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Before you can fix your funding, you need clarity about what’s actually broken.
This post is based on Changemaker Conversations, Episode 9: “Fix Your Funding, Part 1: How to Diagnose What’s Really Wrong With Your Nonprofit’s Financial Health.”
Prefer to read? You’re in the right place — this article summarizes and expands on the full conversation between Alyssa Conrardy and Lindsay Mullen.
Why Diagnosing Your Financial Health Is the First Step to Fixing Your Funding
Nonprofit funding is in a state of unprecedented volatility. From disappearing federal grants to shrinking corporate philanthropy and growing community need, organizations are being forced to do more with less — fast.
Before you can stabilize revenue, diversify funding streams, or build a crisis response fundraising strategy, you need a clear, honest, shared understanding of your organization’s current financial reality.
In this post and its accompanying podcast episode, we break down the four financial gauges every nonprofit should track right now, how to interpret them, and how to involve your board in these conversations with transparency and confidence.
The Four Financial Gauges Every Nonprofit Must Track in a Crisis
1. Operating Reserves (Months of Cash on Hand)
Definition:Operating Reserves
Operating reserves are the unrestricted funds your nonprofit has available to cover expenses if new revenue stopped tomorrow.
How to calculate it:
Unrestricted cash on hand ÷ average monthly expenses
A healthy benchmark is typically 4–6 months of cash on hand, though this varies by mission and funding model.
If you’re sitting at 1–2 months — as many nonprofits are right now — your organization may be just one or two payroll cycles away from serious disruption.
Why Operating Reserves Matter
Operating reserves are your emergency savings. They determine how much stability you have as revenue becomes unpredictable — and whether you can weather delays in government grants, lost funders, or shifts in donor behavior.
2. Restricted Revenue Ratio
Definition: Restricted Revenue Ratio
The restricted revenue ratio measures what percentage of your revenue comes with donor-imposed restrictions (e.g., “must fund X program”).
A general healthy benchmark: 40% or less restricted revenue, with many organizations ideally closer to 20–30%.
Why It Matters Now More Than Ever
Restricted dollars can’t usually fund:
- rent
- administrative or operational staff
- fundraising
- general overhead
- sudden increases in demand
If unrestricted funding is shrinking faster than restricted funding (a trend we’re seeing everywhere), your organization may technically “have money” but lack the right money to keep operating.
3. Revenue Diversification
Definition: Revenue Diversification
Revenue diversification assesses how dependent your nonprofit is on any single funder, grant, or revenue stream.
A good rule of thumb: no more than 30% of total revenue from any one source.
Why Diversification Is Critical in 2025
Organizations that once felt “safe” because they had a long-standing government contract or a reliable corporate funder are seeing:
- major grants cut entirely
- multi-year commitments renegotiated
- corporate giving shrinking
- earned revenue fluctuating
- donor numbers declining
When 40%, 60%, or even 70% of your budget comes from one source, you are vulnerable — even if that source has been stable for decades.
Beyond the percentages, don’t forget to review trend lines: is each revenue source trending up, flat, or down over the last three years?
The trends tell the real story.
4. Budget Surplus or Deficit (YTD + Projected)
Definition: Budget Surplus or Deficit
Your surplus or deficit is the difference between revenue and expenses — both year-to-date and projected through year-end.
Why Most Nonprofits Miscalculate This Metric
Many nonprofits:
- only review YTD numbers
- rarely update budgets monthly
- don’t use realistic revenue projections
- fail to account for rising expenses (inflation, staffing, program demand)
To calculate a meaningful projection:
- Update your budget with actuals for months passed
- Adjust revenue lines based on new realities (lost grants, delayed contracts, underperforming campaigns)
- Adjust expenses to reflect real operations and inflation
- Recalculate projected year-end surplus or deficit
This metric often reveals a problem much larger than leaders expected — and that clarity is exactly what motivates action.
Why You Must Share These Metrics With Your Board
In a crisis, the way you communicate with your board can determine whether your organization stabilizes — or spirals.
Boards can only fulfill their role if they have:
- accurate financial information
- clear interpretation of risks
- shared language for understanding the crisis
- visibility into trends, not just static numbers
When you withhold or sugarcoat financial information, you unintentionally:
- limit their ability to support you
- undermine trust
- delay urgent decisions
- increase liability
But when you share financial gauges consistently and transparently, you:
- build confidence in your leadership
- foster alignment
- gain champions for emergency fundraising
- motivate board members to leverage their networks
- build a stronger culture rooted in truth
As Lindsay shares in the accompanying podcast episode, board members don’t expect perfection — they expect clarity.
How These Metrics Prepare You for Parts 2 & 3 of the Series
Once you know what’s wrong, you’re ready for:
➡️ Part 2: Crisis Response Fundraising Strategy
We’ll discuss how to pull the right levers, reinvigorate donors, diversify revenue, and fill the gaps.
➡️ Part 3: Financial Scenario Planning
How to model multiple possible revenue/expense futures so you can act — not react — when conditions shift.
This clarity builds confidence, accelerates decision-making, and helps your board, staff, and community work from the same reality.
Quick Summary
The Four Financial Gauges You Must Track Right Now
- Operating Reserves: Aim for 4–6 months; many nonprofits today have 1–2
- Restricted Revenue Ratio: Ideally under 40%; high restriction = low flexibility
- Revenue Diversification: No more than 30% from one source
- Projected Surplus/Deficit: Update projections based on real revenue/expense trends, aiming for a small surplus
Why It Matters:
You can’t fix your funding until you diagnose the problem. These metrics give you the clarity and shared language needed to stabilize your organization and activate your board.
🎙️ From the Podcast
This post was inspired by Changemaker Conversations, our podcast for nonprofit leaders navigating change, uncertainty, and strategy.
Listen to the full episode:
🎧 Spotify
🎧 ChangemakerConversations.com
About the Authors
Alyssa Conrardy
Alyssa is the Co-Founder of Prosper Strategies and a national expert in nonprofit strategy, stakeholder engagement, and the Shared Power Strategy™ approach. She leads nonprofits through complex strategic planning and crisis response with a focus on alignment, equity, and impact.
Lindsay Mullen
Lindsay is the Co-Founder of Prosper Strategies and a seasoned advisor to nonprofits navigating change, culture, and strategic decision-making. She brings deep expertise in board engagement, communications, and the Nonprofit Strategy System™.
About Prosper Strategies
Alyssa Conrardy and Lindsay Mullen are the co-founders of Prosper Strategies, a strategic consulting firm that helps nonprofits align mission, strategy, and culture through the Nonprofit Strategy System™ and Shared Power™ philosophy.
About Changemaker Conversations
Changemaker Conversations is a podcast for nonprofit leaders who are ready to build smarter, more strategic organizations with less friction and more joy. Join hosts Alyssa Conrardy and Lindsay Mullen, Principals at Prosper Strategies, every other week as they pull you out of the day-to-day grind and refocus your attention on the big picture through candid conversations about the challenges facing nonprofit leaders today.
Subscribe wherever you get your podcasts and visit changemakerconversations.com for show notes and additional resources. If you have ideas for future episode topics or guests, or if you’d like to discuss stakeholder engagement and strategic planning for your organization, email us at hello@changemakerconversations.com.
