Financial health for civil society organizations (CSOs) is often an easily overlooked topic because organizations usually focus on setting and meeting their goals. However, long-term success and stable growth are more associated with adequately managing economic resources. Below you will find a discussion about ten financial health risks faced by CSOs.
1. One person in charge of management
One of the financial health risks for CSOs is the practice of assigning all tasks, including management, finance, and accounting, to a single individual. This approach carries significant risks, as these tasks are complex and require specialized skills that not everyone possesses. To ensure these duties are carried out correctly, it is crucial to engage experts in finance, accounting, and management. Their professional guidance will enhance our accountability to donors and ensure full compliance with tax obligations.
2. Lack of communication between departments
In many cases, there is a lack of experience in administrative and financial management. There is also often a gap in bringing together programmatic and administrative areas to assess the organization’s financial health daily and better understand how the use of resources contributes to meeting our institutional goals. It is crucial to set up specialized mechanisms to avoid jeopardizing the financial health of civil society organizations, which often sounds more complex than it is.
Sometimes, all that is needed is an updated accounting system and trained personnel that regularly engage with the programmatic areas to align expenses with their funding sources and evaluate the outcomes of resource spending. Options are available at quite affordable costs, including hiring external accounting services. In any case, the cost of taking these actions is much lower than the issues arising from mismanagement.
3. Not having an institutional budget
Financial health for CSOs is kicked off with an action plan, which should encompass the organization’s needs, alignment with institutional goals, and crucial fundraising goals.
Our organizations do not only live by ideals, and we must remember that all our activities require economic resources (our staff salaries and benefits, office rent, furniture maintenance, payment of services, payment of travel expenses, product development, maintenance of our website and social networks, etc.). Therefore, it is essential to know how much the operation of our organization costs and how many financial resources we will need for our activities. This may seem a very complex task, but we should not be discouraged: we don’t have to include the exact cost of each activity, but a reasonable estimate based on our experience and, when possible, some quotes that give us an idea about the actual costs. It is better to have an approximate number than not knowing how much it costs to do our job!
4. Not having an easy and routine system to monitor finances involving the leadership team
Once we assume control, manage our financial resources, and define a financial plan, we must ensure it is result-oriented. This means that leaders must take ownership and ask the following questions:
- How are we getting money?
- How much money is coming in?
- Where does the money come from?
- What is the budget being spent on?
- Are the set goals really achieved?
- Are there areas where we need to pay more attention?
While we understand that these financial topics may be complex and less exciting, we must engage with them. Understanding these topics is vital for the financial health of our civil society organizations. In addition, this daily practice will broaden our knowledge of our operational costs and the required resources to keep the actions and strategies paying off.
5. Estimating project budgets without the involvement of the implementing and technical teams
Setting overly aggressive strategies and goals is a common mistake in any civil society organization. They are part of the expected long-term growth, but it is necessary to set realistic goals based on available resources. To achieve this, stakeholders must be involved in the decision-making process by estimating and allocating resources since they have the most accurate information on the actual costs and resources required for activities. Making financial plans without the team’s support is one of the most significant risks to the financial health of civil society organizations, and vice versa: making strategic plans without the involvement of the administrative and accounting areas is a mistake since the organization could end up spending all its resources on a plan that has no economic basis, setting aside other commitments and expenses.
6. Not including an appropriate amount of indirect costs
One of the great benefits of having an institutional budget and the support of experts when setting goals is that you will not lose sight of indirect costs. It is very easy on paper to jot down ideas, set goals, and solve problems. However, indirect costs can endanger the financial health of civil society organizations.
Indirect costs are all those expenses that can occur daily and that, if not foreseen, can provoke many headaches, from needing experts on certain issues to expenses that seem very small but that, on a broader view, result in significant amounts of resources. Not considering these costs can put a lot of pressure on our organizations. When drawing up the budget, we should plan conservative scenarios and allow for surpluses rather than fall short in our financial planning and run out of resources.
7. Not adding inflation and salary increases in multi-year budgets
The cost of living rises every year, affecting individuals, companies, and civil society organizations alike. If all goes well, your organization will require more employees and resources every year, including expected salary adjustments based on the financial situation such as inflation, which is a natural economic phenomenon. Although we cannot be sure how much it will increase, we do know that it will, and there is information and estimates that can help us make appropriate forecasts and prepare accordingly. Therefore, we recommend that these two aspects be given special attention when making multi-year budgets. If possible, experts in economics, accounting, and finance should make the estimates. At first glance, it may seem like a meaningless investment, but your organization will see the benefits of having realistic budgets over the years.
8. Relying on one donor
Financial health for civil society organizations must have several pillars. Even though a donor may be very committed and fully trust your organization, they may change interests, face financial issues that prevent them from continuing to donate, or simply change their own goals and strategies. Therefore, having other donors who provide independent resources is better. The reality is that the more donors an organization has, the more responsive it is and the stronger it becomes. If a donor leaves, it may be necessary to make adjustments or cut some expenses, but the organization will not fall apart.
9. Starting projects without signed contracts or letters of authorization for donations
In addition to being a financial health issue for civil society organizations, it is a very important legal aspect. In this case, the rule should be to do nothing until everything is perfectly legal, which is not only a matter of protecting against losses or wrong decisions. The contracts and letters of authorization for donations provide certainty about the commitments, scope, and limits. In other words, they provide total transparency on what can and cannot be done.
10. Using unrestricted funds to supplement the budget of projects that are not well-funded by the principal donor
There may be a project we all believe in, and that inspires us deeply, but it is important not to mix resources. Even unrestricted resources have a special purpose. Allocating their use to projects that are not yet fully authorized or funded puts them at risk.
What would happen if that authorization or that money does not come through in the end? We will probably have to find a way to get back the invested money. It may be that the project we were interested in is left halfway and the project we took money away from will not see the light of day either. Worse still, the primary donor may doubt our management and commitment to him.
When thinking about the social change we want, it is very common to focus only on the overall vision and goals without considering aspects such as finances.
In the same way that we stop to think about goals and methodologies, we should make room to think about what our organization looks like with healthy finances since achieving desired outcomes depends primarily on them. When determining the impact we want to make, we must also consider our resources, those we need, and the actors we must engage to manage them.
As you can see, financial health for civil society organizations is a complicated issue. Therefore, our suggestion is to seek support from experts. Contact us if you need more help.
