FOUR PILLARS OF

FINANCIAL SUSTAINABILITY
Patricia León
Resources for Success Series
Volume 2

This series replaces Resources for Success. A Manual for Conservation Organizations in Latin
America and Caribbean (1993), edited by Paquita Bath.

Copyright © 2001 by The Nature Conservancy, Arlington, Virginia, USA. All rights reserved.

Design/Layout: Justice Graphics

Production: International Publications Program, The Nature Conservancy,
International Headquarters, 4245 North Fairfax Drive, Arlington, VA
22203, USA. Fax: 703-841-4880; email: [email protected].

This publication was made possible, in part, through support provided by the Office LAC/RSD/,
Bureau for Latin America and the Caribbean, U.S. Agency for International Development, under
terms of Grant No. LAG-A-00-95-00026-00. The opinions expressed herein are those of the
authors and do not necessarily reflect the views of the U.S. Agency for International
Development. This publication was also made possible, in part, thanks to the vision, trust, and
support of the Summit Foundation.

For further information on Self-sufficiency projects or to provide feedback,

please contact:
Angel Cárdenas
Self-sufficiency and Fund-raising Specialist
The Nature Conservancy
International Headquarters
4245 North Fairfax Drive
Arlington, VA 22203 USA

Phone: 703-841-4188
Fax: 703-841-4880
Email: [email protected]
 Contents

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Basic Principles of Financial Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Chapter 1 Background Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Chapter 2 What is the Financial Sustainability of an Organization . . . . . . . . . . . . . .11

Chapter 3 Four Pillars of Financial Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . .15

I. Financial and Strategic Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

II. Income Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

III. Sound Administration and Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

IV. Own Income Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Chapter 4 Requirements to Attain Financial Sustainability . . . . . . . . . . . . . . . . . . . .21

Chapter 5 Indicators of Financial Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
 Foreword

develop new and better approaches to building

I nternationally, The Nature Conservancy assists
countries, through local partnerships, to build
the capability and commitment to conserve biologi-
strong local organizations with sustainable, lasting
capacity to pursue their missions.
cal diversity and the natural systems necessary to
sustain life. Since 1988, the Conservancy has We have collected these lessons, best practices,
worked to strengthen the institutional capacity of and field-tested tools in what will be a new
our in-country partner organizations to achieve our Resources for Success series to replace our old
shared conservation goals. standby. The new series is designed to be even
easier to use than its predecessor, with practical,
When in 1993 The Nature Conservancy pub- hands-on tips and approaches, clearer text, and
lished its watershed institutional development more in-depth background information, offered in
manual, Resources for Success, to share the lessons accessible booklets, each on a different topic of
learned from the first five years of its work with in- organizational strengthening. As such, the new
country partners, it proved to be a groundbreaking series will both replace and go beyond what was
document for literally thousands of conservation offered in the earlier manual. We are proud to
and other non-profit organizations. Initially present a new volume of the series: Four Pillars of
designed as an easy-to-use primer for strengthening Financial Sustainability. Other volumes include
Conservancy partners, Resources quickly became a such topics as:
classic reference book in countries where local
organizations had little access to practical advice Institutional Self-assessment
and best practices on issues of institutional devel- Strategic Financial Planning
opment. Eight years after its introduction,
Developing Membership Programs
Resources for Success continues to be a standard
“go to” document for Conservancy staff and partners, Human Resource Management
as well as other conservation and organizational Building Coalitions with Others
development practitioners, around the world.
We think you will find the new Resources for
Given the importance and impact of Resources Success series a fitting replacement for its predeces-
for Success, the thought of improving upon it in sor, and hope it will encourage your organization
some way was at first daunting. But The Nature to develop and share its own best practices.
Conservancy and its partners have learned many
important new lessons in organizational develop- Richard Devine
ment in the intervening years. The Conservancy Director, International Partnership Program
now works with over 90 in-country partners in The Nature Conservancy
Latin America, the Caribbean, Asia, the Pacific, and
Canada. These partners run the gamut from small,
fledgling groups to powerful national organizations
that have the capacity to provide assistance to oth-
ers. As we have continued to work with partners,
the Conservancy has also learned from them to

Four Pillars of Financial Sustainability 5

 Introduction

change is a constant rather than a variable, we

A chieving institutional financial sustainability is
a goal that all non-profit organizations strive
for. Theoretically, this financial sustainability will
must employ more sophisticated methods to attain
financial sustainability. The survival of the sector
enable us to cover our administrative costs and to depends on our ability to achieve this goal.
prioritize our activities so as to accomplish our
missions, without undergoing interminable negoti- The corporate sector offers the most successful
ations with donors who may or may not agree with model to date, not to be copied, but to be adapted to
our vision or with our cost percentages. our reality. The main difference between the two sec-
tors is that the surplus generated in the corporate sec-
Many institutions seek donors that will allow tor is used to create individual wealth. In the non-
them to set up a trust fund or income-generating profit sector, this surplus is reinvested to accomplish a
opportunities that yield a profit margin above mission. After all, “not-for-profit” does not mean “for
market conditions. The ingenuity and creativity of losses.” If the corporate sector is efficient, in theory,
non-profit organizations has led to the develop- non-profit organizations must be even more efficient
ment of many innovative mechanisms. This ability to reach our objectives. We cannot allow ourselves the
to dream and to persuade others to realize these luxury of relying on a stroke of luck.
dreams is one of this sector’s principal strengths.
In the Resources for Success Series, we will present,
Nonetheless, the percentage of organizations among other topics, a comprehensive approach to
that achieve financial sustainability remains very achieving financial sustainability in an organization.
low. This is due not to a lack of creativity or com- This comprehensive approach covers aspects from
mitment, but rather to the fact that many organiza- the planning needed to achieve the goal, to strate-
tions continue to have a donor-dependent vision. gies for achieving specific objectives such income-
If a trust fund is obtained, it is usually through an generation. Many of the proposed methods are
outside source. Moreover, attaining a profit margin adapted from the corporate sector, not only from
that exceeds market conditions generally requires the theoretical standpoint, but also through testing.
appealing to the organization’s non-profit status in These publications also illustrate the experiences of
order to obtain special concessions. While it is other organizations already embarked on this path.
important to consider this capacity for access to
capital or preferential terms as a competitive advan- Four Pillars of Financial Sustainability is the result
tage enjoyed by a non-profit organization, attaining of the collaboration of many authors, affiliated
financial sustainability through a single source or organizations, and institutions involved in the man-
mechanism is a stroke of luck. agement of non-profit organizations.

On the threshold of the twenty-first century, We enthusiastically thank all the individuals and
faced with an increasingly competitive market, a organizations who have collaborated, and continue
globalized economy, and a context in which to collaborate with us in this effort.

