Financial Management

What's a budget anyway?

A key component of nonprofit sustainability is the commitment of board and staff to strong financial management and planning. But it's also important to make sure everyone is on the same page. Board members and staff who are new to the charitable nonprofit context may wonder, "Does a nonprofit’s budget have to break-even?" "Can there be a profit?" Nonprofit Budgets Have to Balance: False! (Blue Avocado) covers everything budgets: surplus budgets, break-even budgets, deficit budgets, and the misconception that a nonprofit’s budget has to balance at the end of the year. Is it time to create your nonprofit’s budget? Here are some tools to head your nonprofit in the right direction:

• Budgeting: A guide for small nonprofit organizations (Virginia Society of Certified Public Accountants)
• 10 Step Checklist on Annual Budget Planning (Nonprofits Assistance Fund)
• Nonprofit budget tips (CommonGoodVermont)
• Balance Sheet Cheat Sheet (Nonprofits Assistance Fund) (Instructions)

What policies should your nonprofit consider to help it manage its finances?

• First, complete a short Financial Management Self-Assessment Tool developed by the Nonprofit Association of Oregon.
• Financial Management Resources (Nonprofits Assistance Fund) offers sound Financial Policy Guidelines as well as descriptions of five essential financial policies (samples courtesy of the Nonprofits Assistance Fund)
• Resources for nonprofit financial management (The Wallace Foundation)

Financial Literacy for Boards

Boards need up-to-date financial information so that they can make decisions in real-time, not, "I-wonder-if-we-have-enough-funding-for-that-project?" time. Consider using a dashboard to help your board see the nonprofit's financial status at a glance and take a look at the resources posted by the Nonprofits Assistance Fund in its resource library.

• Help board members talk "finance-speak:" How to Talk About Finances So Non-Financial Folks Will Listen (Bridgespan).
• What is the role of the audit committee, compared to the role of the financial committee? (Nonprofit Risk Management Center)
• What Makes a Great Board Treasurer (Nonprofits Assistance Fund)
• Eight key responsibilities of Treasurers of all-volunteer organizations (Blue Avocado)
• 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"? This now classic report by William Bedsworth, Ann Goggins Gregory, and Don Howard (Stanford Social Innovation Review, 2009) offers steps towards breaking the cycle, based largely on in-depth profiles of four youth-serving nonprofits that managed to expand their capacities in critical ways despite the pressures of the "starvation cycle." Break the cycle with awareness of the true cost of providing programs, plus careful planning:
• Cash flow template plus a scenario planning worksheet (Nonprofits Assistance Fund)

Overhead

• What is Overhead? Overhead is generally defined as a combination of “management” “general” and “fundraising” expenses but you can be guided by definitions found in the Instructions to the Form 990 and on accounting standards found in FASB 117.
• The Donors Forum offers resources for nonprofits and funders on overhead developed as part of the Real Talk about Real Costs overhead project.
• Striving for the Optimal Overhead Goal (Philanthropy Journal) addresses what the cost/overhead ratio means for nonprofits.
• Learn how to operate more efficiently by measuring the cost per outcome (as opposed to per “output”): More Bang for the Buck (Bridgespan). Concerned about making the right decision because your nonprofit has limited resources? Costs are Cool: The Strategic Value of Economic Clarity (Bridgespan) describes how understanding the true cost of providing programs and services helps guide strategic decision-making about the allocation of resources.

What internal controls should a nonprofit have?

• Financial Management Guide for Nonprofit Organizations offers 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 (The National Endowment for the Arts, Office of the Inspector General).
• Protecting Assets with Sound Internal Controls (Minnesota Council of Nonprofits)
• Internal controls (Greater Washington Society of CPAs)
• Preventing Embezzlement and Fraud in Nonprofit Organizations (Venable LLP, presentation to the New York State Society of CPAs Not-for-profit Organizations Committee, May 2011)
• Five Internal Controls for the Very Small Nonprofit (Blue Avocado)
• New York State Attorney General's Internal Controls and Financial Accountability for Not-for-Profit Boards offers practical examples of internal control procedures. (New York State Charities Bureau)

Operating Reserve policies

• What are they and how much is needed? Share this Operating Reserves Overview and Policy Example from the Nonprofits Assistance Fund with your board to help them understand their role in ensuring adequate cash reserves. 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 can help your board implement a policy appropriate for your organization.

Investment policies

“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. 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 (Vanguard).
• More resources on strategic and business planning for nonprofits.

For more resources on financial management for nonprofits, please visit the Council of Nonprofits' online bookstore.