Section 9: Finance Section

This section digs into the details of financial management, budgeting, and provides resources for funding an RCO. 

Financial details, processes, and regulations are often the most stressful and most important part of an RCO’s sustainability. Financial management is important to staff receiving paychecks and funders expecting to receive updates on how their grants and being accountable to the communities being served. Hiring a professional to help get the financial system up and running is always money well spent.   

As a leader, ask yourself these questions as you move through the section: 

• What are the systems, structures, processes, and staff positions focused on planning and overseeing how money is coming in and going out? 
• Where are our gaps in financial management or oversight? What do we need to address to support our sustainability?
• What skills and abilities do we have on our team for fundraising, and what work should we hire or contract out to best support?
• Are we ready for an audit?

RCO financial operations will become more complicated and take more resources to manage as the RCO grows. Having the right systems in place not only helps an RCO grow financially, it helps the RCO sustain its services over time. Below are some concrete examples of financial operations an RCO should focus on at various stages of its growth cycle development.

For RCOs just starting up:

1. Familiarizing yourself with nonprofit accounting principles. Even if you have the luxury of having professional accounting and financial management support, or if you’ve run a for-profit business before, you should take the time to learn the basics of nonprofit accounting. Nonprofits are answerable to multiple funders, which adds a different level of tracking and accountability to their operations. You should know what to look for that will help you run your nonprofit organization when setting up your financial operations.

2. Creating a realistic budget. As a newer organization, you won’t have a lot of history to base your budgets on. Do your research, talk to other RCOs, and think through all the possible expenses and revenue you need to start and sustain your operations for the upcoming year and into the foreseeable future. Ask other RCOs what expenses they hadn’t anticipated in their first few years, or where they overestimated their revenue. There are a lot of “hidden” costs to running a nonprofit. Be thoughtful about budgeting to minimize unforeseen expenses.

3. Developing a good chart of accounts to support your nonprofit general ledger. Your general ledger, or GL, is a means for keeping record of your organization’s total financial accounts, such as assets, liabilities, expenses, and revenue or income. The chart of accounts is a list of all the accounts (using 4–digit numbers to represent different types of activity) available for recording transactions within the general ledger. Setting this up to accurately reflect your nonprofit RCO’s activities will lay the foundation for good budgeting, reporting, fundraising, and more.

For RCOs in a growth phase:

1. Preparing for nonprofit audits. Most states require nonprofit organizations to file an audited financial statement prepared by an independent CPA when they reach a specified annual revenue threshold, and the federal government requires “single audits” when an organization receives $750,000 or more in annual federal funds. Additionally, some funders, especially state and local governments, require audits of the funding they give you. It’s usually not a matter of “if,” but “when” you will be audited, so learn about what an audit requires and start preparing now!

2. Building systems to track your revenue and expenses by funding sources. A healthy RCO will have multiple sources of funding, and many of those funders will want to see exactly where and how you spent the money they gave you. You might need to show documentation of how 25% of someone’s salary, or 50% of your rent, or a specific purchase of supplies was paid for from that source of funding. Learn about “fund accounting” and see what works best for you to track your revenue and expenses by specific funding sources.

3. Developing “boilerplate” grant materials. Many grants ask for similar information about your organization, such as a description of your organization’s mission and history, the community you serve, and the impact you have. Once you have good text prepared for these core questions, you can reuse the material with a few tweaks for multiple grants again and again. It is worth the investment to have a professional grant writer help you develop these materials.

For RCOs that have plateaued or are in a decline phase:

1. Checking your organization for “mission creep.” Have you added programs or services over the years that are less central to your mission? It might be time to let those go. This is the time to dig deep into your finances and identify areas that may be mission critical but need different funding support, or areas that might be cut because they are not mission critical and are draining resources. 

2. Doing a thorough analysis of your revenue and expenses. Revisit your programs’ “true costs” and make adjustments where necessary. The cost of service delivery is affected by everything from gas prices to expanded use of technology, such as Zoom or Google Meet. If you’ve never changed the budget for a training or other program you offer, it’s time to analyze all its costs, including overhead, and all revenue, including fees or grants, it takes to deliver the service. Are you still breaking even or netting a profit? Or are you actually losing money?

3. Investing in systems or services that can increase the efficiency of your financial operations. As your RCO evolves and becomes more complex, consider transitioning to other technology or contracted services that might improve your financial health. You may incur a large expense upfront to switch to a fund accounting software platform for nonprofits, for example, but over time it will significantly increase your effectiveness in managing multiple grants and funding sources. Or you might contract with an accounting firm that can provide an ongoing Chief Financial Officer (CFO) function to analyze your financial strengths and weaknesses and provide corrective solutions.

Financial Management

What positions, people, roles, and responsibilities have been specifically created to manage the RCO’s finances?

Section 5 presented aspects of infrastructure and the legal requirements of RCOs. While referenced in the fiduciary duties of a board of directors, having detailed financial management and oversight is critical for a successful RCO. An organization’s bylaws will provide some amount of guidance regarding the board, finance committee, and executive’s respective roles in financial oversight, and more detail should be outlined in organizational policies and procedures. 

Key Terms for Financial Management

Stepping into nonprofit financial management can feel like entering a foreign country. The “culture” or way of thinking can be unfamiliar to many of us who started RCOs because we wanted to help people, not to be accountants, and the terminology is an entirely different language from what we know and understand. You might find yourself wishing there was a language app like DuoLingo or Babbel to prepare you for your journey into this foreign country. Propel Nonprofits has a free resource library that is a good place to start, and many state nonprofit associations have similar resources. 