Four Pillars of Financial Sustainability 7

 Basic Principles of
Financial Sustainability

T he second volume in the Series “Resources for

Success” explores the basic principles of finan-
cial sustainability. These basic principles comprise
Contents
1. Background Analysis
2. Definition of Financial Sustainability
various aspects including:
3. Four Pillars of Financial Sustainability
• the definition of financial sustainability from both 4. Requirements to Attain Financial Sustainability
an accounting and conceptual standpoint; 5. Indicators of Financial Sustainability
• the main pillars that support it; and Practical Applications
• institutional requirements for achieving this goal. • Examine the factors necessary for an organization
to attain financial sustainability.
This volume is divided by chapters which dis-
cuss each subject from a conceptual perspective. • Evaluate how much your organization has pro-
Other volumes in this series will explore thematic gressed toward this goal.
areas more in depth and provide tools for imple-
menting the proposed strategies.

At the end of each chapter, the reader will find

reflection questions, which are assigned a value.
These questions will help you to engage in a brief
self-diagnostic of your organization’s sustainability.

8 The Nature Conservancy

 Chapter 1
Background Analysis

ing sources. The number of funding sources has

O ne of the greatest challenges facing non-
profit organizations developing countries1 is
that of obtaining critical funds to carry out the
not increased at the same rate as the needs, or as
the organizations willing to implement solutions.
necessary activities to fulfill their mission. These
challenges exist at the local or national, and the Even in cases where funds are available, donor
international level. interests determine how those funds are allocated.
In most cases, priorities for fund allocation are set
by donors who elect to support one cause over
International Level another, rather than by the leadership of local
More NGOs/more projects
organizations. We must recall that no donor is
under obligation to support a particular cause.
Shifting donor interests
As a result, many organizations that are
Local Level dependent on international funding sources are
Government regulations unable to maintain the continuity of their pro-
Economic conditions
grams and activities since fund allocations con-
stantly shift according to the interests of the
Role of civil society
donor. The problem is exacerbated by the fact
that, in general, these international sources tend
to cover overhead expenses at a very low rate,
resulting in a project cost that exceeds the amount
International Level received. Organizations accept these conditions
From the international perspective, while the because their alternatives are often limited: they
amount of available funds is higher, they are either take the money offered or they will be
increasingly scarce due to the growing need and unable to implement the project. Failure to imple-
number of emerging organizations. To be more spe- ment the project means failure to accomplish their
cific, it is not that the number of needs to be met mission.
worldwide has increased, but rather that we are
currently more conscious of those needs, and more What do organizations do to cover costs that
willing to do something to relieve or address them. exceeded the funds received? It is quite simple: 1)
Funds are also scarce because, while there has been they increase the workload of existing staff in order
a quantitative increase in funds, there has not to save on hiring new personnel; 2) they incur a
been a proportionate quantitative increase in fund- deficit; and/or 3) they try to identify additional

1 The concepts and guidelines were developed initially from our experience in Latin America and the Caribbean. However, as we expand our
work throughout the world, we hope to gather lessons learned from the utilization of the materials within this manual.

Four Pillars of Financial Sustainability 9

funding sources to supplement the international There has been considerable progress over the
funds received, usually after the fact. past two decades in democracy-building and civil
society throughout the world. One indicator of this
Local Level incipient growth is the emergence of non-profit
Generating revenues through local sources is also a organizations which represent the people’s will to
treacherous path to take given that the tradition of bring about change for the good of society.
charitable organizations in different regions, such
as Latin America, is still incipient. Where it exists, However, we must acknowledge that we have a
it mostly focuses on religious or high profile caus- long way to go. This movement is not entirely
es. In most countries, you will find no more than understood by governments and society in general.
six or seven organizations that are well known by Governments regard non-profit organizations as
the general public. adversarial to their policies or as competitors for
international funds that otherwise would be chan-
This limited charitable tradition can be attrib- neled through them. The general public does not
uted to several variables: realize that it can express its views through such
• lack of government incentives to encourage chari- organizations and that joining them is a way of
table contributions; demonstrating their desire for change.

• in some cases non-profit organizations lack of For these, and many other reasons, the emer-
trustworthiness; gence of non-profit organizations has not been
• lack of government regulations to guarantee the accompanied by a strengthened tradition of charita-
transparency of non-profit organizations; ble organizations, nor has it translated into govern-
ment policies that appropriately regulate this sector
• a relatively small percentage of the population
and create incentives for it to expand.
with sufficient means to have extra income to
donate;
In this context, organizations must use the most
• economic fluctuations and distrust of long-term advanced methods of internal income-generation
savings plans, which compel heads of families to so as to achieve financial sustainability; this will
prioritize the well-being of the nuclear family. enables them to make autonomous decisions that
truly reflect local, rather than international, priori-
There are many other factors. But the roots of ties. In this context, the need to achieve financial
the limited tradition of philanthropic giving are sustainability is both tangible and crucial.
deeper still; they are embedded in the rubble of
decades, or rather centuries, of not exercising our
civil rights.

10 The Nature Conservancy

 Bab II
Definisi sumber dana yang lestari

gannya lembaga mampu mengimplementasikan

P ada tahap ini, lembaga yang memiliki sumber
dana yang lestari dapat didefinisikan sebagai
lembaga yang punya kemampuan untuk mendap-
proyek dan kegiatan-kegiatannya yang men-
garahkan mereka pada pencapaian tujuan.
atkan dana (dalam bentuk grant atau bentuk lain)
dalam rangka menjamin kelangsungan kegiatan
produktifnya (dalam bentuk proyek misalnya) agar Prinsip akuntansi untuk sumber dana yang lestari
senantiasa berkembang dalam rangka meng- Kalau kita berusaha mencari persamaan-persamaan
hasilkan sesuatu (bisa berupa pencapaian misi lem- istilah dalam keuangan lembaga nirlaba dengan
baga ataupun tujuan lembaga itu dibentuk). istilah dalam akuntansi maka kita dapat men-
Dengan kata lain, tujuan pokoknya adalah terwu- gatakan bahwa grants adalah pendapatan (revenue)
judnya hasil-hasil yang ingin diraih oleh lembaga dari lembaga. Serupa dengan pendapatan pada
tersebut. Dan alat untuk mencapai hasil tersebut perusahaan. Dengan demikian, biaya-biaya untuk
adalah kemampuan mendapatkan dana, yang den- kegiatan / proyek merupakan pengurang dari pen-

Gambar 1: Penggalangan dana dan kegiatan

/Rp
pendaptam
kegiatan

hasil

Four Pillars of Financial Sustainability 11

Accounting Principles of Financial Sustainability

Gross earnings = Grants and/or loans. In business terms, it is referred to as equity capital and includes
periodic expenditures as well as the purchase of equipment and infrastructure which most
donors allow organizations to retain ownership of beyond the life of the project.

