As the leader of financial planning and accounting at your nonprofit, you have the unique ability to build trust through numbers. Sound financial management best practices ensure your organization has ample margin to support its mission. Clarity and transparency around financial practices builds trust through the numbers, trust that encourages loyal donors or members, and positive public perception. The following best practices for nonprofit financial management can help you improve your financial management skills and engender trust and public goodwill.
Five Nonprofit Financial Management Best Practices
- Manage restricted funds carefully.
- Track revenue by fund.
- Diversify revenue streams.
- Create what-if scenarios.
- Build a reserve fund.
Manage Restricted Funds Carefully
Knowing, understanding, and managing restricted funds—grants or donations earmarked for specific projects or activities—is critical. Such funds should be tracked to the related activity and reported back to the funding entity. Grants, for example, are often for a very specific purpose, and must be managed exclusively for that purpose. Most granting organizations require regular reports, including financial reports, demonstrating how their funds were used. Noncompliance can have serious tax, legal, and ethical consequences.
Track Revenue by Fund
Tracking revenue by funding type is more than compliance. It’s a positive activity that can help you gauge the income and expenses for each program or activity. Track all income and expenses by funding type to ensure you understand and can report on the position of all activities, grants, and donations. Reporting this information clearly and succinctly to boards, donors, and members helps build trust and clarity around activities supporting your mission and how funds are used.
Diversify Revenue Streams
You’ve heard the old saying, “Don’t put all your eggs in one basket.” Nonprofits would do well to heed this advice. Relying solely on a single major donor or a single annual fundraiser for most of your revenue is a disaster waiting to happen. If the donor decides not to give the same amount (or any amount) next year, you may not have the capital to continue. Or, as some organizations discovered during the pandemic, if a major fundraiser, such as a dinner or event, is canceled, it can severely curtail fundraising.
Instead of relying on one activity or revenue stream, diversify your income. Plan multiple events. Continue fundraising even in times of surplus and put aside money in a reserve or emergency fund (see the last point in this article). Try new events and apply for different grants. Diversified revenue streams build a healthier fiscal base for nonprofits.
Create What-If Scenarios
Conducting “what-if” exercises can help you plan for a range of financial uncertainties. Such exercises are often used in IT to help plan for worst-case scenarios, and they can be adapted for nonprofit financial management, too.
To build what-if scenarios, ask yourself questions such as:
What if our major donor stops giving each year?
What if the annual big fundraising event doesn’t happen?
What if fixed expenses, such as rent or insurance, suddenly go up?
What if we experience a cyber-attack and lose our donor list?
These and other questions can help you explore various possible situations and develop contingency plans. While you can’t predict every possible worst-case scenario, you can think through many common ones and understand the financial ramifications and possible actions to take to mitigate losses.
Build a Reserve Fund
A reserve fund is money set aside for a rainy day. It can be used to fund operational expenses when times are lean or when unexpected dips in revenue threaten to put the organization in the red. Reserve funds can be built gradually, just as financial planners recommend that individuals set aside a small amount each month from their paychecks to fund emergencies such as car or home repairs. Determine the reserve amount you believe your organization may need in an emergency, and work to build a fund that can cover these expenses.
Nonprofit Financial Best Practices Evolve
The basics of good nonprofit financial management remain the same, but the practices surrounding them can evolve over time. They evolve as organizations grow; a startup has different financial needs than a well-established nonprofit. They also evolve as organizations adopt more sophisticated systems, such as shifting from spreadsheets to nonprofit accounting systems to track expenses.
Working with a nonprofit consultant, such as Welter Consulting, can help you see beyond your blind spots and pinpoint best practices to build a sound financial base for your organization. With time, patience, and focus, you can create the solid foundation upon which great nonprofits are built.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.
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