Top Challenges Nonprofits Face with Financial Management (and How to Overcome Them)

8 min read

February 6th, 2024

Nonprofit financial management is notoriously difficult.

Thanks to unreliable funding sources, restricted funds, cloudy forecasts, growing service demands, and other issues, nonprofit organizations operate on shoestring budgets and commonly face endless financial challenges. Despite these difficulties, your organization's success depends on its ability to come up with smart financial management strategies designed to overcome nonprofit finance issues. 

To better manage your funds and get ahead of problems, consider the following common nonprofit financial challenges and the strategies for overcoming them to create a financially healthy organization. 

10 Common Financial Management Challenges for Nonprofits

1. Limited and Complicated Funding Sources

Nonprofit organizations strive to achieve lofty goals with very limited resources. Depending on the organization, its size, its structure, and its mission, funds might come from individual donors, businesses, foundations, government agencies, investments, or other potential sources. However, fundraising is fiercely competitive and unpredictable. 

Even when your organization meets its fundraising goals, the funds often come with complicated strings attached that restrict the way funds can be used. Often, contributions are given to a nonprofit with stipulations that the money not be spent on overhead or that only a small percent be allocated to overhead. Sometimes, charitable donations are dedicated to one particular program or purpose when given. 

So, nonprofit leaders must find a diverse group of funding channels to ensure several categories of restricted and unrestricted funds while also not putting all of their eggs in one basket (i.e. relying too heavily on a single donor or funding source). 

Read More: How Much Do Bookkeeping & Accounting Services for Nonprofits Cost?

2. Budgeting and Forecasting

Due to unreliable funding sources and multiple categories of restricted funds, forecasting and budgeting become particularly challenging in nonprofit organizations. 

Forecasting revenue is challenging because known fund sources are not always certainties. For example, a nonprofit might have 20 submitted grant applications and only be awarded a few. So, financial managers must be extremely conservative when forecasting revenue for upcoming financial periods to ensure spending is planned in a way that ensures ongoing operations while continuing to support the mission. 

Nonprofit budgeting relies heavily on good forecasting and revenue estimates. So, without knowing how much money your organization will raise, you can't know how much money will be available to spend on programs. Plus, while forecasting your budget, you must also keep track of the funds that are in different restricted buckets to ensure that each dollar is earmarked and budgeted appropriately. 

3. Funding Competition

The nonprofit sector is overcrowded, and competition in the fundraising landscape keeps getting tighter every year. According to the Internal Revenue Service, an average of about 100,000 new nonprofit organizations have been formed every year since 2017. The competition According to The 2024 State of Grantseeking report, 91% of organizations applied for a grant, and 60% applied for more grants in 2023 than in previous years. 

As a result, nonprofit organizations must compete with more and more nonprofits for donor money, endowments, and grants. Nonprofit leaders must work harder (appeal to more individuals, apply for more grants, and focus heavily on donor retention) every year to raise the same amount of funds that they raised the previous year. All of this competition not only makes available funds increasingly scarce but also more expensive to generate, and this increase in fundraising costs is making nonprofit budgets tighter and tighter. 

4. Cash Flow Management

Cash flow management (i.e. the orchestration of when money flows in and out of your organization) is difficult in any type of business, but it can be especially challenging in nonprofits. Your funding is limited and somewhat unreliable. It can also arrive with unusual, irregular timing. For example, many nonprofit organizations receive a major portion of their annual revenue at the end of the year during end-of-year giving campaigns. While any donations at any time are welcome, receiving the majority of funds in month 12 can make it challenging to pay your expenses throughout the first 11 months of the year. 

5. Grant Tracking

If your nonprofit receives money from grants, then it is likely responsible for keeping track of the grants and their reporting requirements - in addition to tracking the search and application processes, as well. Grant funding is essential for the operation and success of most nonprofits, but grant management is complex and challenging, especially for organizations that receive funds from multiple grants.

Poor grant management can result in unused funds, improperly spent funds, missed deadlines, and non-compliance with requirements. This can hurt your nonprofit in the present by causing you not to maximize the potential of your grant's capacity. It can harm your organization in the future by damaging your reputation and making it more difficult to secure ongoing grant funding. 