Direct Costs = All expenses directly and exclusively related to the project. To identify these costs, ask
yourself: if the project ends, would my organization necessarily spend money on this?
Don’t forget to include the cost of preparing project reports and financial statements.

Overhead Costs = The operational expenses of the organization which has been assigned the project. To
identify these costs, simply figure out the expenses incurred by the organization in order
to carry out core, administrative functions. In general these are expressed as a percent-
age of the organization’s total budget.

Balance = This is the term that non-profit organizations use to describe the monetary results (positive
or negative) for a specific time period. If the result is positive, it is called a surplus, if it is
negative, a deficit. The equivalent terms in the corporate realm are profits and losses.

The following example will better illustrate the this project’s balance will show a surplus in the
accounting principles of financial sustainability: form of an asset: the pick-up truck. This asset
The “Generous” Foundation approves a $100,000 becomes part of the organization’s equity.
grant to the “Very Good” organization to reforest
an area on the outskirts of the city with 1 million However, if all overhead costs were not covered,
trees over a one year period. Overhead expenses for example, a percentage of the salary of the
for the project total 15%. In order to carry out accountant preparing financial reports, then the
this reforestation, the organization will contract a organization must tap other resources to cover
forester to supervise the technical aspects of the these expenses. As a result, it will incur a deficit; in
project and a volunteer coordinator to organize other words, the organization was unable to cover
citizens who offer to help with the task. Saplings all the costs necessary to implement the project.
must also be purchased for planting and the Most organizations are unwilling to dispose of a
weekly transportation of both volunteers and property asset (the pick-up truck), or the law does
plants must be anticipated (this activity will take not allow them to dispose of it.
place every weekend throughout the year).
Because this is a weekly activity, it is decided that Some accountants might ask why they didn’t sell
it is cheaper to buy a pick-up truck than to rent the pick-up truck in order to cover the deficit?
transportation. Extremely complicated permits are generally
required of non-profit organizations wishing to dis-
The organization’s gross revenues are $100,000. pose of a property asset. They laws of each country
The direct costs are the salaries of the forester and must be reviewed to make sure that this is a realis-
the volunteer coordinator, the saplings to be plant- tic solution.
ed, and the pick-up truck and gas to provide trans-
portation. The indirect costs (overhead) are those If we apply this example to the financial situa-
that provide the necessary infrastructure for the tion of non-profit organizations, we discover that a
task, such as offices, computers, project fundraising large percentage of them aspire to a “0” balance, or
expenses, public relations if necessary, quality con- to augment their equity by acquiring assets. This
trol, and so forth. Assuming that all overhead costs means that no surplus or deficit remains at the end
are included exactly in that 15% ($15,000), then of a given period. The organization spent all rev-

12 The Nature Conservancy

enues (grants) on its productive processes (projects problem is that the consulting services must begin
and overhead) in order to produce results. the following week and the entire organization’s
staff time is occupied by ongoing projects. Where,
The result described above is considered ideal in the space of one week, can the funds be found
by many organization, in that it has efficiently to contract someone to advise the Ministry?
invested all funds in order to achieve results.
However, the organization is vulnerable to changes The answer to this question usually involves
in its environment and lacks the flexibility to influ- some type of sacrifice: turn down the opportunity,
ence them. Non-profit organizations lacking their re-assign professional staff working on other proj-
own internal resources are dependent on the good ects—to the detriment of those projects—, or sim-
will of donors each time they wish to carry out an ply work weekends and “as much as necessary” to
activity that falls outside the scope of approved the detriment of staff well-being. Our organizations
projects. If the donor disagrees with the organiza- lack a capacity for response because we lack finan-
tion’s needs or priorities, or if it simply lacks the cial capacity.
capacity due to time or financial constraints, then
the organization will be unable to effect the “Not-for-profit”
desired changes. Does Not Mean “For-Loss”!!
After contemplating the situations described above,
Let us imagine that an NGO receives a call today we arrive at the conclusion that we must add a new
from its country’s Ministry of Tourism, requesting a component to our initial definition of financial sus-
consultant for three months to amend the law gov- tainability: surplus generation. You might ask if you
erning national parks in order to include NGO eco- have read this correctly: generate a surplus or, in
nomic programs. It is a fabulous opportunity for corporate terms, “a profit?” Is it not true that we
the NGO, which had been talking to the Ministry consider ourselves lucky when we achieve a “0”
about this very thing for quite some time. The balance and avert a deficit? Is it not true that if we

Income

Demand

Productive
Processes
Surplus

Offer
Results
=

Four Pillars of Financial Sustainability 13

are non-profit organizations, we are not allowed to Financial sustainability means ensuring the
retain more money than we can spend? Well, it’s longevity of the organization. This financial sustain-
not true. What non-profit organizations may not ability must be defined in real terms; we therefore
do is spend money for purposes unrelated to our will adjust our accounting equation to reflect the
mission, or distribute profits for personal gain. desired result.

Generating a surplus is not prohibited. What Total income - Total costs = Surplus
is more, surplus-generation is a need, not a luxu-
ry, and it is our obligation! A surplus is crucial to
planning for the future as well as meeting current Questions to Ponder:
challenges. Without an income surplus, how can
we respond to changes in our surroundings and 1. Do you know if your organization has a surplus, a
opportunities that arise? How can we take pre- deficit, or a “0” balance?
cautions against risks and uncertainties that
might arise in the future, such as political or eco- 2. If there is a surplus or deficit, do you know where
nomic crises? it is coming from?

For this reason we add a new component to our 3. Has financial sustainability been established as a
definition of financial sustainability. In our view, goal? If so, has the financial goal been identified?
the financial sustainability of a non-profit organiza-
tion is its capacity to obtain revenues in response
to a demand, in order to sustain productive
processes at a steady or growing rate to produce
results and to obtain a surplus. It must be kept in
mind that financial sustainability may be achieved
at the project, program or organizational level.

