Why Nonprofit Growth Leads to Financial Strain (Even with Increased Funding)

Growth in nonprofit organizations is typically seen as a sign of success, but it may in fact result from increased expenditures.This article will explore whether growth is indicative of impact or, at the very least, provide information about system inadequacies.Historically, nonprofit organizations have been viewed as a positive force for growth, expanding their programs and service offerings to assist the communities they serve (through grants and staff).As nonprofits grow in size and complexity, this increase can leave them vulnerable due to an inability to sustain their financial systems.

At times, operational demands may exceed the capacity of financial reporting, leaving nonprofits with little to no resources to continue delivering their ongoing programs and/or services.

Organization and/or program growth will almost always present new financial management challenges.For example, an organization operating as a small nonprofit (less than $1 million) may have difficulty transitioning to a larger nonprofit (greater than $1 million) due to ongoing inadequacies in its bookkeeping practices and procedures.For example, the "strain" on the organization may begin with some minor degree of strain.However, as with month-end closing time frames will continue to elongate, leadership will manually adjust the reports provided to them from their organization, departments will track revenue and expense independently from what was recorded in the financial ledger, and leaders will spend more time than they should clarifying financial reports versus making decisions based on the information contained in the reports.

As a result of the challenges nonprofits face, the organization will eventually recognize that the repetition of these challenges reflects an underlying systemic issue that requires resolution.

While it is a common assumption among nonprofit organizations that funding insufficiencies create financial pressures, in some instances, the underlying issue is a lack of visibility into cash flow now and/or in the future.

Key questions that nonprofit leaders should be asking to improve their cash flow visibility would include:

• What amount of unrestricted cash is available for the organization to use?

• What programs are self-sufficient from a revenue perspective?

• What restrictions has the organization imposed on the programs in which the organization is currently engaged?

• How can I adequately estimate how many new employees I will likely add in the next six months?

• What goals can I achieve in the next six months?

When an organization’s future cash-flow visibility becomes limited, nonprofit leaders will lose all confidence, regardless of the funding generated.

Once an organization has lost financial visibility, it will have generally terminated its proactive pursuit of growth and begun operating under a cautious financial decision-making process.

The result of this transition will significantly constrain the organization’s ability to explore future strategic opportunities.Friction in the reporting process can affect the entire organization.An example is when program managers begin using their personal budget spreadsheets because they lack trust in the financial reports they receive.As a result of the ongoing lack of trust, financial professionals may spend countless hours revising board reports.Leadership will delay making decisions because the financial data is not easily understandable, and board members will repeatedly ask the same questions in subsequent quarterly meetings.

Organizations that continue to experience issues accurately reporting their financial position and rely on temporary solutions will significantly reduce their momentum and employees' willingness to take risks.

Once a nonprofit organization has relied on temporary workarounds to sustain its operations while transitioning from one operational size to another, it will continue to do so until it reaches a point where doing so becomes impossible.For example, as nonprofits transition, they may have been able to manage their operations with the use of spreadsheets or manually writing checks; however, once the organization no longer has access to these alternative or temporary solutions, within an organization’s financial operations, the finance department will always be under significant pressure to prepare accurate financial reports and to provide those reports on a timely basis, regardless of the financial viability of the organization as a whole.