Keeping a glossary of terms handy can also help you navigate the territory of financial management. Consider bookmarking a glossary of financial terms from organizations like Propel Nonprofits or Nonprofit Finance Fund. Here are a few common terms to get familiar with:

• Audit: A formal examination of a nonprofit's financial records by an independent party. The goal of an audit is to ensure that the nonprofit's financial statements are accurate.
• Capital Campaign: This is an intensive fundraising effort designed to raise a specific sum of money within a defined time period. The funds raised are typically used for the purchase, construction, or renovation of buildings.
• Cash Flow: This refers to the total amount of money being transferred in and out of a nonprofit. It is a key indicator of the organization's financial health.
• Chart of Accounts: A list of all accounts used in the accounting system (or general ledger),including assets, liabilities, income and expenses.
• Contracts: An agreement about what a person or organization is being paid to do. 
• Endowment: A fund that a nonprofit invests. The nonprofit can use the income from the investment, but the principal is usually kept intact.
• Expenses: The total amount of money that a nonprofit spends on its operations. This includes salaries, rent, supplies, and other costs.
• Financial Statements: Documents that summarize a nonprofit's financial activity. These typically include a balance sheet, income statement, and cash flow statement.
• Fiscal Year: This is a 12–month period that a nonprofit uses for budgeting, financial reporting, and income tax purposes. It does not necessarily align with the calendar year.
• Fringe Benefits: These are additional compensations given to employees beyond their regular salary. In a nonprofit context, this could include health insurance, retirement contributions, educational assistance and more. The cost of these benefits is often considered when calculating an organization's overhead rate.
• Form 990: The annual tax form that tax-exempt organizations are required to file each year to remain compliant with the regulations and requirements set by the IRS.
• General Ledger: The accounting system tool for recording all transactions. 
• Operating Budget: Planning document used to predict expenses and allocate resources within your organization over a certain period of time.
• Operating Reserve: This is a pool of funds that are set aside to cover the cost of unexpected expenses or to compensate for a sudden drop in revenue.
• Overhead Rate: This is a measure of how much of a nonprofit's expenses go towards administrative costs and fundraising efforts, as opposed to its programs or services.
• Restricted Funds: Money that a donor gives to a nonprofit with specific instructions on how it should be used.
• Revenue: The total amount of money that a nonprofit receives from various sources. This can include donations, grants, and income from goods or services.
• Unrestricted Funds: These are donations that a nonprofit can use for any purpose. These funds are not tied to any specific project or program and provide the nonprofit with the flexibility to allocate the money where it is most needed.

Accounting Practices

The Generally Accepted Accounting Principles (GAAP) are general principles accepted by accountants in all sectors. These guidelines are set by the Financial Accounting Standards Board Financial Accounting Standards Board (FASB). Your RCO’s board of directors, executive director, and other leaders should be familiar with these principles and ensure that your organization’s accounting practices are consistent with these standards.

FASB Statement Number 117  establishes guidelines and requirements for nonprofit reporting. For example, all nonprofits must provide these four financial statements:

• Statement of Financial Position (SOFP): Sometimes referred to as the “balance sheet,” the SOFP reflects the overall financial position of your organization at a particular point.
• Statement on Activities (SOA): Sometimes referred to as the income statement, budget report, profit and loss, income and expense report, the SOA shows income, expenses, and net income for a specific time period, all or part of a fiscal year.
• Statement of Functional Expense (SFE): Assists with associating expenses with the service efforts and accomplishments of the organization. The SFE breaks down expenditures into various common categories, providing a “function” for each expense.
• Statement of Cash Flow: Shows how funding and cash moves in and out of the organization. It provides a snapshot of funds available to pay expenses at any given time.

Resources:

Understanding and Applying GAAP for Nonprofits: FAQ Guide from Jitasa

GAAP for Nonprofits: The Accounting Standards To Know by Heart by Springly

Financial Policies and Procedures

The RCO’s board of directors, executive director, and any financial operations staff should work together to create and adopt a written financial policies and procedures manual, which should be updated regularly. This document clarifies the roles, authority, and responsibilities for essential financial management activities, establishes internal controls, and helps you remain compliant, among other things. For example, a sample policy might be that your organization uses the “accrual” basis of accounting, for which you provide a documented procedure that expenses are accrued into the month in which they are incurred and the books are closed no later than the 15th day after the close of the month. You will be required to submit your Board-approved financial policies and procedures when you are audited. 

Many groups that support nonprofit organizations have free samples of financial policy and procedures manuals that can help you get started, such as these examples:

Nonprofit Fiscal Policies & Procedures: A Template and Guide from CompassPoint (San Francisco, CA)

Financial Controls Policies and Procedures for Small Nonprofit Organizations from Nonprofit Support Program (Hartford, CT)

Sample Nonprofit Financial Policies and Procedures Manual from Financial Technologies & Management (Carmel, CA)

Audits

Will your RCO be audited? Most likely, the answer is yes. Although it’s unlikely your RCO would be audited by the IRS, most states require nonprofits to have an “independent audit” when your revenue reaches a certain threshold. If your organization receives over $750,000 in federal funding you are also required to have a “single source” audit, which is an audit of just the federal funds to check for your organization’s compliance with federal grants management standards. Your RCO is required to hire an auditor or auditing firm to conduct either an independent or single source audit. Be prepared! This process is both expensive and time consuming. 

Additionally, state and county agencies may conduct audits of the funding they have given you. In this instance, the government agency will conduct the audit and you will not have to hire an external auditor. State and other local government funding agencies often pay through reimbursement: you submit your expenses related to the project after they’ve been incurred, and the agency reimburses you. When audited, these agencies will want documentation of the expenses. You will need to produce invoices, receipts, bank statements, credit card statements, and more! Putting a system in place to keep these records organized is essential.

