Often, I find that my workshop participants understand, on an academic level, the myths that hold them back. Yet in practice, these myths are so deeply ingrained in the nonprofit world that they drive the way organizations operate.
Here’s an example --
Myth: Nonprofits are supposed to break-even.
I spend enough time around nonprofits to realize striving for break-even is the standard operating procedure for the vast majority of organizations. It is at least a step in the right direction when nonprofit executives will acknowledge that nonprofit doesn’t have to mean “break-even.”A surplus, of course, is the only way to generate reserves -- that is, a “rainy day fund.” Without reserves, an organization is at the mercy of bad luck. That’s a bad place to be, because bad luck is right around the corner.
This is where the objections begin to fly. “Our funders don’t want to see a surplus.” To this objection, I mostly say, “Hogwash.” I simply don’t see nonprofit funders who object to a modest surplus. If the question arises, say the following: “Our board adheres to best practices of sustainability by maintaining a modest ‘rainy day fund’. In doing so, we are better-positioned to avoid disruptions in our operations.”
If you don’t have six months of cash expenses in the bank, you won’t be faulted for working to build your reserves. It is more likely that your challenges will be in educating your internal stakeholders (i.e., board and staff) rather than funders. The natural corollary of the first myth is this one --
Myth: A budget should break-even.
A budget should provide a roadmap for how we want our finances to play out. If we understand that a surplus is desirable, why would we follow a map that falls short of that?
Again, I’ll hear, “Our funders don’t want to see a budget with a surplus.” Refer to the explanation above -- “Our board adheres to best practices of sustainability…”
I understand that there will be certain grants that have strict rules about your budget breaking even. For these, you will need to show a break-even budget; however, that doesn’t prevent you from having internal management targets beyond break-even. If that sounds difficult, it’s because of another commonly held belief --
Myth: Nonprofit finance is simple.
Sometimes it is. Other times, not so much. There are situations where a deeper understanding of finance is critical to getting the entries right, ensuring accurate and useful financial reporting, and avoiding embarrassing and costly mistakes.
Have you avoided all of these myths? Do you think I’ve missed something? Please share your thoughts.
Dan Weiss, founder and President of Counterpart CFO, leads a team of flexible, part-time CFO’s specializing in nonprofits. To read more from Dan, follow him on LinkedIn or subscribe to his blog at www.counterpartCFO.com.