Nonprofit leaders have a lot of important duties to accomplish. Right behind following your mission should be managing your finances – without best practices in force, nonprofit leaders could make some costly missteps.
See our best financial practices for nonprofit organizations below. And these are not just for the CEO, CFO and other executive officers – nonprofit board members have fiduciary responsibilities to their organizations, including having a deep understanding of the finances.
Monitor restricted gifts: The most important financial practice for any nonprofit organization is to monitor your restricted gifts. This is your No. 1 compliance measure and where your audit will be focused. The worst thing that can happen to a nonprofit is that a donor finds out their funds were misspent.
Create a cash flow forecast: Nonprofits that don’t have service fee income don’t have a guaranteed stream of cash coming in, and thus are at greater risk to run out of cash. How long can your current cash balance cover your expenses? A cash flow forecast will give you that answer.
Build a reserve: Prioritize starting and growing a budget reserve to protect yourself from the eb and flow of donor contributions, grant funding, private trusts and other non-guaranteed funding sources.
Have a strong monthly close: Compare your predicted budget to actual revenues and expenditures on a monthly basis, not just at year end. This will give everyone better insight into where finances stand and will make for a much easier year end close process. This way, your audit can get underway sooner.
Monitor programs individually: Be sure to look at the revenues and expenditures for each of your programs, not just your organization’s total bottom line. If a programs, or fundraisers, don’t perform well enough on their own, their continuation needs to be done intentionally. Ask yourself if the program might be able to grow, or should it maybe be ended?
Use financial dashboards: Financial statements can be complicated for any organization, and for nonprofits, explaining restrictions, releases of restrictions and the classification of expenses each create another level of complexity. Most board members don’t understand all of the implications nonprofits face and providing them a full set of financial statements is often too much.
Financial dashboards provide bird’s eye views of the financial status and gives non-finance people a better understanding of the risks of the organization. Beyond just budget numbers, financial dashboards can include how many people did you assist this year versus last year, how many new donors did you bring in this year, how many former donors didn’t contribute this year, how did each program (or fundraiser) perform compared to prior years or each other.
Fully understand your audit and 990 reports: Nonprofit management and board members should understand the steps necessary to walk between:
- Internal financial statements
- Audited financial statements
While your auditor may prepare the latter two, the board is responsible for all three, and your auditor should explain to you any variances or changes. There are a few very common differences between financial statements and a 990, and every organization should know how to identify those.
Concannon Miller has decades of experience providing accounting and audit services to nonprofit organizations. Our highly skilled advisors can provide valuable insight into protecting nonprofits from risks that could threaten their mission, recommendations on controls, and advice on basic accounting as well as providing efficient, courteous annual audit services. Contact us for more information.