Audits are a lot of work, but they have many positive benefits. Some foundations or lenders will only provide funding to your organization after they have received audited financial statements, and having an audit can open up new funding opportunities. The audit also demonstrates your transparency. It shows your supporters and the general public that you are a legitimate and honest nonprofit organization. It also keeps your organization accountable and helps you develop high standards for your financial management. Even if the audit shows areas that need improvement, that’s okay. You can use that information to become a stronger organization. Finally, reaching the financial threshold that requires an independent audit can be cause for celebration! It shows that you have a robust RCO with a significant operating budget, which means you are in a stronger position to make a difference in your community.

Resources:

State Law Nonprofit Audit Requirements from the National Council of Nonprofits

Federal Law Audit Requirements from the National Council of Nonprofits

Nonprofit Audits: Everything You Need to Know from Nonprofit Megaphone

Roles for Financial Management

As you create your RCO’s financial policies and procedures, you will need to assign different functions to different roles. There are four basic roles you should think about for your nonprofit organization:

1. Accountant: The accountant is a professional who has a degree in accounting or related field and has passed a certification exam (CPA). Accountants are responsible for financial analysis and reporting on financial data. Typical responsibilities for the accountant might include maintaining compliance, reviewing accounts, balancing transactions, compiling financial statements, analyzing budgets, or preparing for an audit. Some organizations hire an accountant to have on staff, but more often RCOs outsource this role through a contract with a licensed and bonded individual or organization. RCOs just starting up might also receive in-kind or donated accounting services, but this method is difficult to sustain.

2. Bookkeeper: The role of a bookkeeper is to keep records up-to-date and organized whenever financial data is entered or funds exchange hands. Typical responsibilities for a bookkeeper include entering basic expense, income, and other financial data within your accounting software, writing checks, making deposits and recording bank transaction information, or organizing and recording employee expense reimbursements or your organization’s credit card transactions. Bookkeepers should have enough financial knowledge and familiarity with your accounting software to be able to perform these responsibilities, but they do not typically need a professional degree or certification. Because much of this work requires knowledge of the programs, people, and processes at your RCO, it is usually most effective to have someone inside your organization perform this role.

3. Chief Financial Officer (CFO): The accountant provides analysis and the bookkeeper performs record keeping, but the CFO is responsible for strategy. This role typically creates your organization’s annual operating budget, forecasts and evaluates cash flows in and out of your organization, establishes financial policies and internal controls that govern how your employees handle resources, and develops a grant management system to help secure critical funding. A large nonprofit organization will have someone in this role, but it is unlikely that many RCOs will employ a CFO as a full-time member of its leadership team. Instead, the executive director and/or treasurer often perform some of these functions, often with the help of an external professional hired on a fractional basis to work closely with them and other organizational leaders.

4. Treasurer: The Board Treasurer is responsible for your organization’s financial oversight. The treasurer should be someone with financial expertise who has the knowledge and ability to monitor your RCO’s financial condition and keep the rest of the board of directors informed so it makes sound decisions. The treasurer approves operating budgets, prepares reports for the Boards, develops risk management policies, helps implement audit recommendations, and other activities.

A fifth financial management “role” might be that of your accounting software. In Section 5 we provided some examples of accounting software. Whatever system you choose, think about how it will support the role of accountant, bookkeeper, CFO, and treasurer for your organization. Does it have the functionality to track your expenses for a specific grant? Can someone without accounting experience learn how to use it for transactions like recording and paying an invoice? Can it generate reports that help you analyze financial information? Is it designed for nonprofit organizations? These are some of the questions to think about when selecting your financial software. 

Resources: 

Understanding the 4 Key Nonprofit Financial Roles: A Guide by TopNonprofits

Nonprofit Bookkeeper vs. Accountant: What’s the Difference? by Jitasa

Budgeting

How useful and accurate is our budgeting process? How can we improve it to help us better plan and prepare for the coming year?

A budget is an annual snapshot of how an organization expects to earn and spend money over a particular length of time, usually one year. Some RCOs choose to use the calendar year (January-December) and others choose to use their primary funder’s fiscal year (varies by funder). Budget documents are often created for each RCO program, with income and expense lines specific to the work of the RCO. Regardless of the level of detail outlined in each line item, leadership staff, finance committee members, and board members should be able to understand, or access more detail about, what is being considered and included in each line of the budget. 

Resources:

Budgeting for Nonprofits from the National Council of Nonprofits

Strong Nonprofits Toolkit from the Wallace Foundation

How to Create a Budget

Developing an operating budget requires participation of all staff responsible for managing income and expenses as well as a finance committee and the board of directors. Whether an RCO puts on events, runs annual programs, or develops multi-year projects, the board and staff need to estimate when and how they will bring money in and spend money to facilitate their efforts. 

When budgeting, make sure to set up some structures to help the team find the right balance between budgeting based on their hopes for the coming year or budgeting with a “scarcity mindset” and underfunding important areas of the RCO. An all too common nonprofit practice is not funding enough in infrastructure and people to successfully do the work of the organization, especially when trying to arrive at a balanced budget. In this article, Ann Goggins Gregory and Don Howard talk about how both funders and nonprofits undermine the nonprofit’s work by underfunding, and underreporting on, organizational overhead, setting up unrealistic expectations of how much it costs to run a nonprofit. Be honest about what the RCO needs in terms of overhead (administrative costs that may not be able to be directly tied to a specific program or project). Don’t fuel the cycle of underreporting or undervaluing the work of planning, administrative, and infrastructure costs—all of that work is critical to a nonprofit’s success. Instead, accurately and fully capture the organization’s expenses and share that reality with everyone. 

It’s also important not to pad the fundraising or grant income side of the equation just to balance the budget. It may be that a team believes that they have the ability to increase fundraising by 25% each year with the same capacity and structures already in place, but that may not actually be feasible. Start with developing a budget with the income and expense sides reflecting actual revenues and costs from the past year and then revising each to incorporate any new changes in the annual plan. 

