Evaluating the Health of Your Nonprofit Organization

For small to mid-sized nonprofit organizations, sustaining impact over time means more than balancing the annual budget. It requires strategic oversight of long-term financial health, liquidity, and asset management. While examining financial health may seem overwhelming, it’s critical to maintaining organizational success and achieving your mission goals.  

Start with Organizational Needs  

Financial health begins with aligning funding structures with an organization’s needs. For example, building unrestricted reserves of funds during surplus years strengthens long-term liquidity.   

Similarly, cultivating flexible gifts, not just restricted grants, can enhance both resilience and responsiveness. Gifts become even more relevant in light of recent events that have destabilized grant funding for nonprofit organizations. As legal battles and legislation continue to develop, exploring your needs and funding options can help support your financial health.   

IS YOUR NONPROFIT TECH SERVING YOUR MISSION?

Look at Key Liquidity Indicators  

Long-term financial health depends on an organization’s ability to sustain its operations and continue fulfilling its mission over time. One critical component of measuring financial health is liquidity, which refers to the availability of liquid assets (such as cash and short-term investments) to cover an organization’s obligations.   

Metrics for Measuring Liquidity  

Some key liquidity indicators include the following:  

• Current Ratio: Current assets ÷ current liabilities. A ratio above 1.0 indicates the organization can meet short-term obligations.  
• Operating Reserve Ratio: Unrestricted net assets ÷ annual expenses. A reserve of 3–6 months of operating expenses is considered a healthy level.  
• Cash Flow Trends: Consistent cash shortages may signal deeper structural issues, even if the budget balances on paper. Maintaining a cash flow schedule that allows your leadership to review cash fluctuations over time is a valuable tool for analyzing these trends.   

The recommendation for nonprofit organizations is to monitor these metrics regularly and include relevant pieces in board-level financial discussions. A firm like Maner Costerisan, with a deep understanding of nonprofit accounting, can help you both with tracking metrics and developing a financial strategy based on insights gained through reporting.   

Monitor Revenue Diversity  

Another component of a nonprofit organization’s financial health is revenue diversity. Revenue diversity refers to having multiple, reliable income sources rather than relying heavily on a single type of funding. Various sources of funding improve organizational resilience and reduce vulnerability to external shocks, such as losing a key grant or donor.  

Revenue Diversity Best Practices  

Here are a few best practices to consider when diversifying revenue. While not every organization may be able to implement all these practices immediately, it’s beneficial to understand the options you can work on developing in the future.  

• Create a goal to limit any single source to no more than 30% of total income.  
• Regularly analyze revenue by type and donor dependency.  
• Develop a fund development plan with your leadership that includes identifying and growing underutilized revenue streams.   

Examine Reserve Strength  

Finally, an additional component of financial health for a nonprofit organization is reserve strength. A nonprofit organization’s reserves are unrestricted funds set aside to support the organization with:  

• Future growth  
• Buffer cash flow variability  
• Fund strategic opportunities  
• Safety nets during revenue shortfalls   

A best practice is to establish a reserve policy that includes target reserve amounts, conditions for use, and a replenishment strategy. There’s no one-size-fits-all to determine how much is enough in reserve, but a standard benchmark is three months of unrestricted operating expenses.   

Evaluate Your Organization’s Financial Health with Help from Maner Costerisan  

In summary, long-term sustainability comes from smart financial planning, disciplined asset and revenue management, and maintaining liquidity to weather uncertainty. For small and mid-sized nonprofits, it’s not just about having resources — it’s about using them wisely so your organization can continue to have a positive impact on your communities.  

At Maner Costerisan, our dedicated team of nonprofit experts understands the complexities of the industry, as well as the changing constraints on finances and funding. If you have questions about evaluating your financial health, reach out to us at maner@manercpa.com and learn how we can help you strengthen your accounting and achieve your mission.   

IS YOUR NONPROFIT TECH SERVING YOUR MISSION?