14 The Nature Conservancy

 Chapter 3
Four Pillars of Financial Sustainability

sturdily. We have therefore termed these compo-

W hen The Nature Conservancy launched its
Institutional Development Program in 1988,
much emphasis was placed on income diversifica-
nents as fundamental pillars for the financial
sustainability of and organization.
tion and internal income generation. Over time,
1st Pillar: Financial and Strategic
however, we have witnessed many cases of promi-
nent organizations that successfully achieved both
Planning
objectives but continued to experience financial I have often asked organizations how much of their
difficulties. In the worst cases, they nearly had to own income they need to generate. In a high per-
shut down. Although it may seem obvious, we had centage of cases, the response is “as much as possi-
to learn through experience that it was irrelevant ble, as soon as possible.” While we all want to gen-
whether we were good fundraisers or generated our erate a lot of income, it is imperative that we know
own income if we lacked efficient procedures for the minimum we must raise to achieve the pro-
administration and finances, and fiscal planning in posed objectives related to fulfilling our respective
conjunction with strategic planning. It can be com- missions and covering administrative costs.
pared to a table: it needs four legs in order to stand

1. STRATEGIC AND FINANCIAL PLANNING

2. INCOME DIVERSIFICATION
3. SOUND ADMINISTRATION AND FINANCE
4. OWN INCOME GENERATION

Four Pillars of Financial Sustainability 15

 If an organization is unclear about its goal, it Questions to Ponder:
might, for example, launch an income-generation
project to raise $50,000 annually without taking 1. Does your organization have a strategic plan?
into account that it has a current deficit of
2. Have high, medium and low priorities been set as
$500,000 which must be paid in the short-term.
part of the strategic planning?
Unless it has other means of raising these funds,
then $50,000 will be insufficient. The organization 3. Do you know how much it will cost to implement the
will feel that it has not gotten anywhere or that it is actions described in the strategic plan?
working toward an unattainable goal.

As the organization grows and takes on an 2nd Pillar: Income Diversification

increasing number of activities, it runs the risk of
The second pillar of financial sustainability is
focusing on day to day management issues and los-
income diversification, referring not only to inter-
ing sight of long range objectives. Strategic plan-
nal income generation, but also to the number of
ning is the mechanism to help clarify an organiza-
income sources that provide our main funding.
tion’s mission and objectives as well as prioritize
Even if an organization has twenty donors, it will
the actions needed to accomplish them. Effective
remain extremely vulnerable if a large portion of
planning has become a prerequisite for accessing
the budget depends on only one of these. Any
available international funds.
change in this donor’s decision can induce a major
crisis. At least 60% of the organization’s overall
However, since it operates at the purely concep-
budget must come from five different sources.
tual level, strategic planning has a weakness: it
does not adequately take into account the
Diversification of Sources of Funding
resources an organization has available to
implement the chosen strategies, or its
capacity to obtain new resources. It is there-
fore important to engage in a parallel finan-
cial planning process that makes it possible
to convert the actions described in the
strategic plan into figures.

A financial plan of action basically con-

sists of projected expenditures and the orga-
nization’s potential to generate the income
to cover those expenditures. Although it
may appear that a financial plan is very sim-
ilar to a budget, there are significant differ-
ences between the two. A financial plan is a
dynamic document that changes frequently.
The ultimate purpose of the financial plan is to Questions to Ponder:
determine if the organization is going to have suffi-
cient resources available in the medium term to 1. What is your organization’s total budget?
meet the objectives described in the strategic plan. 2. How much of that budget corresponds to administra-
tive costs?
The financial plan operates on the basis of sce-
narios, ranging from the minimum feasible to the 3. Can you make a rough list of your organization’s
ideal. The minimum feasible scenario quantifies income sources this year, with approximate
priorities that are indispensable to fulfilling the amounts?
mission within a specific time frame, and whether
4. Do you have a retrospective analysis of income
the organization can cover its fixed or operational
sources dating back at least two years?
costs during that period. These indispensable pri-
orities and fixed operational costs represent the 5. Do you have procedures for following up with donors?
minimum fundraising goal.

16 The Nature Conservancy

3rd Pillar: Sound Administration and the organization as a whole. In many organizations,
Finance accounting procedures are set up by project or by
Knowing how to manage our resources is as essen- donor since this facilitates issuing donor reports that
tial to achieving financial sustainability as knowing often require specific accounting categories and codes.
how to generate income. Efficient procedures for Nonetheless, to find out the overall budget or calcu-
administration and finances are governed by a late the total expenses in a particular category such
series of institutional policies that help us make the as travel, accountants add up the figures from each
most of our resources and ensure transparency in project. This is an extremely dangerous habit, as it
fiscal management. Moreover, these procedures does not contain the adequate controls for regular,
must enable us to anticipate the organization’s automatic review of the organization’s financial
financial standing and, ultimately, make appropri- standing. This type of accounting, known as project
ate decisions in a timely manner. Efficient proce- or donor-based, is highly susceptible to human error.
dures also allow us to generate income through the All organizations must have cost center accounting
financial management of available assets. that allows for double entry coding for donor reports.

Accounting-administrative procedures must fit Statements issued for decision-making purposes

the organization’s needs. Regardless of their scope are just as important as accounting procedures.
and structure, these procedures must record the Below are the types of financial statements that the
organization’s transactions to enable us to visualize organization’s management must review periodically.

Financial Statement Review Comments

1. Balance sheet Semi-annually

2. Income/Expenditure Statement Monthly or every two months

3. Cash flow Monthly

4. Audit reports When conducted Ideally at the end of each fiscal year.

5. Financial statement entries With the balance sheet

6. Inventory control Semi-annually

7. Investments Depending on the amount,

significance, risk incurred

8. Financing Depending on the amount,

significance, risk incurred

9. Budget Presented to the Board of Directors Approval minimum 30 days

three months prior to the end prior to the end of the fiscal year.
of the fiscal year.

10. Budget verification Quarterly reviews, at minimum Essential for a non-profit organization
since it depends on contributions. If
they fail to materialize, the budget could
be seriously compromised.

Other reports that the nonprofit organization Questions to Ponder:

should request from its accounting department are:
1. What financial statements does your organization
• Grant reports prepare?
• Trust fund (if one exists)
• Income-generation through business activities 2. How often is each one reviewed?
• Financial reports to donors 3. Are the financial statements easy to understand?
• Project audits
4. How many Board members are involved in fiscal
oversight?