A break-even budget is neither best nor required for an organization to have. There may be years when a nonprofit spends more than it makes, as the team grows or they begin figuring out how to sustain a new program, event, or area of work. In other years, the organization may make more than they spend, as more tickets were sold or the price of materials was less than budgeted. Having a balanced budget each year is a good goal and a way to track progress, but it is not necessary, and it can undermine organizational sustainability and growth.

A financially healthy RCO has reserves to cover 3–6 months of operating expenses. A nonprofit status is an agreement that the organization invests any profits back into the organization’s activities and efforts to achieve the mission. RCO leaders should invest in the organization by preparing for the unexpected (like replacing a broken laptop, loss of a funding stream, or when a pandemic hits) and ensuring that the organization can still meet its financial obligations.  

If RCO leadership decides to prioritize building a cash reserve, the board of directors should create a Cash Reserves Policy. The National Council of Nonprofits suggests:

“As the governing body with fiduciary oversight to ensure the financial sustainability of the nonprofit, the board of directors may adopt a “reserves policy.” When developing an appropriate policy for your nonprofit, consider including guidance on (i) how much money the nonprofit will set aside at all times, (ii) defining the types of circumstances that will result in assets in reserve being used, (iii) the process the nonprofit will go through to make the determination whether or not to dip into reserves, (iv) the process and timeframe for repayment into the reserve account, and (v) whether there should be any directions, restrictions, or limitations on what the money held in reserve may be used for.”

Resource: Template RCO Budget

How to Revise a Budget Throughout the Year

An operating budget is an RCO’s best guess at what income they will receive and what expenses they will incur over a period of time, usually a year. As time passes, projects get underway, events occur, and all the other aspects of life and running an RCO keep on rolling, it may be that what was budgeted is not what happened. COVID is an obvious example of how budgets did not survive reality, but more regular examples include events having more, or fewer, attendees, or even needing to be canceled at the last minute, job hiring processes requiring different levels of salary or benefits to be competitive, or the cost of materials shifting and greatly impacting expense lines. 

Whatever the reality is that an RCO finds itself in, it is useful for an organization, particularly the board and leadership, to revisit and revise the budget based on how things are going. If there is more revenue from a program or event than was expected, is there a new idea or project worth starting this year instead of waiting on until next year, and how can you incorporate it into your budget to get it up and running? If expenses are greater than anticipated, or revenues are not coming in, are there plans that need revising to keep everything functioning? 

An ED, a finance committee, or the finance department should develop and follow a plan to review and revise the budget on a consistent basis. Maybe it is once a year, maybe it is quarterly. The process should include a review of (1) the budget and what was expected by a given point in the year, (2) the actual income and expenses, for each line in the budget, so far, and (3) a revised projection for the rest of the year, which takes into account what has happened so far. 

Program True Cost

While an operating or annual budget predicts expenses and allocates resources for the entire RCO, a program budget will show the revenue needed and the expected expenses for a specific program. While this might feel redundant or duplicative once you have your operating budget, knowing your true program costs creates a more transparent financial perspective. Once you know how much a program costs, you have data to make decisions on expanding or ending a program within the RCO. It is also helpful when thinking about applying for a new grant or contracted services, and they can ensure you don’t shortchange your organization by not accounting for things like overhead, administrative costs, or supervision. Program budgets allow you to see all the costs associated with running a specific program. (See Budgeting for Grants and Contracts.)

Resource: True Program Costs: Program Budget and Allocation Resource and the Program Budget and Allocation Template from Propel Nonprofits

Budgeting for Grants and Contracts

RCOs and other nonprofits depend on a variety of funding sources, especially grants and contracts. Most grants and contracts are for a fixed amount of funding based on a budget prepared by you that explains the costs of delivering the programs or services you will provide if awarded the grant or contract. A common mistake when preparing these budgets is to underestimate expenses or not include indirect items like your rent or the phone service needed to perform the work. When putting together a budget for a grant or contract, think about the following:

Direct Expenses

An easy mistake is not thinking through all of the direct expenses associated with providing a service through a grant or contract. In addition to the hours for the employee that is providing the service, have you included hours for the employee who will supervise or manage the project? Are there expenses like mileage or travel? What are all the supplies you might need for the project? For example, suppose a local hospital would like to contract with your RCO to facilitate five All Recovery Meetings onsite and provide 10 hours of 1:1 recovery coaching a week for people in its short-term inpatient behavioral health program. You estimate that it would require 28 hours per week for a Peer Recovery Specialist to perform these services. You pay the Peer Recovery Specialist $22 per hour and figure out that 28 hours per week is 1456 hours a year, making the cost of this service $32,032. Right?

No. Take a look at a more detailed budget proposal below. Here, direct costs like program supervision, fringe, a contracted service like support from a Licensed Alcohol and Drug Counselor, and miscellaneous expenses related to the service are factored in, bringing the annual cost to provide this service to $49,684. 

Indirect Expenses

If you submitted the budget above, however, you would still be shortchanging your RCO. In addition to the direct expenses of providing the service, you should always budget for the indirect expenses that make the service possible. The cost of maintaining liability insurance, your accounting software, the executive director’s salary, or phones and internet are examples of indirect expenses. You may not be able to directly link these items to the direct delivery of a program, but they are essential for the overall operation of your RCO. Without them, you wouldn’t have an organization that could provide the services in the grant or contract.

Once you’ve calculated the direct expenses, make it a standard practice to include 10% of that amount in a line item for indirect expenses. In the budget above, the subtotal is $49,684. After adding a 10% indirect expense of $4,968, the total budget for this contract is $54,653. That’s over 40% more than the cost of just the Peer Recovery Specialist’s hourly wages that we originally budgeted for!

