This article is an expansion from an article originally posted in our March/April edition of the Nonprofit Hub Magazine. This is the fourth in a five part series on overcoming the struggles of starting a nonprofit organization.
As excited as you are about your new organization and as ready as you are to roll up your sleeves and get to work, you can’t escape this reality: You need money.
Before you get too far ahead of yourself, you must have a good handle on what it’s going to take financially to operate your nonprofit. As much as I’d love to tell you the money will just take care of itself, that’s a pipe dream—you need to have a solid financial plan from the get-go. Banks and granting organizations will want to know it, trust me. And so will donors.
Speaking of donors, remember this about accepting contributions: It’s best to wait until you are incorporated as a nonprofit in your state and have your letter of nonprofit status as a 501(c)(3) from the IRS before you take donations. Incorporation will protect your personal assets in case of the unlikely event that you are sued. Before incorporation, you’re personally responsible for how you handle donations.
Also, you cannot tell donors that their contributions are tax-deductible until you are officially declared a tax-exempt nonprofit by the IRS. If you need to start raising money before you’re incorporated, consider finding a fiscal sponsor that can receive contributions for you. A fiscal sponsor is simply another nonprofit that’s willing to handle your donations for you while you wait for 501(c)(3) status. For example, the Nonprofit Hub Foundation was set up as a donor designated fund (meaning donors could decide where they wanted our foundation money to go). Foundations that provide fiscal support with this flexibility work especially well for nonprofit organizations that have an aligned mission with the organizations they’re helping to support.
Here are six other things to think about as you plan your financials:
1. Even if you don’t have much money, you must have a budget.
Your budget outlines your plans and tells prospective constituents how realistic you are. If yours looks a little lean, don’t worry—most start-up budgets will typically include minimal staff, equipment and facilities. But if you have a reasonable plan, supporters are more likely to buy in than if you’re operating without some kind of roadmap.
2. Don’t just rely on your own pocketbook.
Many nonprofit founders do it alone for too long, and paying for everything out-of- pocket can be stressful. Even filing the IRS form costs money, and that has to come from somewhere. People who already know and trust you will be your strongest supporters. Consider hosting an event to explain your mission to friends, family and business colleagues and ask them to help cover the initial costs.
Plus, keep your eyes peeled for foundations that could provide fiscal sponsorship. For example, the Nonprofit Hub Foundation was set up as a donor designated fund (meaning donors could decide where they wanted our foundation money to go). Foundations that provide fiscal support with this flexibility work especially well for nonprofit organizations that have an aligned mission with the organizations they’re helping to support.
3. Think small initially.
You might be tempted to request a large grant right away, but honestly, you may need to build up a track record of little achievements before you try to land a big fish. There are many local businesses and community groups that may be willing to give you $100-$500 donations if they see a budget and understand your cause. No donation is too small, especially in the beginning.
4. Be careful with debt.
A loan or a credit card advance might seem like a tempting way to get the ball rolling, but spending income later to pay off debt from the first year could hurt your finances in the long run. Try to steer clear of spending money you don’t have—you don’t want to saddle your organization with a pile of debt that could become a big financial burden later.
5. Create a reserve fund to provide stability.
The nonprofit world is one full of one-year grants and government funding that can end without notice, not to mention unpredictable income from individual donors. If you can manage to set dollars aside, even initially, to build a reserve fund, you’ll feel better about your long-term situation.
6. Plan long-term.
Why not shoot for a grant during years two and three? Look at where you want to be a few years down the road. This, along with a track record of small achievements, will help you get grant applications in on time and set you up for a higher chance of approval.
Patience is key to becoming a successful nonprofit. You might not be able to change the world within the first month, but you can be wise with what you are given and take small steps toward making a big impact. Spend within your means and plan to grow. Starting anything from scratch requires time, perseverance and a headstrong attitude that portrays that what your organization has to offer is worth every dollar of financial support.