Financial Management

Why is Financial Management Important for Nonprofit Organizations?

Financial management is a key part of a healthy and sustainable nonprofit, so it's important for everyone at an organization to at least know the basics. To get started, review this Basic Guide to Nonprofit Financial Management by Carter McNamara. Both board and staff can benefit from completing this short Financial Management Self-Assessment Tool developed by the Nonprofit Association of Oregon. If your organization is having difficulty getting your staff to appreciate the importance of financial planning, read Bridgestar's article, How to Talk About Finances So Non-Financial Folks Will Listen.

How Can Nonprofit Boards Become Financially Literate?

It is critical for boards to have up-to-date financial information and to be able to convey that information effectively. Read this article, Financial Foundations: Reporting Financial Information to the Board, from the Nonprofits Assistance Fund to learn more, including what the board should know about the nonprofit’s finances. Here are some more tools:

• The website of the Nonprofits Assistance Fund offers many template financial policies, tools and articles to help nonprofit leaders with everything from understanding balance sheets to bridging cash flow gaps and tips for dealing with financial uncertainty including this cash flow template and a scenario planning worksheet.
• Read the Nonprofits Assistance Fund's 10 Step Checklist on Annual Budget Planning.
• Does a nonprofit’s budget have to break-even? Does it have to balance? Read Jeanne Bell's article in Blue Avocado, Nonprofit Budgets Have to Balance: False!, to learn about surplus budgets, break-even budgets, deficit budgets, and the misconception that a nonprofit’s budget has to balance at the end of the year.
• Read about keys to a successful budgeting process.
• What is the role of the audit committee, compared to the role of the financial committee? Review this side-by-side comparison developed by the Nonprofit Risk Management Center.
• Before you borrow – review this guide to borrowing funds by the Nonprofits Assistance Fund.
• Learn how to read, or create, a nonprofit’s balance sheet with this Balance Sheet Cheat Sheet.
• Can a dashboard help your board understand the nonprofit's finances?
• Make Good Use of the Treasurer and Finance Committee, as suggested in this article by Kate Barr, Executive Director of the Nonprofit Assistance Fund (published in Nonprofit World, 2009).
• Having an effective treasurer is vital. Read this blog from the Nonprofits Assistance Fund on What Makes a Great Board Treasurer. Check out this article that describes eight key responsibilities of Treasurers of all-volunteer organizations from Blue Avocado (2010).
• Review the section on Managing Restricted Funds from the Nonprofit Assistance Fund's site. It takes the mystery out of "restricted," "unrestricted," and "temporarily restricted" funds and gives nonprofit leaders guidance on properly recording and managing contributed income and assets.

Managing Cash Flow

• Heard about the "Nonprofit Starvation Cycle"? Read Nonprofit Overhead Costs: Breaking the Cycle of Misleading Reporting, Unrealistic Expectations, and Pressure to Conform. This report by William Bedsworth, Ann Goggins Gregory, and Don Howard (Bridgespan, 2008) offers steps towards breaking the cycle, based largely on in-depth profiles of four youth-serving nonprofits that have managed to expand their capacities in critical ways despite the cycle's pressures.
• Read this article from the Nonprofits Assistance Fund that addresses the question: Is overhead “dead”?
• What is Overhead? The Nonprofits Assistance Fund encourages nonprofits to use their own judgment as to what constitutes ‘overhead’ (generally defined as “management” “general” and “fundraising” expenses) based on definitions found in the Instructions to the Form 990 and on accounting standards found in FASB 117.
• Read this article: Striving for the Optimal Overhead Goal, by Jeff Masons, writing for the Philanthropy Journal to understand what the cost:overhead ratio means for nonprofits.
• Review Bridgespan's More Bang for the Buck (2008) to learn how certain nonprofits have been able to operate more efficiently by measuring the cost per outcome (as opposed to per “output”).
• Read the post, When is a Deficit Ok?, on the Nonprofit Assistance Fund's blog.

What Financial Policies Does Your Nonprofit Organization Need?

Take a look at sound Financial Policy Guidelines as well as descriptions of five essential financial policies and links to sample policies provided by the Nonprofits Assistance Fund.

Annual Filing Requirements

Compliance with annual filing requirements is critical for tax-exempt organizations to avoid penalties for late filing, or revocation of your organization’s tax-exempt status. It used to be that smaller organizations – those with gross receipts during their fiscal year totaling under $25,000 – did not have to file an annual return with the IRS. That rule has changed. Now all exempt organizations must file annually. Organizations with gross receipts of $50,000 or less may file the Form 990-N (although they may also elect to file the full 990). In addition to the IRS annual filing requirement of the Form 990 (or Form 990-EZ or 990-N), many states also require financial reports on an annual basis. Read all about annual filing requirements on the National Council's website.

Internal Controls

• What internal controls should small nonprofits have in place? Read this handy guide for board members on controls.
• What internal controls are appropriate for a small nonprofit? Read Five Internal Controls for the Very Small Nonprofit from Blue Avocado (2010), which describes critical internal controls that can help even the smallest nonprofit meet the expectations of segregation of duties and designing a chain of accountability.
• The National Endowment for the Arts Office of the Inspector General (2008) issued a Financial Management Guide for Nonprofit Organizations designed to offer practical information for grantees on what is expected by the federal government in terms of financial accountability. It includes descriptions of the expectations for financial reporting and internal control procedures.
• Read Protecting Assets with Sound Internal Controls from the Nonprofit Risk Management Center to learn more about the importance of establishing internal controls.
• Coming soon! An Online Audit Resource Center for nonprofits from the National Council.

Operating Reserves

• What are they and how much is needed? Share this Operating Reserves Overview and Policy Example from the Nonprofits Assistance Fund with your board. If they are ready for a deeper dive, Maintaining Nonprofit Operating Reserves, will help your board members understand the concept of an operating reserve ratio.
• This Operating Reserves Policy Toolkit for Nonprofit Organizations can help your board implement a policy appropriate for your organization.
• Making tradeoffs because of limited resources? This article, Costs are Cool: The Strategic Value of Economic Clarity from Bridgespan (2003), describes how understanding the true cost of providing programs and services helps guide strategic decision-making about the allocation of resources.

Investments

“The governing board, through its investment committee, must define the investment objectives that will best support the nonprofit’s philanthropic mission. The committee should write the objectives into an investment policy statement and use it continually as a guide for its investment managers and its own decisions.” Source: The CommonFund in Principles of Nonprofit Investment, a guide to investment management for nonprofits, that also includes a worthwhile bibliography on this subject.

• Before you invest…develop a sound approach to investing assets with tips from the Nonprofit Risk Management Center.
• Read this article by Deborah Connors from the California Association of Nonprofits for more advice on how to create a strong investment policy.
• Careful delegation of authority to the committee charged with oversight for a nonprofit’s invested assets is needed because of the legal and fiduciary responsibilities involved. BoardSource offers guidance about the important elements of an investment policy.
• Tools for your investment committee from Vanguard.

Also read about strategic and business planning for nonprofits. And for more resources, please visit the National Council's online bookstore.