One primary trait of healthy nonprofit organizations is exercising solid financial management policies and strategies that will put your cause in a position to be successful for the foreseeable future. While this seems like common sense, many nonprofits struggle or fail because their financial plan is missing several components of a thriving organization.
This article will explain the basics of managing nonprofit finances and delve into frequent financial management practices that make up a strong nonprofit mission.
What Is Financial Management?
As previously mentioned, managing the financial activities of your nonprofit organization involves incorporating multiple ingredients to achieve success. The overall philosophy behind effective management of nonprofit finances is relatively simple: to implement and apply solid accounting principles that generate reliable financial data, establish fiscal responsibility, demonstrate transparency, and build trust with the public.
Nonprofit Financial Management vs. For-profit Financial Management
Here are some of the primary differences between nonprofit accounting and accounting for a for-profit business:
A nonprofit is not owned by an individual or a group, unlike a for-profit business, where ownership consists of either one person or multiple people (also known as an entity). While the founder and board members invest a lot of time and effort into the success of the organization, no one owns any equity in the nonprofit.
Recording Expenses And Income
Most for-profit accounting revolves around revenue and costs related to the sale of goods and/or services. Accounting for the nonprofit sector requires tracking revenue and expenses through a series of general ledgers (also known as funds). A for-profit has a legal obligation to account for all sales, while a nonprofit’s responsibility is to prove that all grants and donations are being used appropriately.
The financial statements that are used by both groups vary with regard to the focus of the report. For-profits usually use Balance Sheets to demonstrate the health of corporate assets and utilize an accounting system to monitor net income. Nonprofits commonly use a Statement of Financial Position to record and track assets that can be used to reach the goals of the organization’s mission. Nonprofits also use specialized reporting to track the ratio of revenues to expenditures.
Who Typically Handles Finances For A Nonprofit?
Typically, the treasurer is tasked with being the gatekeeper for finances for the board. This person generally ensures that all other board members are familiar with important financial matters. General responsibilities include:
- Reviewing and enforcing financial policies and procedures
- Creating financial reports for board members and potential donors
- Assisting with the budget
- Advising the board on financial strategy
- Providing financial reports and assistance related to fundraising
Healthy Habits Of Successful Nonprofit Organizations
There are many important factors that determine the success (or failure) of a nonprofit. Here are seven common practices of accomplished nonprofit organizations.
The importance of solid budgeting cannot be overstated. Budgets provide a roadmap for all planning, and they require realistic projections to be successful.
Multiple Sources Of Funding
Diversity is important when it comes to funding. Establishing multiple sources will help relieve stress if some of your financial resources become unstable.
Accurate Projections Of Program Expenses
Accuracy is essential when it comes to expenses related to operating nonprofit programs so you can make well-informed decisions about fundraising, expansion, and other important issues.
Positive Cash Flow To Minimize Debt
Having cash in the bank to take care of any monthly bills is as important as any lofty long-term plan for the future. Smart cash flow management is a must.
Financial Literacy For All Members Of Your Nonprofit
The entire board should be familiar with the nonprofit’s terminology, be aware of the financial aspects of the nonprofit, and understand how to read reports. Donors are more likely to engage with board members they trust and respect.
Organizational Financial Culpability
All members of a nonprofit staff need to be on the same page when it comes to financial decisions and any activities related to your mission. While there will be different levels of authority, responsibility should be shared by all.
Transparency And Accountability
In order to build trust with potential donors, the community, and the IRS, if required, a pattern of transparency should be adhered to. Many successful nonprofits also believe that a culture of accountability instills confidence and respect in the organization.
Resources And Tools To Assist Nonprofits With Financial Administration
As this article has demonstrated, there are a lot of unique demands associated with successfully operating a nonprofit. Fortunately, Aplos has created a solution that includes all of the resources and tools you need to run your organization efficiently and effectively. See why thousands of nonprofit organizations use Aplos to manage their finances.