While it may seem like running a nonprofit is all about changing the world, there are many important tasks behind the scenes. One of those key tasks is managing your organization’s finances. If you’re not sure where to get started with nonprofit financial management, you’ve come to the right place! We’ll share why it’s so important to have a plan, policies you should include, and some best practices to guide you.
Financial management may not be your first thought when starting a nonprofit, but it’s crucial for your organization’s long-term health. Financial management doesn’t just apply to fundraising. Instead, it covers your organization’s net income, expenses, potential threats, and more. In this article, we’ll share exactly what nonprofit financial management means, why you need it, what policies and elements you must include, and some best practices.
Financial management for nonprofit organizations outlines financial goals, details program expenses, and provides these details to a board of directors to ensure financial health.
The primary difference between nonprofit and for-profit organizations is the responsibility nonprofits have to the community. While for-profit companies raise money for their shareholders, nonprofits must reinvest all income into the organization to be used towards programs for its beneficiaries. The IRS has additional requirements for tax-exempt organizations, so a primary role of nonprofit financial management is to follow federal and state policies and accounting best practices.
Financial management helps build stability and flexibility in an organization. Nonprofits with a solid financial management plan can benefit in several ways, including –
As we’ve mentioned, states and the IRS have several regulations for nonprofit organizations in the U.S. A large part of those regulations includes policies for nonprofits to follow.
Nonprofits must file four financial statements each year, according to IRS regulations.
Organizations must include these statements with their taxes. These statements provide the necessary transparency for the government and donors, so you can also share them in your organization’s annual report. The required financial statements include:
Learn more about each of these statements and check out some helpful examples in this guide.
Policies are designed to help maintain transparency and provide a clear outline of how your organization should run. Financial policies are a crucial part of any nonprofit management plan because they establish the rules and procedures behind how you manage your finances.
A Conflict-of-Interest policy is the first policy every nonprofit organization must develop. Nonprofit board members, donors, founders, and staff cannot benefit from a nonprofit’s actions beyond receiving a salary. Your nonprofit must have a Conflict-of-Interest policy when applying for your organization’s tax-exempt status with Form 1023. Every board member must be aware of this policy and follow the standards it includes.
Other financial policies nonprofits should adopt include –
And more. These policies are the backbone of any successful nonprofit financial management because they outline the way your nonprofit will approach any given financial situation.
The process to develop these policies is not as complicated as many may fear. Your board can and should create many of these policies when starting your nonprofit. The following steps can limit the confusion and help you delegate responsibilities –
As your nonprofit develops a financial plan, there are five elements you must include.
The reality of the United States economy is that there is almost always a threat of recession. Nonprofits are in danger during these threats because most of their income comes from individuals and corporate excess wealth. During recessions, people tighten their purse strings and limit these expenses. Nonprofits must create contingency plans to handle the inevitable tough times by keeping an eye on the economic forecast.
Nonprofits will have good and bad years. It’s crucial to have plans for both, so you must create monthly and yearly surplus and deficit plans based on past data. Deficit plans may seem obvious, but a surplus plan is equally important since the board must determine where to invest or use the excess funds to benefit the organization in the long run.
Projected cash flow statements list all expected gross and net cash flows for monthly and yearly revenue and expenses. This is crucial for managing your operations and programming.
A balance sheet is a statement of the nonprofit’s assets and liabilities. This statement shares your organization’s net worth and financial position at a particular point.
Standard ratios analyze the organization’s total assets and liabilities. By tracking these ratios over time, nonprofits can spot developing trends, like increases in debt or a possible surplus.
Financial management is not in everyone’s wheelhouse, but there are many practices that can help your organization grow.
Nonprofits tend to dream big. There isn’t anything wrong with that, but when it comes to financials it’s essential to be realistic. Nonprofits should base projected revenue and costs on past performance. When planning an event or campaign budget, you must look to past similar events to see how much was raised, what it cost, and where improvements can be made.
A primary duty of nonprofit financial management is to provide transparency about the organization’s financial status and activities. People give to organizations that share their beliefs. If your nonprofit is clear about its mission and vision and shows how donations are used to fulfill your nonprofit’s purpose, you can count on donors to come back and give repeatedly.
Nonprofits must prepare for the worst-case scenario. They face many external and internal threats to their financial health. Some of these may come from recession or other economic calamities. Others may happen because of mismanagement or poor publicity.
Regardless of where the threats come from, nonprofits must be prepared with an agile budget and best, worst, and average case budget forecasts in three-month intervals. The best way nonprofits can do this is by evaluating fixed and variable expenses and finding ways to cut fixed costs.
Nonprofits must prepare for threats, but preparing for opportunities is equally crucial. Organizations that don’t invest in the future have fewer chances for growth and long-term success. Your nonprofit board’s financial committee should consult with leaders and other nonprofits with similar experience for help finding software, processes, and people to invest in.
Pro tip: Nonprofits that are unsure of where threats and opportunities may come from should perform a SWOT analysis. Check out this article with samples and a downloadable template for nonprofits to get started!
The worst thing you can do for your nonprofit’s financial health is to depend on one event or campaign. Still, far too many smaller organizations fall into this trap.
The fundraising world moves quickly, and organizations that dismiss modern technology as trends are in danger of missing out. Nonprofits must develop multiple revenue streams to reach and exceed financial goals. New technologies provide a way to do that with existing campaigns and events.
Pro tip: Technical tools can make giving easier during in-person events and online. Nonprofits can also turn existing in-person events into virtual or hybrid opportunities and reach a larger audience. Visit our website to see how campaigns and tools like peer-to-peer, UltraSwift™ Pay, and the Donorbox Live™ Kiosk app can help you raise more funds.
Financial management is crucial for your nonprofit’s success. Not only does the IRS require nonprofits to file specific financial statements, but having the right financial management plan helps nonprofits stay transparent and efficient. This, in turn, builds donor trust and brings in more donations! Nonprofits can use these statements, policies, and other best practices to ensure their financial health and future success.
If you’re a board or staff member of a nonprofit or are just starting a new organization, sign up for our newsletter to receive weekly articles on nonprofit financial rules and regulations. We also provide several resources and tips for fundraising, management, events, and more on our Nonprofit Blog.
If you’re looking for an affordable online donation tool, visit our website to see how Donorbox can help you attract new donors and turn existing ones into long-term financial support.
Kristine Ensor is a freelance writer with over a decade of experience working with local and international nonprofits. As a nonprofit professional she has specialized in fundraising, marketing, event planning, volunteer management, and board development.
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Kristine Ensor