5. Does the Board have a committee for this purpose?

Four Pillars of Financial Sustainability 17

4th Pillar: Own Income Generation 2. Fundraising for institution building or operations
Own income generation is one way for an organiza- This refers to requesting donations from those indi-
tion to diversify its sources of revenue. In this cate- viduals, corporations, or agencies willing to make
gory, however, we discuss all the ways in which an contributions in support of the institutional devel-
organization can generate unrestricted income: in opment of the organization. These donations may
other words, income that the organization, not the be given in the following ways:
donor, decides how to spend. Principal ways an
organization can generate its own revenues follow. a. helping the organization to increase its income-
generation capacity whether by hiring new staff,
1. Contributions to a trust or endowment fund acquiring computer systems or the initial invest-
The objective of a trust fund is for an institution to ment necessary to implement an income-genera-
derive benefits from the interest generated by the tion project, etc.
capital. The capital remains untouched. Its value
must be maintained and/or increased over time. b. increasing equity, whether by building infra-
structure or building up an endowment fund.
An organization can include under indirect costs
c. contributing unrestricted funds (without condi-
(overhead) a percentage earmarked for an endow-
tions placed on their use) for a specific time peri-
ment or trust fund. If this is the case, the percent-
od. (usually from one to three years). Such funds
age constitutes a surplus. To do this, however, the
are usually provided to an organization when it
organization must legally establish the endowment
starts up operations to allow it to achieve a
fund, and must include this investment under its
indirect costs as a matter of institutional policy. degree of financial stability until such time as its
project volume increases.
The legal establishment of an endowment fund
usually consists of setting up a separate bank Unfortunately, very few donors offer this type of
account—which the organization pledges not to contribution.
spend. The purpose is to build up this account to the
Questions to Ponder:
point that the interest accrued constitutes an income
for the organization. In many cases, people— 1. Has your organization requested these types of funds?
“trustees”—are named to ensure the public that this
commitment is kept. Banks already have standard pro- 2. What was the outcome?
cedures for setting up these funds in many countries.
3. Do you think other opportunities are available to
Establishing an institutional policy to include raise these types of funds?
this investment under indirect costs means that
the same percentage of these costs will be
included in every proposal, so that all donors
receive equal treatment. For example, if an orga- 3. Income generation through
nization’s indirect costs are calculated at 15%, it public contributions
can add on to these costs a proportionate Some organizations turn to the public to solicit
amount to build the endowment fund; therefore, support for their mission. There are many different
from the moment the Endowment Fund is estab- ways to approach the public, including:
lished, the organization’s indirect costs will be
16% instead of 15%. a. Offer membership in the organization.
Questions to Ponder: b. Organize events which people pay to attend
such as parades, raffles or dinner parties.
1. Does your organization have a trust fund?
c. Solicit donations in public campaigns such as
2. If so, have policies been established to maintain or “telethons” or taking up national collections dur-
increase its value over time? ing a specific time frame (usually of short dura-
3. If you do not have a trust fund, is it a projected goal? tion, such as one day).

4. Does your organization have any other asset, such d. Solicit corporate contributions in exchange for
as property, that is capable of generating revenues? tax deductions, image, group membership, or a
combination.

18 The Nature Conservancy

e. Exchange royalties or licensing (organization it corporations in which the organization has full or
name or logo) to corporations in exchange for a part ownership. It usually occurs when a non-profit
fixed amount or a percentage of the sales of a organization identifies a business opportunity and,
specific product. at the same time, recognizes the existence of vari-
ous factors conducive to creating a separate entity
Questions to Ponder:
rather than managing the initiative at the program
or project level. There are myriad potential factors,
1. Has your organization undertaken any such initia- but they may include:
tives? If so, list them.
a. The need to obtain capital by commercial means.
2. Do you know if the initiative is making a profit? If
so, how much does it contribute to the organization? b. The need to attract personnel from the private
sector to direct the initiative, creating salaries and
3. If it is not making a profit, do you know what its
incentives that differ from the organization’s.
financial projections are? When will it reach the
break-even point? c. Safeguarding the organization’s equity from the
risks inherent to a business.
4. How much has the organization invested in order
to launch this initiative? d. The risk of diverting the organization’s assets to
activities that do not directly correspond to its
mission.
4. Income generation through the sale of
goods and/or services e. The need to safeguard the organization’s image, etc.
Many institutions offer products or services as an
income-generating strategy. This type of initiative Whatever the reason or reasons for choosing
exists in many forms. It can be as simple as the sale this route, it is an option that must be carefully
of promotional products (t-shirts, posters, or other weighed. Any entrepreneur will tell you that it is
products with the organization’s logo), or as complex not easy to make a profit. It involves consider-
as offering professional consulting services in a par- able effort and work, and in this case, companies
ticular field. The latter usually corresponds to an area compete directly in the marketplace. Moreover,
in which the organization has technical expertise. there must be a clearly established policy regard-
Moreover, such goods and services can be offered in ing the allocation of profits corresponding to the
a variety of ways. A simple method is direct sales to organization. There should never be any doubt
friends and acquaintances. A more complicated as to how these profits are used. A policy usually
method involves the mass distribution in commercial is established stipulating that all profits ear-
sales locales, and/or advertising in the press. marked for the organization must be invested in
Questions to Ponder: it immediately!

Questions to Ponder:
1. Has your organization undertaken any such initia-
tives? If so, list them.
1. Has your organization undertaken any such initia-
2. Do you know if the initiative is making a profit? If so, tives? If so, list them.
how much does it contribute to the organization?
2. Do you know if the initiative is making a profit? If so,
3. If it is not making a profit, do you know what the how much does it contribute to the organization?
financial projections are? When will it reach the
break-even point? 3. If it is not making a profit, do you know what the
financial projections are? When will it reach the
4. How much has the organization invested in order break-even point?
to launch this initiative?
4. How much has the organization invested in order to
launch this initiative?
5. Income generation through establishing
businesses related to a specific mission 5. Are there partners to share the risk?

This is the most sophisticated and complex form of 6. Is the initiative compatible with your organization’s
income-generation. It involves establishing for-prof- mission?

Four Pillars of Financial Sustainability 19

6. Income generation throug out its mission. Sometimes funds received are a
financial management
percentage of sales; in other instances, they might
This is an income-generation technique that can be be a specific amount; and other times the institu-
implemented by all institutions, regardless of tion receives a combination of both.
whether it generates a little, or a lot, of income.
This category refers to the appropriate, strategic Through this type of alliance non-profit institu-
management of an organization’s assets (assets may tions reduce the economic risks but its public image
be bank accounts, property, etc.) in order to maxi- is at stake. If the corporation has a bad public repu-
mize their financial potential. For instance, proper- tation, it is almost certain that the public image of
ty that is not being used can be rented, bank the institution will suffer a negative impact.
accounts can be transferred to interest-bearing
Questions to Ponder:
accounts until the funds are needed, or unused
assets which retain some market value can be sold.
1. Is the organization in alliance with a corporation?
However, non-profit organizations undertaking 2. Do you know if the institution is making a profit? If
any of these strategies should review existing laws so, how much does it contribute to the organization?
in each of their countries to verify that there are no
legal barriers. For example, in Peru, foundations 3. If it is not making a profit, do you know what the
may not sell any asset without a special permit financial projections are?
which takes a long time to obtain. Donor policies 4. Do you know what the public image of the corpo-
with respect to financial management is another ration is?
area that must be researched. For example, the
United States Agency for International 5. How much has the organization invested in order
Development (USAID) requires that any interest to launch this initiative?
generated through fiscal management be entirely
reinvested in the same.
Questions to Ponder:

1. Has your organization generated income through

financial management? If yes, how much?