Reimbursement-Based Grant Funding

When RCOs seek out grant funding that operates on a reimbursement model, there are several critical factors to keep in mind. First and foremost, these types of grants require the RCO to pay the costs and cover all expenses up front before being reimbursed by the grant provider. RCOs should have a solid financial plan to manage the upfront costs and plan for potential delays in reimbursement. Evaluating the financial stability and capacity of the RCO before applying for such grants can save a lot of stress in the long run.

There are several other key considerations that RCOs should consider when applying for a reimbursement-based grant:

1. Cash Flow: Reimbursement grants require the RCO to initially cover the costs before getting reimbursed by the grant provider. Ensure your RCO has sufficient cash flow to cover expenses before reimbursement.
2. Documentation: Maintain comprehensive and accurate records of all expenses. Detailed documentation is often required to secure reimbursement.
3. Eligible Expenses: Understand what expenses are eligible for reimbursement under the terms of the grant. Non-eligible expenses will not be reimbursed.
4. Timely Submission: Submit reimbursement requests on time. Late submissions might not be reimbursed.
5. Late Reimbursements: Be aware that reimbursements might not always come in on time. Delays in receiving reimbursements can impact your RCO's cash flow. It's essential to have a contingency plan in place to manage this scenario.
6. Compliance: Ensure your RCO remains compliant with the terms of the grant. Non-compliance can result in the denial of reimbursement requests.

A bridge loan or line of credit can be useful tools for managing cash flow in the period before the RCO receives reimbursement. This type of short-term loan or line of credit can temporarily cover the costs that will later be reimbursed by the grant. When considering a bridge loan, it's important to carefully evaluate the terms of the loan, including interest rates and repayment terms. Once the reimbursement from the grant is received, the loan can be paid off. It's crucial to remember that while a bridge loan can be beneficial, it does come with risks, and should only be considered if your RCO is confident in its ability to secure the grant reimbursement and repay the loan.

Resource:

Loans: A Guide to Borrowing for Nonprofit Organizations

Funding Streams

How diverse is our revenue?

Healthy RCOs rely on multiple funding streams to ensure sustainability. Funding streams might include grants from various sources like federal, state, and local government entities and community and family foundations, corporate sponsorships, individual donors, fees for service (such as training or consulting services), and (in the case of many RCOs) Medicaid reimbursable services for peer support services. Having diversified funding streams help with sustainability - if 90% of your funding comes from one grant or one stream and that source goes away… stressful!

Here are some of the big buckets of funding:

• Donations: Donations are charitable gifts from individuals, businesses, corporations, and other entities that want to support your RCO’s mission. Donations can be in the form of money, goods, or services. Donations are often the most flexible form of funding for a nonprofit and might be “unrestricted” in how they are used, as long as they are in service of the organization’s mission and operations. Some donors, however, request that the funds be used for a specific purpose or project and are considered “restricted.”  See below for more about restricted or unrestricted funding.
• Sponsorships: Whereas donations are charitable gifts to your nonprofit, sponsorships are financial or in-kind support from a company or organization in exchange for promotional benefits. Many RCOs get sponsorships for annual events, such as a Recovery Month Walk or a fundraising gala. In exchange for having their name associated with the event and often some material benefits, such as an exhibitor booth or event tickets, the sponsoring organization gives the RCO a certain amount of money that correlates with the amount of recognition or material benefits provided. Sponsorships should fund the events and generate additional revenue to support your organization’s ongoing activities.
• Grants: Unlike most donations, grants are usually restricted to a specific project or purpose, have a formal application process, and are bound by strict guidelines and timelines. Private foundations issue grants to organizations that provide services aligned with their funding priorities. Your RCO is more likely to get a grant from a foundation that prioritizes health equity than it is from a foundation that prioritizes the arts, for example. State and federal agencies also award grants to organizations to deliver programs and services aligned with legislative priorities. For example, a state legislature may appropriate funding to the state’s human services agency to reduce overdoses. The state agency, in turn, distributes that money through grants to organizations that can do overdose prevention programs. Similarly, Congress appropriates funding to the Substance Abuse and Mental Health Services Administration (SAMHSA) for specific purposes. SAMHSA, a federal agency, then issues funding to organizations across the nation through grant awards. See more below about federal funding opportunities.
• Contracts: RCOs provide services that counties, hospitals, correctional facilities, and other entities might want to contract for. For example, a county might have received funding as part of your state’s opioid settlement agreement and wants to use it to reduce overdoses among people returning to their communities after being incarcerated in the county jail. They would like to connect people with ongoing peer support services prior to re-entry. Rather than developing the capacity of the county jail to offer peer recovery support services, they contract with your RCO to provide these services. 
• Revenue Generation: Receiving fees for services provided by your RCO is another way to offset or cover costs, and even net profit that can be applied to other organizational expenses. See Revenue Generation later in this section.
• Reimbursements: In some states, RCOs can be reimbursed through Medicaid for providing peer recovery support services. The RCO might be reimbursed directly, or more often through another entity such as a Federally Qualified Health Center (FQHC) that submits the Medicaid claim and then reimburses the RCO.

Every RCO will have a different mix of funding sources, but the important thing is to build a diverse mixture of funding sources and not be too dependent on one specific source. A healthy RCO might have 10 different grants that make up 40% of its funding and then a mix of other funding sources. A pie chart of that RCO’s funding might look like this:

Restricted / Unrestricted Funding

As mentioned previously, RCO funding sources can be both “restricted” and “unrestricted.” Contributions which are designated by a donor for a specific use, such as paying for new computers or buying naloxone (i.e. NARCAN) kits to distribute, are considered restricted. They can only be used for the purpose designated by the donor. Many grants are also restricted funds. If the grant is to be used for a specific program or set of activities, the funds are restricted to that purpose. Here are some examples of restricted funds that RCOs might encounter:

• A donor contributes funding to provide scholarships for people to go through your RCO’s Recovery Coach training program. The donor might add other restrictions, such as limiting the scholarships to  members of an underrepresented community or to people who meet a certain income threshold.
• A private foundation with a focus on technology gives your RCO money to buy new computers.
• A grant from a state agency gives you funding for a specific set of activities, such as providing peer recovery support services in emergency departments. 

