Although it is crucial to dedicate significant time to the objective and the mission of your organization, you can’t neglect nonprofit financial management.
Most of the nonprofit organizations (NPOs) in the USA lag behind in financial management. They either employ basic or trivial ways to manage the accounts and finances or don’t have a system for financial management installed at all.
This is bad for the financial health of the NPO and hampers its ability to put the donor’s funds to the proper use.
A not-for-profit organization ought to ensure that the resources at its disposal are used most efficiently. This is why such an organization can’t do without nonprofit financial management.
Let us take a closer look at the importance of financial management for a nonprofit organization.
The Importance of Nonprofit Financial Management
Nonprofit financial management is as crucial for the organization as its mission itself. This is because the organization needs resources such as capital to fuel its mission.
However, if the nonprofit organization doesn’t manage its finances well, it will end up wasting resources probably donated or meant for bringing positive changes to society. This is why nonprofit financial management can’t be taken lightly.
Monitoring and managing the finances is essential to eliminate problems like:
- Misuse of funds and donations
- Poor allocation of resources or investments
- Exposure to financial fraud
- Inaccurate reports
- Issues with taxes and compliance
- Poor financial reporting
It is imperative that you start actively managing the finances of your organization. Nonprofit financial management employs healthy practices to ensure stability and productivity.
If you have let your finances sit on the back burner for too long, this guide will get you started with financial management.
Core Elements of Nonprofit Financial Management
To start with the financial management of a nonprofit organization, one should have a crucial understanding of its core components.
1. Nonprofit Budget
A nonprofit budget is an essential document for the organization and helps it plan its expenses, monitor ongoing operations, and allocate resources for the financial year.
The budget lists priorities, goals, expectations, and priorities for the year and helps as a reference guide for the purpose of evaluating financial performance.
The nonprofit budget assists the organization in making informed decisions and achieving the pre-planned outcome.
A comprehensive budget focuses on the objectives and goals of the nonprofit organization.
It includes a strong statement on the aspirations and intentions of the organization. The two major parts of the nonprofit budget are – estimated revenue and expenses.
The nonprofit budget helps the organization in the following ways:
- Keeps the donors informed about the funds’ allocation and expenses
- Promotes accountability and transparency
- Works as a roadmap for the financial year
- Helps the organization focus on short and long-term goals
- Assists the NPO to make informed decisions
2. Organizational Structure
Nonprofit financial management requires a comprehensive organizational structure for higher efficiency. The components of the organizational structure are:
- Roles and responsibilities of board members and employees
- Organizational charts
- Strategies for risk management
- Financial management policies
- Policies for Human Resources and Privacy
- Approval process for new initiatives, expenses, and programs
3. Financial Statements
Financial statements include crucial reports summarizing the financial activity and position of the nonprofit organization.
The financial statements include a statement of cash flow, a statement of activities, a statement of financial position, and a statement of functional expenses.
Statement of Cash Flow
The cash flow statement elaborates on the cash inflow and outflow through the organization over a financial period. The cash flow statement outlines the total cash available in the organization at the end of the financial period.
Statement of Functional Expenses (SOFE)
The statement of functional expenses outlines the money that is being spent on every program and function.
SOFE is crucial for the donors, potential investors, and the IRS as they wish to know how funds are utilized in a nonprofit organization.
The statement of functional expenses specifies the amount of money the organization is spending on each activity. Moreover, it tells the fraction of the total budget utilized for administration.
SOFE also shows how effective programs are in achieving the desired outcomes and if the funds are allocated correctly.
With the help of SOFE, the board members and investors can assess if there is a need to invest more.
Income Statement (Statement of Activities)
The income statement briefs all the activities of the nonprofit organization.
The income statement includes the revenue, expenses, and net assets for the financial period. It notes the income and expenses flowing through the organization in the given period.
The statement of activities has the following use in an organization:
- Help in tax reporting
- Promote transparency and accountability
- Evaluate the effectiveness of fundraising campaigns
- Identify the less optimal programs and find the scope for improvement
- Distribute funds among departments, initiatives, and programs
Nonprofit Balance Sheet (Statement of Financial Position)
The importance of balance sheet is that it provides a birds-eye view of the financial health of the company. Also called the statement of financial position, it lists the assets and liabilities of the nonprofit organization.
The nonprofit balance sheet helps the organization in the following ways:
- Elaborates on the levels of the assets with details
- Previews the organization’s capability for debt repayment
- Exhibits the organization’s ability to begin new programs and initiatives
- Lists any potential risks for the financial stability
- Outlines the changes in the financial standing of the organization
- It gives an overall picture of the financial situation of the organization
4. Communication and Cooperation
The communication and cooperation between different employees, financial officers, and management involved is important for sound nonprofit financial management. For efficient financial operations, these individuals must work and collaborate seamlessly.
Healthy Policies for Nonprofit Financial Management
The nonprofit organization must have clearly defined policies and procedures. These policies guide everyone and ensure that they are on the same page.
Healthy policies for financial management in a nonprofit organization define safe financial practices.
The policies are based on the culture and values of the organization and outline the responsibilities and authority for activities and decisions involved.
This establishes a framework to build financial flexibility and stability in the present and coming future. Clearly laid out and consistent policies help the nonprofit organization in the following ways:
- Assign the authority clearly
- Disseminates information better
- Improves transparency for stockholders
- Assists with the feasibility of various projects
- Helped in unbiased decision-making
- Promotes accountability for involved individuals
- Helps in timely reporting
- Streamline operational and administrative processes
- Devise a framework to prepare the organization for an audit
Tips on Developing and Approving Financial Policies
When developing financial policies, one should keep in mind the purpose of the financial policies. Moreover, the financial policies should be short, easy to understand, and fundamental in nature.
Some organizations do make comprehensive financial policies. What is essential is that the policies should be fit for your organization’s requirements.
These tips should help you when developing and approving financial policies.
- Conduct an informal risk assessment to understand the shortcomings of your organization.
- This way, you can list some crucial aspects of your organization that you wish to address through the policies.
- Discuss the requirement for financial policies with your finance or executive committee.
- Draft the financial policy with the help of your financial officers and review it with the management and board leadership.
- The financial policies should assign the authority for financial activities, actions, and decisions.
- The financial policies should elaborate on the situations where there is a conflict of interest.
- The financial policies should define the authority for making decisions regarding contracts.
- The financial policies should elaborate on the authority for spending funds and approval, check signing and payment, etc.
- The financial policies should define the responsibility to maintain accurate books and financial records.
- After reviewing the policy, present it before the board for the adoption
- Now, train the employees and staff on the policies
- Developing and approving policies isn’t enough. The policies should be reviewed regularly and updated accordingly.
Golden Takeaways for Nonprofit Financial Management
Utilize these golden takeaways to manage the finances of your nonprofit organization like a pro.
- Utilize effective budgets that are realistic, and use sound assumptions and clear accountability to achieve the budgeting goals.
- Check if diversifying the funding source is possible and right for your business. The income sources do require specific business structures, communications, and relationships to attract the funds.
- Understand the actual costs of the programs so that you can make correct decisions when it comes to fundraising, program expansion, modification, and contract terms.
- Everyday cash, or real-time cash availability, is more critical than financial statements as it helps pay the bills and fund the operations. Therefore, use various cash flow monitoring tools to ensure cash availability.
Wrapping It Up
The above guide on nonprofit financial management should help you support the finances of your organization. It will also help you lay out the financial policies of the organization.
We advise you to take a step forward to ensure financial stability and compliance with our audit and assurance services. Audit and assurance help the organization evaluate its financial statements and assess the financial health of the organization.