2. If it has not generated income, do you know of any

obstacle to your organization’s using this strategy?

3. Do you know if any donor opposes generating

interest through financial management?

4. Does your organization have financial manage-

ment policies?

7. Income generation through corporate

alliances
Cause-related marketing is the most common name
for the alliances with corporations. These alliances
can be defined as the commercial activities where
non-profit institutions partner with corporations to
market an image, product, or service with the pur-
pose of obtaining a mutual benefit. In successful
cause-related marketing the institution and the cor-
poration get positive results. The corporation
achieves a good public image, sells more products
or services and the institution raises funds to carry

20 The Nature Conservancy

 Chapter 4

Requirements to Attain
Financial Sustainability

investment of $10,000 obtained through a grant. A

W e have examined accounting principles, the
importance of the concept of generating a
surplus to achieve financial sustainability, and its
200% profit is anticipated. In other words, the organi-
zation will make a $20,000 profit and recover its
fundamental pillars. However, a lot of effort and $10,000 capital investment.
teamwork is required to reach this goal. It also
requires an organization-wide change of mentality, However, even if it achieves this result, it still
since it has to do with generating an income sur- needs $20,000 to cover its budget. To simplify, let
plus, which is antithetical to what is commonly us say that the organization opts to reduce costs to
regarded as effective methods of directing non- avert a deficit and use the $30,000 generated by
profit organizations. The six essential require- the t-shirt sales. If all of these conditions are met,
ments for achieving financial sustainability in an then there will be a “0” balance; in other words no
organization are: deficit or surplus.

1. Long-term Commitment Unfortunately, despite having conducted a suc-

2. Leadership cessful t-shirts sale, the objective of the organiza-
3. Investment of Time and Money tion was to generate revenues annually (not just for
4. Business Plan one year). Because the money earned was spent,
5. Effective Management Team the institution has no more funds to produce t-
6. Team Work shirts to sell the following year. The organization

Year Investment Cost # Units Sale Price Gross Revenues NGO Use

1 10,000 1 10,000 3 30,000 30,000

2 0 1 — — — —

Let us illustrate these requirements by giving an has not advanced significantly towards financial
example: sustainability.

The “Pura Vida” organization needs to raise $50,000 If “Pura Vida” decides to utilize only part of the
annually to cover its administrative budget and avert a income generated to cover its budget, and each
deficit. “Pura Vida” proposes to sell t-shirts as a means year it will invest $5,000 more than the previous
of achieving financial sustainability, using an initial year, how long will it take to reach its goal of gen-
erating $50,000 annually? Let us suppose that the

Four Pillars of Financial Sustainability 21

organization continues to make a 200% profit each
2. Leadership
year, production and sales costs are $1, the sale
price is $3, and all external variables remain con- It is nearly impossible to achieve financial sustain-
stant (inflation, demand, costs, etc.). ability without the commitment of the organiza-

Year Investment Cost # Units Sale Price Gross Revenues NGO Use

1 10,000 1 10,000 3 30,000 15,000

2 15,000 1 15,000 3 45,000 25,000

3 20,000 1 20,000 3 60,000 35,000

4 25,000 1 25,000 3 75,000 50,000

tion’s leadership and directors. The fundraising staff

Under ideal circumstances, it took four years for will become discouraged if the organization’s direc-
the organization to generate $50,000 on an annual tors demand short-term results despite the fact that
basis. In the first year, the organization had a total a long-term effort is required to achieve the desired
income of $30,000, given that the initial capital goals. Likewise, in some instances, everyone (staff
investment was a grant, all of this counts as profits. and management) must collaborate in order to
Therefore, it can use it all, save what it expects to achieve financial objectives. The leadership must
reinvest the following year, in this case $15,000 set an example.
($10,000 + $5,000 more each year). The equation Questions to Ponder:
is repeated successively until the fourth year, when
the organization generates $75,000 with an invest- 1. Who, among your organization’s leadership, is
ment of $25,000 (the difference is the projected committed to this effort?
goal of $50,000). If all variables were to remain
2. What is the nature of their commitment, moral
constant, the organization could go on generating
support alone or active participation?
$50,000 indefinitely, using a $25,000 investment
for the production and marketing of t-shirts.
1. Long-term commitment
Just as no project of any magnitude is accom-
plished over night, it takes time to generate 3. We must invest time and money to make
income. All of the successful enterprises that you money
see around you required a long-term commitment
It’s true! Resources are necessary to achieve finan-
to achieve success. In the case of “Pura Vida,” it
cial sustainability. In our example, an initial
took four years to attain the projected goal.
investment of only $10,000 was required, but we
Meanwhile, the organization had to make sacrifices
assumed that this amount would cover the costs of
in order to resist the temptation to spend money it
production, distribution, sales, monitoring, etc. It
needed for operations, instead of investing it to
is usually more complicated than that. As with any
produce more t-shirts.
project, there are direct and indirect costs.
Questions to Ponder: Moreover, there are fixed costs (those that remain
constant over time) and variable costs (those
directly related to production for sale, such as the
1. Do you know if your organization has an immedi-
t-shirts).
ate need (such as covering a deficit) to generate
income?
Income generation is not a part-time job. It is,
2. Has your organization articulated a concrete rather, a full-time undertaking and sometimes a
financial goal? whole team of people is needed to cover innova-
tive activities such as the t-shirts sales, as well as

