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5 Common Financial Planning Challenges of Nonprofit Organizations

5 Common Financial Planning Challenges of Nonprofit Organizations

| August 16, 2022
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Many nonprofit organizations set out to help others. They provide services, guidance, support, or other resources to a specific group or cause. Yet, to do the work they do, they often need financial strength. Nonprofit organizations may struggle with financial planning challenges, especially when their conditions continue to change.

The pandemic created numerous financial concerns for nonprofit agencies, some of which remain. In one report, 66% of nonprofits experienced increased demand for their services. Yet, more than 50% of these organizations have had to cut costs due to a lack of funding.1 Putting aside these pandemic challenges, consider these other common reasons nonprofit organizations struggle with financial planning.

#1: Lack of Financial Education

Nonprofits may do good work in the area of their focus. Yet, leaders may lack the financial education and experience to make solid decisions. Without proper financial education, leaders may not understand how to read a financial statement, manage the accounting process, or create a budget.2

#2: Lack of Time

Some organizations may struggle to have the time to create plans. They may operate with a very limited staff to manage funds going out to those in need. Many managers and organization owners are hands-on with the work done, leaving little time for the actual management of the financials. Developing a plan and a strategy to sustain the organization over the long-term requires an investment of time and effort.

#3: Instability

It is difficult to create a plan when there is a lack of stability in the amount of capital available. Revenue cycles for nonprofits may drastically change month to month, making it difficult to manage a budget or create long-term goals. Many managers need to be on a constant lookout for new funding sources. This effort could be looking into available grants, which takes grant writing skills and managing expenses.

Raising funds consistently from private sources and programs is a necessary step. Yet that requires focusing on marketing and building strong networked relationships.

#4: Grant Process is Burdensome

It is common for organizations and the federal government to offer grants and other funds. Still, they require a nonprofit to submit documentation and other data to receive the cash. This documentation may be difficult to create, and the process may be hard to manage.

#5: Limited Oversight

In some situations, managers lack time to balance books or plan for future needs like tax liabilities and insurance increases. They may not make wise investment decisions because they lack time to navigate these options. Some struggle with tax-exempt status or may lack the insight to maintain this designation. There is also the risk of fraud and misuse of funds.3

While difficult to overcome, addressing these planning limitations may improve the financial stability of an organization. With the help of a financial professional, it may be possible to gain more insight into how to manage this process more effectively.

Footnotes

1 COVID-19 crisis strains needy and groups that help them, Reuters, https://www.reuters.com/article/us-health-coronavirus-philanthropy-insig/covid-19-crisis-strains-needy-and-groups-that-help-them-idUSKCN21Y1XS

2 Difficulties with Financial Planning of a Nonprofit Organization, Houston Chronicle,
https://smallbusiness.chron.com/difficulties-financial-planning-nonprofit-organization-4410.html

3 The Most Common Financial, Management Risks Facing Nonprofits, Early Childhood Learning & Knowledge Center,
https://eclkc.ohs.acf.hhs.gov/fiscal-management/article/most-common-financial-management-risks-facing-nonprofits

 

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

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