Unrestricted funds, on the other hand, do not have to be spent in a specific way and allow the organization the freedom of discretionary spending. These are essential financial resources contributing to the effective operation of a nonprofit organization, and often fund things like rent, additional fundraising, and executive salaries. Examples of unrestricted funds that RCOs might receive include:

• A family member of someone who received support from your RCO writes a large check and presents to you in gratitude for your services.
• You have a peer-to-peer fundraising campaign in association with your annual Recovery Walk. Community members create individual fundraising pages through your RCO’s fundraising platform and solicit donations in support of your RCO.
• A local corporation wants to support your organization and makes a financial contribution. They ask for nothing in return except a donation acknowledgement.

Resources:

Restricted Funds: What Are They? And Why Do They Matter? from Jitasa

Managing Restricted Funds from Propel Nonprofits

Growth Planning

Does our nonprofit need to grow? How are we making sure that our growth remains focused on our mission?

Many RCOs chase donors and funding opportunities to support growth without focusing their plans to grow strategically. Sustainable RCOs, however, take a proactive approach to funding, seeking only those opportunities that align with their mission and program plans. 

Grant proposals and financial asks are most effective when they are developed in relation to an RCO’s strategic plan and the resulting program and growth plans. Having a strategy that guides how the organization responds to funding opportunities, partnerships, or other new directions helps ensure that all new growth opportunities are aligned and supportive of the organization’s intended direction. 

Fundraising Plan

Fundraising is an important part of most nonprofits, as their financial resources often do not allow them to do all of the work they intend for their communities. Planning for fundraising helps a team focus their goals, efforts, and asks to different audiences and for different areas of work. 

Here are some initial steps to begin developing a fundraising plan:

1. Review the coming year(s) budget(s) and gaps between expenses and income to understand the organization’s financial needs and programmatic priorities. How much money is needed for what events, programs, or activities?
2. If your organization had a fundraising plan last year, reflect on that plan: what fundraising activities worked well, and what didn’t work? What about those activities didn’t work?
3. Identify your organization’s existing fundraising resources such as development staff or who will lead fundraising efforts, and organizational relationships with current or potential donors.
4. Work with staff to identify activities to attract, renew, and upgrade donors. This could include events, campaigns, engagement opportunities, etc.
5. Determine what kind of donations, gifts, relationships, or other supports the team expects will result from each of the above activities, and determine how many resources (time, expenses, stress) the team expects to spend on each activity. Which ones are worth developing and running this year?
6. Solidify the goals and timeline for each activity. Identify activity leads and teams, and define when and how to review progress, share updates, and make important decisions about each activity. 

Resources:

Example of an RCO Fundraising Plan from Minnesota Recovery Connection (2018)

7 steps for developing a fundraising plan

A Beginner’s Guide to Fundraising

Revenue Generation

Beyond grants and reimbursements, how else can we generate revenue to help us fulfill our mission?

In the previous section on fundraising streams, we discussed revenue generation. Nonprofits can find ways to generate revenue that align with their mission and engage the community in a variety of ways. Remaining within the bounds of the law, anything is possible and may be of interest to communities and participants!

From providing consulting services or selling resources, trainings, or other products to owning and renting business spaces, nonprofit organizations can find many ways to support their efforts. Here are a few examples from Recovery Community Organizations across the country:

• Many RCOs offer Recovery Coach training and charge a fee that covers the cost to deliver the training and generates additional revenue.
• Providing consulting services to businesses on topics such as integrating peer services or being a “recovery friendly workplace.” RCOs can set a fee for services that add value to businesses in the community.
• Some RCOs buy group tickets to a sporting event and then resell them as part of “Recovery Night” outing. They might get sponsors to cover the cost of the group tickets  and then set a ticket price that enables the RCO to generate additional revenue beyond covering the cost of the experience.
• RCOs might sell t-shirts or other items with positive recovery messaging on them. The item selling price should cover the RCOs cost to purchase the items and generate additional revenue to fund organizational efforts. Be careful about selling items like t-shirts, mugs, or other “objects” however. These items might be taxable in your state and considered “unrelated business income,” in which case your nonprofit will have to report the revenue as such and pay the taxes.
• Renting out space at your RCO for other meetings and activities. A local support group, for example, might need a space to meet and can provide a small stipend each month to your RCO in exchange for use of the space.

Grant Writing 

Most RCOs use grants as a primary source of funding. There are many grant making entities that can provide funds to nonprofits, including federal and state government agencies, community and family foundations, and corporations. 

Grant writing activities include grant prospecting, or finding grants that align with the organization’s mission and programs, writing grant proposals, and reporting on grants that the organization has received. Below are resources for prospecting for grants. Writing and reporting on grants are not covered in this document. 

Resources: 

Planning and Writing a Grant Proposal: The Basics from University of Wisconsin-Madison

Funding Opportunity Databases from Harvard University

Grant Research Tools from the National Council of Nonprofits

Grant Prospecting

Before looking for grants, an RCO should understand their funding needs. What new or continuing programs, events, opportunities, operations, or activities require additional funding? How much funding is needed? What kind of funding is needed - restricted or unrestricted? 

Identify the organizational needs before looking for opportunities - this will help grant writers focus on the right opportunities to support the RCO rather than making the RCO fit the opportunities they find. Give the process time—keep in mind that the prospecting, applying and funding process can take anywhere from 3–12 months. 

