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4 Nonprofit Financial Health Insights From Bookkeeping Data

Farah Harajli January 30, 2024

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Charitable giving is on the rise, with 1.4 billion people worldwide donating monetarily to nonprofit organizations. As a nonprofit leader, this means more funding for your cause, and as a result, an increased need for effective financial management.

Just like your outreach and fundraising efforts, you can learn a great deal from analyzing your nonprofit’s financial data and past performance. Whether you’re preparing for a financial audit or developing next year’s budget, your nonprofit’s financial health is crucial to your ability to fulfill your mission. In this guide, we’ll explore these financial health insights to look for in your bookkeeping data:

  • Revenue reliability
  • Cost efficiency
  • Full cost coverage
  • Liquidity

You can’t analyze key performance indicators (KPIs) without thorough and accurate financial records. As you consider the following financial health indicators, make sure your nonprofit has the right tools in place to record the data you need.

Revenue reliability

Reliable revenue means an organization’s income is predictable and sustainable, and the same can be said for the funds your nonprofit raises. Your nonprofit’s ongoing ability to bring in unrestricted funds is referred to as revenue reliability, and it’s vital to healthy finances.

However, this doesn’t mean your nonprofit must consistently raise the same amount in donations each year, or receive contributions from the same sources. Rather, revenue reliability simply means your nonprofit can predict its revenue with a fair amount of certainty.

To evaluate this, bookkeeping data should reflect your revenue sources and historical trends, including:

  • Unrestricted donations: What amount does your nonprofit raise yearly in recurring gifts? How much does your nonprofit raise, on average, from major gifts?
  • Corporate philanthropy: What is the nature of your nonprofit’s partnerships with corporate donors? How much do you typically raise from matched donations and volunteer grants each year?

Keep in mind that diversified funding sources can provide financial sustainability, one of the greatest challenges in the nonprofit sector. With numerous funding sources, your nonprofit can maintain stability, even if one source of funding dries up. 

To fully understand the context of your nonprofit’s revenue, talk with your organization’s leaders. Individuals such as program directors have witnessed the pattern of funding for your nonprofit’s specific operations and can offer greater insight into the reliability of funds.

Cost efficiency

After evaluating your nonprofit’s revenue, determine how efficiently your revenue is used by analyzing your expense allocation. Bookkeeping data should clearly outline all of your nonprofit’s financial transactions, which indicates how your organization uses its revenue.

Your nonprofit’s revenue should cover the direct and indirect costs of operating, including:

  • Program expenses: These costs cover any goods or services your organization distributes to fulfill its purpose. For example, the cost of dog food for an animal shelter would fall under this category.
  • Administrative expenses: This refers to any expenses associated with your nonprofit’s administrative tasks, such as management or bookkeeping. For example, if your organization invests in professional nonprofit bookkeeping services, this would be considered an administrative expense. 
  • Fundraising expenses: Your revenue will also cover any expenses incurred by fundraising events and campaigns. For example, the cost of renting a venue for a fundraising gala would be considered a fundraising expense. 

Accurate bookkeeping is vital to evaluating the efficiency of your nonprofit’s costs because you’ll need to know how your nonprofit uses each dollar to determine the best way to budget your revenue. Use tools like Blackbaud Financial Edge NXT, which helps streamline nonprofits’ accounts payable functionality. This ensures your nonprofit pays bills promptly and offers insights into your organization’s financial health. 

Full cost coverage

According to Foundation Group’s guide to tax-exempt status, 501(c)(3) organizations must use their earnings solely to serve their charitable purposes. However, when your nonprofit’s unrestricted revenue exceeds its expenses, what should you do with the surplus?

Beyond direct operating costs, your nonprofit should set high enough revenue targets to also cover the full cost of doing business. This includes your day-to-day expenses and extra costs that aren’t reflected in your nonprofit’s income statement. Specifically, your nonprofit’s revenue should cover:

  • Total expenses: This includes recurring costs, program expenses, and overhead costs, which should account for 35% of a nonprofit’s revenue or less.
  • Working capital: The predictable cash ebbs and flows in your nonprofit’s operation are covered by working capital. 
  • Reserves: Your nonprofit’s savings help mitigate various risks associated with funding streams, facility maintenance, and other unexpected costs. 

The ability to completely cover these expenses is called full cost coverage, and it indicates long-term financial sustainability. 

Bookkeeping data is a powerful tool for staying on track to achieve full cost coverage because visibility into your nonprofit’s financial position can improve your approach to cash utilization. By automating data management with tools like PairSoft’s automation solutions, your nonprofit will immediately reap the benefits of increased visibility into its financial data.

Liquidity

When it comes to growing as an organization or adapting to unexpected budget constraints, your nonprofit needs to maintain an appropriate level of financial liquidity. Although it can be measured in various ways, liquidity refers to the unrestricted cash your nonprofit has on hand. In short, this shows how long your nonprofit could operate without any new revenue.

At a minimum, it’s recommended that nonprofits keep three to six months of operating funds in cash reserves, but the amount of liquidity your nonprofit should strive for depends on its unique needs, cash management strategies, and other circumstances. 

Bookkeeping data provides valuable insights into your nonprofit’s liquidity by monitoring cash flow and offering projections for future income and expenditures. With this information, your nonprofit can estimate the appropriate amount of liquidity.

While effective bookkeeping should be a top priority for nonprofit budgeting and compliance, the practice also provides valuable insights into your organization’s financial health. Equipped with this data, your nonprofit can make the most of its funding and, as a result, maximize its impact.

Along with accurate bookkeeping data, your nonprofit must also prioritize data privacy. Using PairSoft’s gift processing software, your organization can protect against data breaches and cyber attacks to keep donor data and financial information secure.

Farah Harajli

Farah joined the SaaS space with PairSoft to continue her digital-content-focused career that's included roles at Johns Hopkins University, the Hearst Corporation, and the University of Michigan. She is based in Michigan.

View all posts by Farah Harajli
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