Nonprofit Financial Management: 3 Frequently Asked Questions

A guest post by Jon Osterburg at Jitasa 

If your nonprofit is like most, you focus most of your time and effort on two priorities: fundraising, and furthering your mission. After all, your organization was founded to make a difference in the community, and fundraising provides the revenue you need to achieve that goal.

However, there is an essential step that comes in between fundraising and mission-related work: financial management. A solid nonprofit financial management strategy allows you to carefully track the revenue you bring in through fundraising and allocate it to fund mission-critical programs and projects.

As your nonprofit gets started with financial management, you’ll likely have some questions. In this guide, we’ll answer three frequently asked questions about nonprofit finances, including:

1. Why is financial management important for nonprofits?
2. What are the core aspects of nonprofit financial management?
3. How can my nonprofit get started with financial management?

1. Why is financial management important for nonprofits?

Financial management is essential for all nonprofits, whether your organization is just getting started or is well-established. Some of the advantages you can gain by developing and implementing a financial management strategy include:

• More efficient operations. Keeping track of your finances allows your organization to fundraise more sustainably, make more informed decisions, and plan upcoming projects and campaigns with less stress.

• Long-term strategic planning. In addition to mapping out your short-term strategy, effective financial management helps you make projections about your organization’s future and determine how quickly it can grow.

• Legal compliance. Because of your nonprofit’s tax-exempt status, it’s subject to some financial rules and regulations that for-profit organizations aren’t. So, you’ll need to put time and effort into financial management to follow those guidelines.

• Transparency. Donors want to know that your organization is using their contributions to make a difference. By showing them that you’re managing your finances properly, you’ll build trust and deepen your relationships with them.

Financial management and fundraising depend on each other to succeed. If you correctly handle the contributions your nonprofit brings in, you’ll attract even more donations that can be used to further your mission and fund future fundraising campaigns.

2. What are the core aspects of nonprofit financial management?

Similar to a fundraising plan, nonprofit financial management involves three major elements: strategy, execution, and evaluation.

• Strategy = budgeting. Your nonprofit’s budget is a financial planning document that outlines all of your expected revenue and expenses for a given year. According to Jitasa, most nonprofits categorize their revenue by source (individual donations, corporate giving, grants, etc.) in their budgets. Expenses are budgeted based on whether the money is spent on mission-related activities (program costs) or operating needs (overhead costs) so you know how your funding is being used to make a difference.

• Execution = financial policies. Creating a standard set of procedures ensures everyone at your nonprofit is on the same page about how to handle the organization’s finances as they go about their daily activities. Your financial policy handbook should include guidelines for gift acceptance, staff compensation, expense reimbursement, investing, and more.

• Evaluation = reporting. Financial reporting provides the previously mentioned benefits of transparency and compliance, plus analyzing your organization’s collected data helps with internal decision-making. The most important report you’ll complete each year is the IRS Form 990, which allows your nonprofit to stay tax-exempt. Most organizations also include some financial information in their annual reports for their donors’ benefit.

Once your nonprofit’s budget is finalized, following your financial policies will help you bring in the revenue you outlined and cover all of your predicted expenses. Then, you can use that information to create thorough, accurate reports that you can reference as you develop your budget for next year.

3. How can my nonprofit get started with financial management?

If you run a small shop, it is possible to start managing your nonprofit’s finances on your own. There are a variety of resources available online, from budget templates to the IRS guidelines for filing Form 990, that you can use to understand your organization’s financial needs. Additionally, it’s important to set your nonprofit up with specialized accounting software that you can use to collect, store, and pull reports of your financial data.

However, the best long-term financial management strategy is to work with experts. There are two main types of nonprofit financial professionals, bookkeepers and accountants. Here are a few of the key differences between these roles:

• Bookkeepers are responsible for your nonprofit’s day-to-day financial needs. According to NXUnite, some of their tasks include recording transactions, writing and depositing checks, and processing payroll. Because your bookkeeper doesn’t need to be a Certified Public Accountant (CPA), you can give this role to any staff member with financial knowledge or even a trained volunteer.

• Accountants focus on financial analysis, reporting, and decision-making. Their duties include guiding the budgeting process, filing your Form 990, and reviewing your financial policies to ensure compliance. Your nonprofit’s accountant needs to have their CPA certification, and most of these professionals also have at least a bachelor’s degree in accounting or a related field.

Because hiring an in-house accountant can be expensive, many small and mid-sized nonprofits choose to outsource their accounting services. You can also look for an outsourced bookkeeper if your organization’s needs become too complex for your staff and volunteers to manage on their own. No matter which financial roles you choose to outsource, make sure the external professional you partner with specializes in working with nonprofits for best results.

Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not for profit organizations.