Funding Opportunity Databases

Pivot: Searchable database of federal and private funding opportunities in all fields. Pivot can be utilized to save searches and track funding opportunities; discover collaborators; get tailored funding recommendations and alerts; and gain insights from previously awarded grants. View the Pivot Guide (PDF) or watch a recording of a past Finding Funding workshop. 

Foundation Directory Online (FDO): Searchable database that contains a wealth of information on foundations and the grants they support. View the FDO Guide (PDF) or watch a recording of a past Finding Funding workshop. 

Grants.gov: Searchable database of all grant opportunities offered by federal agencies.

NIH Research Portfolio Online Reporting Tool (RePORT): Provides access to reports, data, and analyses of National Institutes of Health research activities, including information on grants awarded, expenditures, and the results of NIH supported research.

SPIN: Searchable database of federal and private funding opportunities in all fields.

Other sites to search for potential funding opportunities:

• Candid.org
• Google.org
• Grantwatch.com

Take a look at these websites to find grants specifically for nonprofits:

• The Grantsmanship Center
• Community Foundation Locator
• The Chronicle of Philanthropy
• GrantStation
• Instrumentl
• Mozilla.org
• Philanthropic-Programs
• Knight Foundation
• CNE
• Nonprofit Expert
• The Stable Company
• Fundraiser Help
• Grantsplus Grants Opportunities

Other databases that provide grant opportunities based on an RCO’s location:

• Local and state government websites. 
• corporation or corporate giving websites. 
• Local community foundation websites.

Federal Funding Opportunities

Federal funding is a great way to support your RCO. Different agencies within the federal government have grant programs that are intended to support individuals, communities, and American society through research, practice improvement, and implementation. 

However, federal funding requires RCOs to work through many layers of registration, application, review, monitoring, and reporting before, during, and after receiving funding. Make sure to read the full solicitation for each grant before applying—sometimes the burden of compliance and reporting is greater than the benefits you will receive through the funding. 

Preparing to Apply for Federal Funding

If you are looking to receive funds from federal agencies, you need to sign up with and maintain active status with different systems. Here are some of the most important systems to track.

1. Obtain a DUNS Number: A Data Universal Numbering System (DUNS) number is a unique nine-character number used to identify your organization. It is free to apply for a DUNS number. Visit the Dun & Bradstreet (D&B) website to get started.
2. Register with eRA Commons: eRA Commons is an online data platform that allows applicants, award recipients, and federal staff to securely share, manage, and process award related information.
3. Register with the System for Award Management (SAM): SAM is the official government system that consolidates the capabilities in Central Contractor Registry (CCR), Federal Agency Registration (FedReg), Online Representations and Certifications Application (ORCA) and Excluded Parties List System (EPLS). Registration in SAM is free: visit the SAM website to begin.
4. Create a Grants.gov account: Your organization will need to register with Grants.gov to apply for federal grants. Visit the Grants.gov website to create an account.

Receiving confirmation details and information for federal grant applications can take weeks or months—don’t wait until you find a funding opportunity to register with these entities.

Details about Specific Funding Opportunities 

This next section was written by Wendy White Tiegreen, detailing some of the most important funding opportunities for RCOs. 

Many RCOs are launched with short-term funds which are term-limited. There are a myriad of alternatives to sustain funds, many of which are also term-limited but many of which can be sustained for a much longer time period. 

Substance Abuse and Mental Health Services Administration (SAMHSA) Block Grants Funds

Several RCOs were funded from short-term SAMHSA specialty grants released in the mid-to-late teens (Recovery Community Services Funds, Building Communities of Recovery Funds, etc,). There remain several more sustained SAMHSA grants which can be pursued by RCOs through the state behavioral health authority, including the State Opioid Response grants and the more permanent Substance Abuse Prevention & Treatment Block Grant (SABG, which in most recent years has specifically named RCOs as models which are ideal for using these funds). 

Each state is allocated a portion of the SABG appropriated funds and proposes to SAMHSA annually its unique plan to address prevention, treatment, and recovery for substance use conditions. The plan is submitted annually to SAMHSA for its approval, and while funds are not guaranteed to states (and are subject to continuation budget Acts from Congress), they have remained quite consistent and can be a more sustainable funding source for the RCO if the state endorses RCO funding through this grant/s. These funds cannot be directly accessed by an RCO from SAMHSA, but are accessed through the state who directly receives the Block Grant.

Specifically, an RCO would want to be in communication with the state’s lead substance use/addiction agency (often referenced as the SSA – Single State Authority for Substance Abuse Services) and/or the associated and required Planning Council for the Block Grants to learn more information about applying for or accessing RCO-supporting funds through the state agency who directly receives the Block Grant. 

SAMHSA also episodically is enabled through Congress to release more time-limited and targeted funds directly to recovery organizations. While these funds may not assist the RCO in achieving more sustained funding, these grants are often offered in 2–3 year cycles and can create a bridge in an RCO budget while further financial sustainability is developed. 

Medicaid Administrative Claiming

The informal nature of RCOs do not naturally align with billing traditional Medicaid in a fee-for-service format. Medicaid billing documentation varies among states yet most require medical necessity determination from a mental health/substance use professional, services/recovery plans, and electronic health record documentation for each contact with the individual. As an alternative, state behavioral health lead authorities may work with the state’s Medicaid agency to consider whether RCOs may be considered for Medicaid Administrative Claiming. 

