By adopting nonprofit financial management best practices, organizations can optimize their present and protect their futures. Following a few key steps can make a big difference in the performance of a nonprofit, giving it the stability and flexibility needed to deliver on its goals and achieve its missions. Following financial management best practices also protects nonprofits from making costly mistakes or taking actions that compromise the organization’s integrity. While it is impossible to account for every situation, it is possible to set your organization up to weather many different storms. Here are 5 key tips for nonprofit financial management and tips on how you can easily integrate these into your operations.
1. Keep a close eye on your tax forms and financial statements
Most nonprofit organizations are required to file the applicable Form 990 each year with the IRS to maintain its exempt status. The Form 990 provides a look–back on the organization’s activities, operations, finances, and programs; however, simply filing the form for compliance purposes is not enough. Nonprofit leaders, as well as board members, also have the fiduciary duty to understand the organization’s financials.
Reviewing the annual Form 990, and regularly reviewing the Statement of Financial Position (SOFP), Statement of Activities (SOA), Statement of Functional Expenses (SOFE) and other financial documents will ensure that all responsible parties have a thorough understanding of the organization’s financial standing. To support these reviews, the nonprofit’s accounting and finance team should be providing actual and historical variance analyses on a monthly, quarterly, and annual basis.
2. Make your financial data more accessible
It is important for financial data to be accessible to stakeholders and easy to digest. Creating a strategic dashboard for a nonprofit organization is an effective way to present key performance indicators (KPIs) and financial data. This enables a nonprofit to effectively track performance goals and clearly present information; stakeholders are then able to understand the financial health of the organization at a glance.
3. Budget, budget, budget!
Developing a budget should be a priority for all nonprofit organizations. It is more than just numbers on a paper – it is a financial roadmap for the organization. A budget can be a challenge to develop if you are not prepared. It takes planning and commitment. Tracking performance against a carefully constructed and realistic operating budget will provide valuable information that will help you project the near-term financial future of the organization – especially in times of uncertainty and change. Pairing a budget to actual analysis with financial projections provides a snapshot of what happened, and what you expect to happen.
4. Look to the future
While creating an annual budget is a helpful way to keep your nonprofit on track, it is also important to keep an eye on the future by creating a long-term plan. A best practice is to create a plan that looks several years into the future. A three-year or five-year plan is a good place to start. The length of the plan depends on the volatility or predictability of your organization.
Setting a financial goal for your nonprofit to achieve within a set amount of time provides direction for you and your team, ultimately leading to more deliberate and efficient actions. Each annual budget, strategy session, or even your day-to-day operating activities should be guided by your multi-year plan. Revisit the plan often and revise it as needed. Multi-year plans often help organizations achieve goals earlier than intended. This results in new goals that help your nonprofit make greater strides towards achieving its mission.
5. Uphold the organization’s financial integrity
Nonprofits should strive to have strong internal controls and follow effective monitoring and reporting practices. Internal controls bring credibility and demonstrate sound financial management to stakeholders. Following best practices to ensure financial transparency is not only important for compliance but also earns the trust of donors, volunteers, and even your internal team. Here are some other ways you can uphold your organization’s integrity:
- Adopt a Conflict-of-Interest policy and ensure everyone in the organization, including board members, responds to the annual questionnaire
- Develop sound financial management policies, to include strong internal controls
- Respond in a timely manner to requests for financial reports and data
- Ensure the annual budget and other financial reports are reviewed and approved by your Board of Directors
These are only five best practices that all nonprofit organizations should implement to successfully manage and oversee their accounting and finance operations; however, there are many other important things you can do to streamline your processes and improve compliance. If you need assistance with your organization’s accounting and finance function, we would love to help!