Review nonprofit revenue streams like an auditor

For nonprofits, maintaining financial transparency and accountability is not just a regulatory obligation; it’s critical to building trust with donors, stakeholders, and the communities you serve. But when was the last time you reviewed your revenue streams with the same scrutiny as an auditor would?

Understanding your nonprofit’s revenue in detail can reveal new opportunities for growth and ensure your organization’s sustainability. This article will guide you through a step-by-step process to evaluate your nonprofit's revenue streams, empowering you to make informed decisions.

Why Reviewing Your Nonprofit Revenue Matters

Nonprofit revenue typically comes from diverse sources, including grants, donations, fundraising events, memberships, and program services. Each stream requires proper oversight to ensure that funds are being utilized effectively and in compliance with regulations.

Regularly reviewing your nonprofit revenue isn't just about detecting potential financial issues; it also allows you to:

• Make strategic adjustments to support long-term sustainability.
• Identify potentially underperforming revenue streams.
• Gain transparency and build trust with donors.
• Ensure compliance with nonprofit laws and accounting standards.

Auditors have a keen eye for finding inefficiencies and potential red flags in revenue management. By taking a similarly diligent approach, you can be ready for success before audit season even begins.

Steps to Review Your Nonprofit Revenue Like an Auditor

Identify All Revenue Streams

One of the first tasks an auditor undertakes is ensuring that all revenue streams are properly accounted for. Many nonprofits focus primarily on grants and donations but may overlook smaller revenue sources, like fees for services, rental income, or earned income through partnerships.

Actionable Tip: Create a comprehensive list of your revenue streams and categorize them based on size, frequency, and restrictions (e.g., unrestricted vs. restricted funds). Identify any overlooked streams that may not fully align with your financial goals.

Evaluate Revenue Diversification

Relying heavily on a single stream of revenue can put your nonprofit at significant risk. For instance, if a large grant or major donor contribution is delayed or discontinued, your organization could face financial instability. Auditors often flag a lack of diversification as a vulnerability.

Actionable Tip: Analyze the percentage each revenue stream contributes to your overall income. If more than 80% of your funding comes from one or two sources, consider strategies to diversify, such as expanding donor outreach or increasing income from program services.

Analyze Revenue Trends Over Time

Auditors don't just look at the numbers; they examine patterns. Reviewing revenue trends over the past 3-5 years can uncover significant insights, such as seasonal fluctuations or downward trends in donations.

Actionable Tip: Use your nonprofit’s accounting software or financial records to track revenue trends. Ask questions like:

• Are there any consistent peaks or slow periods?
• Are certain revenue sources declining annually?
• What’s the year-over-year growth rate?

Assess Cost Efficiency of Revenue Streams

Generating revenue often comes with costs. Fundraising events, for example, can be expensive to plan and execute. Auditors scrutinize whether the associated costs of a revenue stream are justified by the financial returns.

Actionable Tip: Calculate the return on investment (ROI) of each revenue stream by comparing the revenue generated to its costs. If certain streams are disproportionately expensive, consider optimizing costs or reallocating resources to more cost-efficient activities.

Evaluate Compliance with Revenue Restrictions

For restricted revenue streams, such as grants and designated donations, it’s important to ensure the funds are allocated and used as intended by the donor or grantor. Auditors review these restrictions closely to check for compliance.

Actionable Tip: Maintain a clear tracking system for restricted funds and verify that expenses align with donor agreements. Use accounting software that helps you manage fund restrictions seamlessly.

Benchmark Against Industry Standards

An auditor might compare your nonprofit’s revenue strategies and financial health with industry benchmarks to identify gaps. Knowing where you stand can help you assess whether your organization is competitively positioned.

Actionable Tip: Research benchmarks relevant to your sector using nonprofit reports and statistics. Tools like GuideStar or Charity Navigator can provide insights into other nonprofits’ financial performance for comparison.

Conduct a Risk Assessment

Finally, auditors evaluate risks that may impact revenue, such as economic downturns, changing donor behaviors, or over-reliance on a specific income source.

Actionable Tip: Create a risk management plan that includes scenarios for revenue shortfalls. Consider developing an emergency reserve or contingency fund to safeguard your nonprofit against financial shocks.

Red Flags That Require Immediate Action

Auditors are trained to spot issues that could escalate if left unattended. Here are some red flags to watch out for when reviewing your revenue streams:

• Unexplained Revenue Variances: Large discrepancies in expected and actual revenue should be investigated immediately.
• Over-reliance on One Donor or Grant: Diversify your income sources to reduce this risk.
• Unutilized Capacity: If certain fundraising efforts or services take up resources but generate little return, it may be time to rethink your strategy.
• Lack of Proper Documentation: Missing or incomplete records for revenue streams can lead to compliance issues.

How Reviewing Revenue Aligns with Mission Goals

Financial oversight should ultimately support your nonprofit’s mission. Reviewing revenue streams not only enhances accountability but also ensures that your resources are being directed to maximize impact.

For example, realigning funds from an underperforming revenue source to a program with high demand can help expand your reach and better serve your community. By regularly assessing financial performance, you’re taking control of your organization's ability to grow sustainably.

Proactive Financial Management with SD Mayer and Associates

Managing a nonprofit’s finances can be complex, but you don’t have to figure it out alone. At SD Mayer & Associates, we specialize in helping nonprofits gain financial clarity and make strategic decisions that align with their mission. Our team of experts provides innovative insights and solutions so you can focus on what matters most—making a difference.

Want to take a deeper look into your nonprofit’s revenue streams? Schedule a consultation with us today and discover how we can help transform your financial strategies.