Is Your Nonprofit’s Financial Management System Up to Par?
posted Nov 4, 2015 by Sandy Ross, CPA, CFE in the Mission Matters Blog
How do nonprofits begin to think about finances when the mission of the organization is to concentrate on fulfilling the charitable mission rather than the financial gain of the organization? It is crucial for organizations to effectively budget and manage cash in order to be in a position to accomplish the charitable mission. There are some tell-tale signs that your organization is in trouble, which are crucial to realize before your organization runs into financial disarray.
Effective budgeting is key
Successful financial management begins with approval of an annual budget. Typically it is the staff’s responsibility to create the annual budget, and the board’s responsibility to review and eventually approve it. Effective budgeting in your organization depends on a few factors, including:
- Understanding your revenue- You and your board members should have a general understanding of the revenue you are receiving and how transactions are recorded, to prevent revenue shortfalls. Be realistic about the revenue you expect to receive in the year; it is better to be conservative about your projected revenue than to factor in funds that are only possible and not confirmed. It helps to pinpoint on your budget which funds are set in stone, and which are only a possibility.
- Using your organization’s chart of accounts to compare expenses against your budget- When you budget, try using the same categories used in your chart of accounts, including salaries and wages, rent expenses, promotional costs, etc. Providing financial reports to donors and others will be significantly easier if you monitor your expenses against your budget.
- Factoring lead time for grant requests into the budget. It is crucial that your organization plans ahead for grant requests. Sometimes organizations have to prepare budgets to make sure there are enough funds set aside for programs expected to last longer than the average budget cycle.
- Factoring in some cushion money- If there are a lot of unpredictable elements in your budget, it is best to set aside funds (if at all possible) to handle cost increases or unexpected expenses without disturbing the budget.
Signs you may be in trouble
If you have experienced any of these shortcomings, you may need to rethink your current structure/operations:
- Has community support declined significantly?
- Have you been forced into using restricted funds or using restricted grants for something beyond their desired purpose?
- Are you using “next-year’s” funds to cover expenses?
- Are board members or those in leadership positions neglecting to act on the problem?
- Are you borrowing funds to cover payroll, taxes, or other expenses?
Effective financial management depends on monitoring your organization’s budget. Maintaining a realistic budget is a collective effort—involving your staff and board from the get-go will lessen the stress of any budget shortages or issues that might arise.