Financial strategies for non-profit organizations to consider

For any business, whether it’s focused on making a profit or not, financial stability is crucial. It’s even more important than just earning money because an organization needs to keep a balanced budget to stay successful in the long run. This applies to both profit-making and non-profit organizations.

A profit-based organization aims to maximize its earnings by increasing revenue. The business becomes more stable when it has a large cash reserve. Companies with strong cash flow and a good amount of cash on hand face less risk and can more easily access loans or investors to grow and expand.

Similarly, for a non-profit organization, financial stability is also a key goal. However, unlike profit-focused businesses, the main priority is not making money. The main aim of a non-profit is to provide goods or services that meet the needs of the community.

Non-profits focus on offering products or services that benefit society, and this is seen as their mission. They rely on donations or funding from people who share a common interest in helping society. These donors contribute money, which the non-profit uses to provide public goods and services.

To achieve their mission, non-profit organizations need clear financial strategies. This includes how they plan to manage and distribute funds, how much money will go toward public services, and which programs or needs they will raise donations for.

What is a Non-Profit Organization?

A non-profit organization (NPO) is an organization that does not focus on making a profit. Instead, its goal is to help society by using all its income for causes like charity, environmental protection, cooperatives, or religious activities.

Most NPOs rely on volunteers, who work without pay. These organizations are often exempt from taxes. NPOs that focus on charitable or religious purposes can get tax exemptions under the Income Tax Act, 1961. These purposes may include helping the poor, providing medical care, protecting the environment (such as forests, wildlife, and water resources), supporting education, and improving public services.

In India, the terms NPO (Non-Profit Organization) and NGO (Non-Governmental Organization) are often used interchangeably because most NGOs are also non-profits. However, they are slightly different. NGOs are independent of the government and don’t need a government council, but they usually depend on government funding.

In India, there are three main legal types of NPOs: Trusts, Societies, and Section 8 Companies (under the Companies Act, 2013).

Trusts

Trusts are of two types: private trusts and public trusts. A public charitable trust is set up to benefit a large and changing group of people, such as the general public or a specific community.

Public charitable trusts can be created for various purposes, such as providing education, medical aid, helping the poor, or promoting public services like recreation. While there is no single law for public charitable trusts in India, states like Maharashtra, Gujarat, Rajasthan, and Madhya Pradesh have their own laws on public trusts.

In India, public charitable trusts are usually “irrevocable,” meaning they cannot be easily changed or canceled. However, if a trust becomes inactive for a long time because the trustees neglect it, the Charity Commissioner can step in to help revive it.

The “Doctrine of Cy-pres” is used in trusts when it’s hard to fulfill the trust’s original purpose. It allows the trust to change its purpose to something as close as possible to the original goal.

Societies

Societies are governed by the Society Registration Act of 1860, and they are typically set up for charitable purposes. A society is an organization made up of members, with a managing committee and a governing council that oversee its activities.

According to the Society Registration Act of 1860, Section 20, a society can be registered for various purposes, such as:

• A charitable society.
• A society formed to promote science, arts, literature, education, or fine arts.
• A society focused on public art museums and galleries.

Unlike trusts, societies can be dissolved. To dissolve a society, at least 3/5th of the members must vote in favor of it.

Section 8 of the Companies Act, 2013

Section 8 companies are registered under the Companies Act, 2013. They are set up to promote purposes such as business, art, science, sports, education, research, social welfare, religion, charity, environmental protection, or other similar goals.

Section 8 Companies

The profits or income of a Section 8 company are used only to support its main purpose, and no dividends are given to its members. Like a society, a Section 8 company can also be dissolved if needed.

Financial Strategies and Their Components

In an organization, financial strategy involves managing how funds are raised and spent. The main goal is to make sure the organization has enough funds to meet both its current and future needs, while also achieving its objectives.

Financial strategy is a key part of any business. It helps the organization find sources of funding and use those funds effectively. The focus is on aligning financial management with the company’s goals, which helps the business grow and succeed.

Financing Decision

The financial health of a company is very important when making decisions. For any organization, whether it’s profit-based or non-profit, having enough funds is essential to carry out any strategic plan.

When raising funds, financial managers must ensure that the funds are used with minimal risk. They need to decide whether to raise money from external sources (such as issuing shares, selling bonds, or taking loans) or from internal sources (like saving profits or selling off fixed assets).

Based on the financial situation, the organization needs to make important decisions, such as:

1. Where will the long-term funds come from, and in what amounts should they be allocated?
2. How much long-term debt should the organization take on?
3. Can the company use commercial credit? If so, how much can they use?
4. Should the company consider using capital leasing (where the company rents an asset and makes periodic payments to the owner)?

