Nonprofit Financial Management Basics
Strong financial management is essential for nonprofit health and success. By tracking funds, preparing financial statements, and conducting audits, organizations ensure resources are allocated to maximum impact and maintain transparency that builds trust with donors and stakeholders. While financial management can require significant effort, the benefits to nonprofits and the communities they serve are substantial.
Some best practices for nonprofit financial management include:
Establish financial policies. Draft policies such as those for internal controls, reserves, endowments, investments, and other financial procedures to guide decision-making. Review and update policies regularly based on nonprofit growth and current standards for governance and donor trust. Well-defined financial policies demonstrate fiduciary responsibility.
Manage cash flow and budget. Monitor income, expenses, assets, and liabilities to ensure you stay within budget and have enough cash on hand to cover operating needs. Adjust spending or fundraising targets accordingly based on your financial position. Regularly comparing actuals against your budget helps identify waste or opportunities, enabling course correction. Managing cash flow is essential for financial sustainability.
Record donations and pledges. Properly recording all donations and pledges in your accounting system provides the documentation required for acknowledgment letters and reporting. Coding donations by source and purpose allows analysis to determine where to focus future fundraising efforts. Keeping clear, accurate donation records builds trust that funds are used as specified by donors.
Produce financial statements. Contract with an accountant or bookkeeper to help prepare and analyze statements including income statements, balance sheets, cash flow statements, and statements of functional expenses. Statements provide a comprehensive view of your nonprofit's financial position and results, enabling better decision-making and transparency for stakeholders. They are necessary for audits and funding applications as well.
Conduct annual audits. Schedule an annual audit with an independent certified public accounting firm to review your financial statements and controls for validity and compliance. Audits verify that resources are properly allocated and protected from misuse. They provide assurance to donors, funders, partners, and other stakeholders that your nonprofit operates ethically and financially responsibly. Audits are required for nonprofits above a certain size but best practice for organizations of any annual budget.
Assign financial oversight. The board of directors oversees nonprofit finances with support from an audit committee and finance committee in some organizations. Schedule regular briefings and training to ensure the board understands your financial position, policies, and oversight responsibilities. The board treasurer or chair of the finance committee takes a leadership role, working closely with accounting staff to monitor activities and ensure integrity.
Secure financial systems and data. Invest in accounting software, controls, and procedures that properly safeguard funds and sensitive financial data. Limit access based on job responsibilities and conduct regular reviews to identify any fraud or illegal activities. Strong financial controls are necessary to mitigate risk and maintain donor trust. They provide protection for the organization and staff alike.
In summary, strong financial management impacts every aspect of nonprofit success and sustainability. From recordkeeping and reporting to budgeting, controls, and audits, it is well worth investing in the proper systems, software, services, and staff required to ensure your resources are used ethically and effectively for maximum impact. By making financial governance a priority, nonprofits gain stability, integrity, and trust—the foundation on which their mission is achieved, and community work is built. Keeping funds, policies, and practices transparent provides assurance to all those invested in your cause that their faith and support are justified. Financial accountability should never be an afterthought.