22 The Nature Conservancy

traditional ones such as international fundrais- However, it is also a necessary step for small proj-
ing. To raise funds from international founda- ects. Moreover, this methodology can be applied to
tions, for instance, a proposal must be written traditional forms of fundraising used by non-profit
and sent by courier, there must be follow-up organizations, such as corporate or membership
with the donor, preferably a visit, and, if the campaigns in addition to business endeavors.
proposal is rejected, the process must start all
over again until the goal is reached. All of this A business plan enables an organization to iden-
means investment costs! tify essential factors for evaluating whether the
effort involved in the initiative is worthwhile. For
In this example, we have invested the time of example, a feasibility study will help determine:
members of our team for proposal-writing, fol-
• A potential market for the good or service that is
low-up activities and cultivating the donor. Non-
to be offered;
profit organizations must begin to consider staff
time in monetary terms in order to plan realisti- • Opportunities and threats in the environment,
cally for its human resources. Don’t forget the old including the competition;
saying, “time is money.” • Costs associated with the initiative; this will help
to set a pricing policy and make financial projec-
We have also observed the foundation example tions so as to calculate potential profits and when
that we must invest cash in telephone calls, couri- we can expect them to materialize.
er services, and even the visits. This “capital
investment” is even greater when we launch a • Set market and financial goals in order to monitor
progress in a timely fashion.
commercial venture, such as producing t-shirts for
sale. In this case expenses that we must account
The necessary cost and effort to undertake this
for are: the time of the person in charge of produc-
exercise will depend on the magnitude of the ini-
ing and marketing the t-shirts, artistic designers,
tiative. The organization staff can carry out the
production and sales costs, advertising costs, dis-
task if it is a small project. Methodologies are
tribution costs and, lastly, the cost of having capi-
available to assist professionals who have not
tal invested in an operation when it could have
undertaken a study of this nature. The greater the
been earning interest in the Bank — this is the
investment and risk, the greater the imperative to
cost of missed opportunities.
invest in a thorough study with the help of profes-
Questions to Ponder: sionals with expertise in this field. It is important
to emphasize that, even though a consultant is
1. How much is your organization willing to invest in hired to conduct the study, a team comprised of
this type of initiative? the organization’s staff members must participate
in the process. Otherwise, there is a risk of not
2. Does your organization have other funding fully understanding the conclusions, or lacking a
sources? feeling of ownership in the project. Usually this
3. Who will have to invest their time in order to move
results in unused business plans on file.
this initiative forward? Will only new staff be
counted, or will some of the existing staff be
All non-profit organizations must ensure that
involved?
their scarce resources are utilized as efficiently as
possible. Without a feasibility study or business
4. How much time is the Executive Director and/or plan, there is no way of anticipating what will
the Board willing to invest to oversee this initiative? happen with an endeavor and, once again, we
rely on luck. The business plan does not guaran-
tee success, but it can substantially increase the
4. Business Planning potential for success. Non-profit organizations
All income-generating initiatives must conduct a must incorporate this methodology into the
feasibility study. If the study indicates potential, planning process for any income-generation
then it should be expanded into a business plan. project as a means of ensuring that they have
Many organizations believe that these procedures made every effort to invest their money in a
only apply to large-scale commercial endeavors. viable project.

Four Pillars of Financial Sustainability 23

 Questions to Ponder: 6. Team work:
Don’t forget that many of the plans that your
1. If your organization has launched an income-gener- organization makes to achieve SUSTAINABILITY
ating initiative, did it conduct a feasibility study or involve personnel in other areas. It is essential to
draft a business plan before launching the project? train and communicate with them. For example, an
organization that sold products on-site to visitors
2. If it did not conduct a feasibility study, did it at had displayed the items in an attractive case in the
least research market potential or make financial reception area. However, the receptionist attending
projections? visitors did not know the prices nor the transac-
3. Does your organization have a person (paid staff tions involved to complete a sale. The result: many
or a Board member) who is familiar with business sales missed.
planning or has received some training in this area?
Another organization launched an ecotourism
4. If your institution is planning an income-generation program for its members using a brochure featur-
initiative, is it considering carrying out these studies? ing different destinations. Members had begun to
call to ask about the program, but the switchboard
operator was unfamiliar with it and connected the
5. Effective management team callers to the protected areas division since the
When an investor is considering whether to get organization had never offered trips. Unfortunately,
involved in a business, the first things to be evalu- the membership department had neglected to
ated are four variables: sound product, market inform the protected areas division about the pro-
potential, promising financial outlook, and a com- gram, so the technicians told the callers that there
petent management team. A business cannot func- must have been some mistake and referred them to
tion without a leader with the vision to implement a travel agency. Surprised at the lack of response,
the initiative. Even if you have the best business the membership director begins to check around
plan in the world, the context is constantly chang- and discovered that everyone who called has been
ing and a leader with vision and experience is told that there was an error! The result: no sales.
needed to avoid obstacles along the way or recog-
nize new opportunities. These two examples might seem ludicrous, but
they are real. Large organizations are not the only
If your organization is unwilling, or lacks the ones to experience communication breakdowns.
resources, to contract such a director and the team We all are busy and absorbed in our projects. It is
needed for a particular undertaking, then it should also important to train staff members in order to
not launch the initiative. Executive Directors or increase their capacity and motivation.
Board members are sometimes willing to oversee an
Questions to Ponder:
undertaking. This is a valuable contribution, but it
should not be confused with the implementation
1. Has the organization’s staff been informed about
process. A full-time person is needed; however,
the income-generation initiatives in progress?
with active supervision, it might be possible for the
person in charge to have a more limited profile. 2. Has a list of people who might be involved, even
indirectly, been drawn up?
Questions to Ponder:
3. Has the organization anticipated briefing and/or
1. Assuming your organization has an income-genera- training people indirectly involved?
tion initiative, do you know who is in charge of it?
4. Has the impact of this initiative on the organiza-
2. What did the hiring process consist of? Was a pro- tion’s image been considered? If it were negative,
file developed of the ideal candidate? Was the job has staff been informed about potential problems,
announcement widely disseminated? and strategies for addressing them?

3. Do you know that person’s experience in this area?

4. Is the organization satisfied with the results pro-

duced to date? Is it reaching the goals set forth in
the business plan?

24 The Nature Conservancy

 Chapter 5

Indicators of Financial Sustainability

It is worth reiterating that development usually

S ince the launching of its Institutional
Development program, The Nature
Conservancy has developed various indicators to
does not take place evenly in all areas. It must also
be emphasized that these indicators are constantly
measure progress in institutional development. We evolving. If an organization has found other solu-
strongly believe in the importance of using these tions that lead toward success, they are as valid as
indicators; they provide a system for measuring the goals offered in this chapter. This simply repre-
progress in specific areas, and set a goal to strive sents a common denominator.
for. These indicators are the fruit of the shared
experiences of all the affiliated organizations. The The Questions to Ponder presented in different
ideal goal (scale 5) is the result of an analysis of subject areas will help expand your vision as you
factors influencing the success of many organiza- undertake this exercise. These reflection questions
tions. are part of a diagnostic tool of financial sustain-
ability. This exercise’s sole purpose is to aid in
The indicators that follow are part of a more your organization’s development. We hope it
comprehensive set of measures of institutional becomes a tool that your organization will use to
development. Here we present those relevant to achieve its goals.
organizational financial sustainability.

A: Indicators of Strategic Vision and Leadership

Indicator A 1: Strategic Planning

5 The strategic plan includes long-term institutional financial plan (3-5 years) updated periodically as
the result of a participatory process involving staff, board and outside advisors.

4 Staff uses the current strategic plan, which incorporates long-term institutional financial plan, to
guide all major program decisions, including submission of grant proposals.

3 Current strategic plan exists. Staff is somewhat familiar with strategic plan.

2 Strategic plan outdated or being prepared.

1 No strategic plan exists.

Four Pillars of Financial Sustainability 25

 Indicator A 2: Board Effectiveness

5 Board members govern actively and effectively to guide the future of the organization and ensure
its long-term institutional and financial stability. Committees have been formed to address specific
issues such as investments, financial sustainability, fundraising, etc.