Medicaid Administrative Claiming is defined by the federal Centers for Medicare & Medicaid Services (CMS) and in federal regulation as “…necessary…for the proper and efficient administration of the state plan,” per 42 Code of Federal Regulations (CFR) 433.15(b)(7).  As RCOs often serve as a point of first engagement for individuals who may not have been willing or able to go through traditional medical pathways, the state can make a global proposal to qualify the work of the RCO network as necessary for the proper and efficient complement to the state’s Medicaid plan services. As this is an administratively complex request of the state Medicaid agency, this is generally not an option for a single-RCO approach but could be a comprehensive state approach to leverage sustained funds for an RCO network.

Medicaid Managed Care

If a state has managed care plans which are identified to manage Medicaid treatment and recovery benefits for adults with substance use conditions, the Managed Care Organization/s (MCOs) can be individually approached to support the funding of the RCO. The RCO will want to present a brief proposal to the one or more MCOs who support Medicaid covered individuals in the community. The proposal should include actual or estimated numbers of individuals served by that organization who are enrolled with that company or should propose a strategy to receive referrals of new individuals from that managed care plan. Depending on those estimated numbers to be served, a cost proposal should be included which is a proportional estimate of costs for the persons covered. For instance, if the RCO serves 100 persons/week and it is estimated that 10% are covered by MCO 1, then a budget proposal of approximately 10% of the operating budget could be included in the managed care proposal for funding.

Opioid Settlement Funds

States and local governments throughout the country are all receiving opioid settlement funds. These funds are being paid by companies that made or sold/distributed opioid pain medication which resulted in addiction, negative health impacts, and deaths. These large settlements are targeted to improve health and addiction treatment, support, and recovery in all communities impacted by these devastating losses. Settlement funds distributions are being decided at state, regional, and local levels and have varying degrees of public input and oversight depending on the particular settlement and area. To identify the local points of contact for these funds, the RCO may begin research on this at Kaiser Family Foundation, the National Academy for State Health Policy or OpioidSettlementTracker.com.

Certified Community Behavioral Health Clinic (CCBHC) Prospective Payment System

The newly emerging CCBHC program is converting more traditional Medicaid fee-for-service reimbursement models to a new payment method. The Prospective Payment System (PPS) allows a CCBHC to include a myriad of mandatory and optional services costs into one payment per day or per month, depending on the state’s Medicaid agency plan for CCBHC implementation. CCBHCs are authorized to include traditional and non-traditional recovery and peer support. As such a CCBHC can create partnership arrangements with an RCO and include certain costs in their PPS payment. For this to meet the federal expectations for performance and financial accountability, the RCO might expect a formal agreement with the CCBHC and may have to provide quite detail cost detail to the CCBHC (as they, in turn, have to provide very rigorous cost data to the state Medicaid agency to create a sound payment rate). There may also be contact details to be provided to the CCBHC for the persons supported by the RCO, so the agreement between the CCBHC and RCO would also have to be clear about the exchange of personally identifying information. In some cases, RCOs are already being administered by CCBHCs (or CCBHC candidates) and so this arrangement is already formalized and can create sustained funding year-over-year. 

Private Philanthropy

There are several national healthcare foundations which provide healthcare grants to agencies but the localized nature of RCOs provides an excellent opportunity to pursue funds within communities. Be aware that most private hospitals (and some public) have foundation grant funds available to solve challenges which it sees as impacting its shared mission and vision. Consolidated non-profit agencies such as United Way also can assist in identifying funders for unique programs in healthcare and social services. Depending on the size of the community, there also may be college/university endowments (to create a young adult recovery group once/week), aging foundations, or other community development foundations to which application can be made to sustain the RCO program model.

Employee Assistance Program (EAP) Investment

Employee Assistance Programs (EAPs) are programs which businesses pay to provide their employees with value-added support to promote work performance in addition to traditional health care. Generally, these work performance issues include work-life balance, anger management, grief response, and trauma and generalized counseling or education is offered to mitigate any management-identified employee concerns. Because of the stigma associated with behavioral health conditions and the challenges to parity and equity in traditional insurance models, many of these EAP programs have robust mental health and substance use supports.

If there is a large corporation employer in the RCO geographic coverage area, the RCO can engage with that corporation’s EAP to be a local vendor to provide its informal recovery support to employees who may need informal recovery support. Agreements can be brokered to establish a fee each time someone is referred or there can be negotiated an estimated volume of referral amount which can be contracted with monthly or quarterly payouts.

County/Municipality Funds

In many states, counties and municipalities have comprehensive health and social services obligations in law or, at minimum, have local small grants for RCO-like services. In these cases, there is often a local registry that proposing entities may need to access in order to receive notice of grants as they come available. As with the alternatives above, the RCO should be able to articulate its program model as well as individual impact. Additionally, for these types of localized funds, the RCO should be able to speak to the ways it has impacted the community or neighborhood in which it sits to adequately compete for funds. Building community visibility and goodwill is a precursor to successful awards of funds. Community engagement (with other civic services, faith leaders, and health providers) creates the foundation for letters of support and ultimate advocacy for funding success.

For any of the arrangements above, the RCO should be prepared with any performance or outcome data it has to persuade the funder regarding the return on the payer’s investment (ROI). If there is limited current data, the RCO should expect negotiation from the potential payer for future outcomes content. The RCO should carefully consider the cost of data gathering and reporting in any of the costs which are being negotiated and should also weigh whether the rigor of the request may be administratively burdensome in a way that compromises the nature of the program. These considerations take careful strategic thinking yet are the nature of any newly emerging business partnership.

Section 9: Pause & Reflect 

At the end of each section, take time to reflect on what was presented, consider how it applies to your unique situations, structures, and goals of your RCO, and identify possible next steps. 

CAPRSS Considerations

At the end of some sections in this guide, you will find a segment titled “CAPRSS Considerations”. These segments highlight particular aspects of Council on Accreditation of Peer Recovery Support Services (CAPRSS) standards that relate to the section topic. See the paragraph below for more information on pursuing CAPRSS accreditation.