Investment Decision

Investment is a way to build wealth, helping to achieve financial goals and secure the future financially. It involves putting money into things like stocks, bonds, real estate, mortgages, etc.

For any organization, investment is a key part of its financial strategy. It is important both now and in the future because any investment made by the company can either be very successful or cause problems. Organizations need to be careful when making investment decisions, as they carry a high level of risk.

An investment decision is considered successful only when the company takes into account certain important factors, such as:

1. Hurdle Rate – The hurdle rate is the minimum expected return on a project or investment. It also reflects the level of compensation required to balance the risks involved. In an organization’s financial strategy, the goal is to maximize wealth. Therefore, if the expected return is higher than the hurdle rate, the investment is considered worth it. If not, it may not be a good choice.
2. Capital Rationing – Capital rationing means putting limits or restrictions on how much a company can invest, based on the available funds at a particular time.
3. Risk Factor – The risk factor is very important when making investment decisions. The finance manager must assess whether the investment carries high or low risk. A good financial strategy provides clear guidance on the risks involved in any investment.

Dividend Decision

A dividend decision is important for effective strategic planning in an organization. This decision is usually made by the finance manager or senior managers, who decide how much of the company’s profits should be paid out to shareholders as dividends. They also decide how much should be kept within the company for future growth, expansion, and development, ensuring a good balance between the two.

Working Capital Management

Working capital refers to the money a company needs to cover its day-to-day operations. Efficient management of working capital helps increase shareholders’ wealth. The main sources of working capital include bank loans, overdrafts, and trade credits (also known as financial credits). Strategic decisions are strongly influenced by how well working capital is managed, balancing the company’s liquidity (cash availability) with profitability.

Cash Flow Management

Cash flow management is when a company effectively balances its available cash (liquidity) and the costs it has to pay (financial costs). The finance manager needs to implement policies that reduce financial costs, which helps the company make a profit. Many multinational companies, as well as small businesses, face challenges in reducing their taxes. So, when managing cash flow, organizations need to make strategic decisions carefully.

Managing Growth and Risks

Business growth can be very expensive because it requires a lot of capital, which must be managed wisely. Investing capital involves high risks, so an organization should gather all necessary information before making any investment decisions. Therefore, strategic decisions related to growth and risks should always be made with caution.

Need for Financial Strategy in Non-Profit Organizations

Just like profit-making organizations, non-profit organizations also need to be financially secure and stable to achieve their goals. However, unlike profit-based organizations, non-profits don’t aim to make a profit. Instead, their goal is to remain financially stable in order to provide social and community-based services, which are essential for the well-being of society. Non-profits often rely on donations to fund their work and achieve their objectives, so having a solid financial strategy is crucial for delivering these services effectively.

A financial strategy helps non-profits make informed decisions about which activities to prioritize for their charitable work. It also supports them in planning and overcoming challenges. A well-designed financial strategy increases the organization’s ability to reach both short-term and long-term goals. It provides guidance on key decisions related to finances, investments, and cash flow management, helping non-profits operate efficiently and effectively.

Financial Strategy for a Non-Profit Organization
To succeed, both profit and non-profit organizations need a strong financial plan. While their methods may differ, both require financial stability to run their operations smoothly. Non-profits must focus on key factors to maintain this stability.

Key Elements of a Financial Strategy for Non-Profits:

1. Create a Budget Based on Past Data and Future Goals
Budgeting is crucial because it helps with financial planning for the future. Many organizations make mistakes by overestimating their ability to raise funds or underestimating their expenses.

To avoid these issues, the budget should be based on past financial data, previous performance, and future goals. This approach ensures clear direction and more accurate financial planning.

Include overhead expenses when setting goals and objectives
People working in non-profit organizations often overlook overhead expenses, which can lead to cost-cutting that affects their mission. Non-profits usually focus entirely on their goal of helping society by providing essential services or products to those in need. However, overhead expenses—like employee salaries and office costs—are important for the organization’s growth. It’s crucial to balance these expenses with fundraising efforts to ensure the mission can be achieved effectively.

Build and rely on an organized system
To run a successful non-profit organization, it’s important to have effective organizational methods. When financial information is well-organized, it becomes easier to follow and implement a financial plan. The organization should also ensure that its data is stored securely and is easily accessible when needed. Using reliable software to store and regularly monitor data helps prevent any issues or misuse.

