations need to work. This means having the right skills and roles on the finance team, having efficient and effective workflows for core processes, and investing in appropriate systems and customizing them to the organization’s needs.
Resources: Financial and Human
When the values and practices are in place, we find that the resources follow. Leaders must understand and optimize their organization’s business model—that is, what drives revenue and expenses and how their nonprofit creates impact. Having a sustainable business model means resources are used in alignment with mission goals and that revenues reliably cover the full cost of operations.
Do you have sufficient financial resources to ensure resilience? Yes, of course, it means having enough revenue to reliably cover core operating expenses, but if resilience is the goal, “sufficient” must include resources to build and sustain a financial reserve as well. Many nonprofits stop at a balanced budget, yet aiming for an annual surplus is the key to building this capital. We call it “capital for change and security,” as it buffers the organization against future uncertainty and allows investments in growth and change.
Values, practices, and resources are the keys to financial resilience, but, in the end, every organization needs one particular kind of resource to thrive: people. People hold those values, implement and maintain those practices, and put those financial resources into action. And, in our experience, a well-balanced leadership team can set the tone from the top, modeling a collaborative and data-informed decision-making process to deliberately set the cultural norms that support the three key elements of financial resilience.
For more learning on the topic of financial resilience, please check out the webinar recordings of Achieving Financial Resilience: Part 1 and Part 2 presented by Hilda Polanco.