Nonprofits need more people, money and resources. As a nonprofit leader I often heard how important it was to strategically choose board members according to what we needed. I knew we needed to connect to people who could help us with our fundraising events, we needed more donors, and someone to take the treasurer’s position.
My current MBA finance class taught me that we needed something else. Someone who had a good understanding of finance. Not just someone who could help make a budget, but someone who has some understanding of net present value and how to use it to make decisions about purchases.
We did review purchases and made decisions based off of whether they were helping us fulfill our mission, but we did not have a set required rate of return on expenditures and didn’t calculate future cash flows. I wish I had known to do these things, or had someone on our team to help us calculate these numbers and help us make even better decisions about the future.
According to an article by Daniel Bauer and Keith Richardson, Is That Expense Justified?, there is a way to calculate net present value for a nonprofit expenditure to determine if an expense will pay off in the long run. Bauer and Richardson recommend calculating net present social value and adding that to the NPV.
Net present social value represents the return to the nonprofit in social dividends. The expenditure needs to help the nonprofit accomplish it’s mission which means that the organization needs to ensure that they have a clear mission statement in place. The organization will add the net present social value to the NPV and if that number is greater than the cost of the expenditure than the organization should make the purchase.
This method would be so valuable in sharing information about expenditures to donors and community stakeholders. Donors would appreciate if a nonprofit took the time to calculate the value of an expenditure and report that in clear financial terms they could understand. Donors invest in a nonprofit so that they can help them meet needs and nonprofits should give them professional financial information to help them decide if an expenditure and organization is worth their time and money.
A good financial person on our board can help us to calculate ratios and figures that we can use to present our cause to donors. It can help us stand out in the milieu of nonprofits and can communicate to future investors that we take our expenditures seriously and want to ensure that their investment is used to accomplish the mission.