Making Smart Decisions
Non-profit organizations often believe that their missions won’t be impacted by economic challenges, but that’s not always the case. To navigate such situations, they consult professional accountants for guidance. Our organization’s accountants help in making well-informed decisions and offer advice on:

1. The best way to allocate funds during tough economic times.
2. Whether the organization has enough financial resources to support a large welfare campaign.
3. Which type of campaign is most suitable for the organization.

Ensuring Transparency with Donors
Donors have the right to know how their hard-earned money is being used by a non-profit organization. This means the organization should be open and honest about its financial plans and strategies.

If the organization provides false or misleading information about a campaign, it can harm its reputation, weaken its finances, and prevent it from achieving its goals. Therefore, being financially transparent with donors is essential for the organization’s growth, success, and ability to fulfill its mission.

Simple and Clear Guide to Boost Non-Profit Funding

Asking for donations is challenging for non-profits but essential for their work. This can be managed by following a solid financial plan and staying committed to it. Here’s how:

Step 1
Hire a financial coordinator to manage all financial tasks and oversee the funds received from donors and supporters.

Step 2
Create a finance committee to monitor the financial coordinator’s activities and handle the organization’s financial matters.

Step 3
Set guidelines for how the funds will be used. A team of senior staff, volunteers, or employees can brainstorm creative ideas to use the funds effectively for campaigns or charity work.

Step 4
Partner with government programs, NGOs, and charitable trusts. This collaboration ensures transparency by showing donors how their contributions are being utilized.

Step 5
Plan the fundraising methods for the next year, such as donations, grants, crowdfunding, events, sales, memberships, or sponsorships.

Step 6
Establish a timeline for collecting donations.

Step 7
Maintain an efficient administrative system to record all financial transactions, including credits and debts. Regularly review the transactions, such as after each fundraiser or monthly.

Step 8
Always thank donors and supporters. Recognize their contributions at social events, in newsletters, and through advertisements. Also, acknowledge key leaders like the CEO, Directors, and Chairpersons.

Step 9
At the end of the financial year, review the organization’s activities with donors, supporters, the CEO, and board members. Discuss the previous year’s achievements, identify areas for improvement, and plan for the year ahead.

Simple Golden Rules for Fundraising in a Non-Profit Organization

Fundraising is essential for the growth of a non-profit organization. However, it’s not easy because people don’t usually donate their hard-earned money to organizations they don’t trust or recognize. Fundraising is the main source of funding for welfare campaigns, charity projects, and other activities.

To succeed in fundraising, the organization needs to build trust and present itself effectively to potential donors. To achieve this, here are the Golden Rules for Fundraising:

1. Know Your Donors
Understanding your donors is critical. Learn about their habits, interests, and motivations for giving. This will help you communicate with them in a way that resonates and builds stronger connections.

Educate Your Donors
Make sure your donors and supporters understand how their contributions are making a difference. Educated donors feel more confident and satisfied, which builds trust and encourages them to donate again.

Share materials like brochures, testimonials, and records of your organization’s past achievements to keep them informed and aware of your impact.

2. Meet Donors’ Personal Needs
Donors are more likely to give when they see a personal benefit from supporting your cause. Even in charity, people appreciate recognition or value in return for their help. Ensure your organization offers benefits, like acknowledgment or incentives, to show appreciation and highlight how their support aligns with their personal goals.

Support Donors by Meeting Their Needs
Donors are more likely to contribute when they feel personally fulfilled by supporting your cause. While giving is generous, many donors also seek some form of personal benefit. Assure them that their support aligns with their goals or brings them recognition.

2. Build Strong and Trustworthy Relationships
A strong, trustful relationship with donors is essential because they are the backbone of your fundraising efforts. Always be honest and transparent about how their contributions are used. Avoid secrecy or actions that could make donors feel deceived or mistrusted.

3. Respect Donors’ Emotions
Respecting donors’ emotions is critical for maintaining long-term relationships. If donors feel unvalued or disrespected, they may stop contributing. Show appreciation for their generosity and acknowledge the importance of their support.

In conclusion, financial stability is crucial for both profit and non-profit organizations, even though their goals may differ. For a non-profit to survive and grow, it must raise funds and balance organizational growth with contributions to welfare programs.

Donors and supporters are the main sources of funding for non-profits. To maintain their trust, the organization must be financially transparent, honest, and perform well to meet their expectations. Always value and respect donors, as this not only enhances the organization’s reputation but also attracts new supporters to your cause.

To achieve these objectives, a well-thought-out strategic plan must be created and implemented for sustainable growth and success.