One of the most important aspects of maintaining a small business or nonprofit organization is effective financial management. This concept of financial management is especially true in the current economic climate. In 2021, the inflation rate reached 7% (Bloomberg), which is the highest it has been in nearly 40 years. Due to this, it is more important than ever before to take an active approach of protecting your assets. Listed below are a few strategies to help improve your financial position as a small business or nonprofit.
Diversifying revenue streams involves leveraging various opportunities to bring money into an organization. Typically, for nonprofit organizations, 88% of total money raised comes from 12% of donors (Bloomerang). This funding breakdown typically causes many organizations to become extremely dependent on a small subset of their target market. and thus, diversifying revenue streams allows an organization to become more flexible for unforeseen circumstances. For a nonprofit organization, a diversified channel of revenue could consist of a variety of individual donors, foundation grants, corporate partnerships, government funding, fundraisers, servicing fees, and more. As a starting point, having more than one stream of revenue is great, but the ideal position should be to have upwards of 5 revenue streams.
Accurate financial records allow an organization to better understand their previous financials, analyze trends and forecast their financial future. While it can be easy to push off maintaining accurate records due to time or money constraints, it is extremely important that these stay up to date. A few great ways to manage financial records are to consider hiring a freelance bookkeeper, who can provide service for a few hours a month or on a consulting basis. Proper records allow an organization to maintain confidence in decision making, as records provide organizations with concrete data of previous decisions that led to success.
In line with maintaining proper financial records, organizations should ensure to separate business and personal accounts. According to a survey conducted by Clutch, over 25% of small businesses owners do not separate business and personal bank accounts. This lack of separation can become challenging when it comes time to determine cash flows. Separation of business and personal bank accounts means allows lenders to better understand your organization and makes taxes less of a headache.
Mentorship is a very important piece when it comes to the development of an organization. Finding a mentor with prior experience and industry knowledge can help you guide your organization into the right direction. A mentor can work with you to stay accountable on goals and provide additional tips for managing the finances of your nonprofit or small business. Another way to discover a mentor is in the form of a consultant. For example, Flyer Consulting provides guidance and mentorship for nonprofit organizations and small businesses to help them achieve financial stability.
While the concept of planning may seem simple, it is not something that should be skipped out on. Planning for the future of your organization will in turn bring about better financial management. Planning allows for flexibility when the unknown arrives, such as a pandemic that can bring about sudden changes and high costs for organizations. Take a look at the historical trends of your nonprofit or small business and use these trends to plan. Do donations or expenses fluctuate during different seasons or holidays? Do specific donor groups tend to be more active in various points throughout the year? What events and tactics correlate with higher success, or led to inefficient funding? Asking yourself these questions about your organization and extrapolating the answers to the future can be pivotal for structuring the growth of your organization. Different tools can assist in the process of answering these questions, such as Tableau (data analytic software that donates software to qualifying nonprofits upon request).
Overall, for nonprofits and small businesses, new information isn’t necessarily the most important tool for financial success, it is the historical data that really matters. It is vital to maintain an active approach in applying strategies to maintain and better the finances to secure organizational-wide financial health.