4 Most board members regularly provide leadership, financial oversight, set policies, participate in
planning, give or obtain funds and provide continuity for leadership transitions.

3 Some board members occasionally assume leadership and oversight, and give or obtain funds for
the organization.

2 Only a few board members contribute time, effort or money to organization’s governance.

1 Board members are inactive, do not provide guidance and/or funding.

Indicator A 3: Strategic Financial Planning

5 Organizations’ financial sustainability plan implemented and monitored; goals are being met and
adjustments made.

4 Organization has tested and analyzed various approaches and integrated those strategies into a
plan to achieve its financial goals, and has begun to achieve some of those goals.

3 Organization has begun to develop fund-raising and other income-generation strategies to respond
to quantified financial need and has begun testing those approaches.

2 Organization has quantified financial need to accomplish administration and program objectives
for the next 3-5 years.

1 Organization has not identified minimum financial need to accomplish administration and program
objectives for the next 3-5 years.

B: Indicators of Income-Generating Capability

Indicator B 1: Fundraising and Development Plan

5 The fundraising process is integrated with financial administrative systems, and monitored and
adjusted on an ongoing basis.

4 Clearly defined fundraising goals and plan developed based on the organization’s financial/strate-
gic plans; responsibilities shared among several individuals as part of a systematic process.

3 Organization has begun to systematize resource generation activities; delegation of donor contacts
and fund-raising efforts.

2 One individual responsible for almost all resource-generation.

1 No systematic resource-generation activities under way.

26 The Nature Conservancy

 Indicator B 2: Diversification and Funding Sources

5 Organization has a broad funding base consisting of at least eight sources (donors); no one source
contributes more than 25% of the total annual revenues.

4 At least five funding sources (donors) account for 60% of the organization’s overall budget; no one
source accounts for more than 25% of the organization’s revenues.

3 One funding source (donor) accounts for more than 40% of organization’s revenues; at least four
other sources account for remaining 60%.

2 One funding source (donor) accounts for more than 60% of organization’s revenues.

1 One funding source (donor) accounts for more than 80% of organization’s revenues.

Indicator B 3: Generation of Unrestricted Income

5 Unrestricted income accounts for more than 40% of the organization’s total annual budget.

4 Unrestricted income accounts for more than 20% of the organization’s total annual budget.

3 Unrestricted income accounts for more than 50% of annual operations costs.

2 Unrestricted income accounts for less than 50% of annual operations costs.

1 Organization generates no unrestricted income.

Note: This indicator refers to funding that may be spent at the organization’s discretion. This funding may
have been earned (sale of products or services, income from a trust fund) or provided by donors without
specific instructions on how the funds are to be spent. In order to answer this question, an organization
must have previously determined its operations costs (also known as overhead or indirect costs), or deter-
mine that more than 20% of total income is derived from unrestricted sources.

C: Indicators of Financial Administration Capability

Indicator C 1: Indirect Cost Recovery Rate

5 Indirect cost recovery rate (also called operations costs or overhead) has been calculated by exter-
nal auditor and is being included in all grants (when donors allow it).

4 Indirect cost recovery rate has been calculated by an external auditor and is included in most grants.

3 Indirect cost recovery rate calculated but not verified by external auditor; rate included in most grants.

2 Some indirect costs included in most grants, but a rate has not been calculated.

1 No indirect costs charged in project grants.

Four Pillars of Financial Sustainability 27

 Indicator C 2: Accounting Systems

5 Accounting information utilized in decision-making process.

4 Organization-wide chart of accounts permits cross-project financial analysis.

3 Accounting done by project, “rolled-up” into organization-wide statement.

2 Accounting done by project or donor only, no roll-up.

1 Accounting done by disbursement.

Indicator C 3: External Financial Reporting

5 Financial reports for external review are completed and delivered on time, and utilized regularly for
decision making. Financial reports are included in organization’s Annual Report and have been
published for at least two consecutive years.

4 Financial reports for external review are completed and delivered on time, and occasionally utilized
for decision making.

3 Financial reports for external review are usually completed and delivered on time.

2 Financial reports and statements for external review are often incomplete or delivered late, including
donor reports, balance sheet, income and expense statement, and cash flow.

1 Financial reports and statements produced sporadically for internal use only.

Indicator C 4: Internal Financial Reporting

5 Organization-wide and program-specific financial statements, showing cumulative actual income and
expenditures versus budgets, produced and circulated quarterly for at least two consecutive years.

4 Organization-wide and program-specific financial statements, showing cumulative actual income

and expenditures versus budgets, given at least quarterly to program managers and board.

3 Organization-wide and program-specific financial statements, showing cumulative actual income

and expenditures versus budgets, produced but not circulated to program managers and/or board.

2 Some program-specific financial statements, showing cumulative actual income and expenditures
versus budgets, produced but not circulated to program managers and/or board.

1 No financial statements showing cumulative actual income and expenditures versus budgets
produced.

28 The Nature Conservancy

 Indicator C 5: External Oversight (Audits)

5 Both internal and external audits conducted on a periodic basis and all recommendations fully
implemented.

4 Both internal and external audits conducted on a periodic basis and recommendations partially
implemented.

3 Both internal and external audits conducted on a periodic basis.

2 Only internal audits conducted.

1 No internal or external audit or formal board review of organization’s financial statements conducted.

Indicator C 6: Cash Flows

5 Cash flow, calculated quarterly, guides programmatic decisions for at least two consecutive years. No
negative annual cash flow exists for two consecutive years (annual income equal to or exceeds expenses).

4 Cash flow, calculated quarterly, guides programmatic decisions. No negative annual cash flow exists.

3 Cash flow calculated annually, used to guide programmatic decisions.

2 Cash flow calculated occasionally or for specific projects.

1 No cash flow analyses done.

Conclusions

A chieving financial sustainability is a long-term

goal that requires the concerted efforts of the
entire organization. While access to grants or pref-
We also must recall that creativity alone is not
enough to achieve financial sustainability; it is
essential that we adopt the most advanced strate-
erential conditions is a competitive advantage gies and methods within our grasp to maximize
enjoyed by non-profit organizations, we cannot rely our potential for success.
exclusively on such privileges to reach our goal. If
we were to do so, we would be allowing luck to Achieving financial sustainability should no
determine our fate. longer be an impossible dream. Achieving this goal
is both a necessity and an obligation for non-profit
We must understand that achieving financial organizations since it ensures our ability to accom-
sustainability is an ongoing process that has to plish our respective missions.
become part of our organization’s day-to-day man-
agement: in strategic planning, in administration
and finances, in fundraising policies, and in the
planning and implementation of strategies that
enable us to generate our own income.

Four Pillars of Financial Sustainability 29