Read More: Top 10 Tips for New Executive Directors

6. Economic Volatility

Economic volatility hurts nonprofits in several ways:

• Donors have less money available for charitable donations which means your organization receives less funding. 
• Your operational costs increase as a result of inflation, and your dollars have less spending power. This means you're on a much tighter budget. 
• The demand for your services will likely increase due to an increase in the number of individuals who are also financially struggling. So, program costs increase, as well. 

7. Mission-Driven Financial Management

Nonprofit leaders must find a balance between financial health and mission execution, where one is not compromised in favor of the other. Nonprofit leaders must rely on financial strategies that also support the mission and find ways to carry out the mission while promoting financial strength. 

8. Reporting, Compliance, and Tax Filing

Nonprofits must adhere to a variety of constantly changing local, state, and federal regulations and laws. While 501(c)(3) organization are exempt from paying income taxes, they still must comply with payroll tax payments in addition to filing an annual Form 990 to maintain their tax-exempt status. 

9. Employee Acquisition and Retention

Jobs in nonprofit organizations are intrinsically rewarding, but employees need more than gold stars to stick around. Operating on tight budgets, nonprofit leaders must be selective in hiring practices (identifying employees who align with the mission and core values) while also being creative and fair when it comes to rewards, recognition, and compensation. 

10. Donor Retention and Engagement 

As stated above, your organization must compete with more and more nonprofits every year to keep your donor base engaged and enthusiastic about your organization, instead of losing their charitable donations to another nonprofit. So, you must dedicate time, energy, and brain power to devising a successful donor management strategy that focuses on keeping donors informed, attracting new donors, and ensuring your donors understand the difference that their charitable donations make. 

5 Basic Strategies for Overcoming Nonprofit Financial Management Challenges

1. Optimized Spending Through Stack Ranking

Nonprofits must make the most of their available funds and sure they maximize the impact of every dollar spent. One solid strategy for getting the most mileage out of your money is to stack rank your programs to determine how effective they are. You can then put more money into your most effective programs while deciding which programs can be improved and which programs should be cut. This practice will ensure the most efficient and effective program spending. 

2. Restricted Funds Management With Fund Accounting

Nonprofits must use a fund accounting system to successfully organize, track, and manage different "buckets" of restricted and unrestricted money. This ensures your organization optimizes the use of restricted and unrestricted funds so that no restricted money goes unspent. 

3. Savvy Donor Management

Find a donor management system that easily integrates with your accounting software. This will enable you to keep track of all your donors and donor communications while also evaluating your best fundraising strategies and most valuable types of donors and individual donors. 

4. Automated and Recurring Donations

Organizations that encourage automated, recurring giving have a healthier cash flow than organizations that don't. One strategy that works well is the divide by ten monthly ask. In other words, ask a donor who gives an annual gift of $1,000 to divide it by ten and give you $100 per month, instead. This is a clever way to increase total giving while also providing your organization with a source of reliable, recurring revenue. 

5. Forecasting and Contingency Planning

Despite the challenges of nonprofit financial forecasting, you should still forecast routinely as a practice. The more financial history you accumulate and the more "forecast vs. actual numbers" you have, the more accurate your forecasts will become. In addition to forecasting, start a practice of projecting best and worst-case financial scenarios to facilitate

better contingency planning. If you have a plan in place, you will be better able to overcome challenges and leverage opportunities as they arise. 

Overcome Challenges and Leverage Opportunities With Outsourced Financial Management for Nonprofits

A strong, well-functioning back office is the solution to overcoming nonprofit finance issues, and outsourced financial management, bookkeeping, and accounting services can help your organization bolster its back office and improve financial health. When your nonprofit works with a provider that has extensive experience in providing strategies to overcome nonprofit financial management difficulties, you can spend less time worrying about your organization's money issues and more time focused on accomplishing your mission. 

Outsourced financial management is one of the simplest ways for nonprofit leaders to save money (compared to hiring an in-house financial management team) while accessing some of the leading experts in nonprofit bookkeeping, accounting, and financial consulting. Plus, an outsourced provider will work with you to improve your bookkeeping and accounting systems and processes, shoring them up against internal fraud risks, improving financial transparency, increasing accuracy and efficiency, and bolstering your ability to make data-driven decisions to prevent nonprofit financial challenges and leverage financial opportunities.