Developed by Authenticity Consulting, LLC
All About Financial Management in Nonprofits
© Copyright
Carter
McNamara, MBA, PhD, Authenticity Consulting, LLC.
Applies to nonprofits unless otherwise noted.
New nonprofit leaders and managers have to develop at least basic skills in financial management. Expecting others in the organization to manage finances is clearly asking for trouble. Basic skills in financial management start in the critical areas of cash management and bookkeeping, which should be done according to certain financial controls to ensure integrity in the bookkeeping process. New leaders and managers should soon go on to learn how to generate financial statements (from bookkeeping journals) and analyze those statements to really understand the financial condition of the business. Financial analysis shows the "reality" of the situation of a business -- seen as such, financial management is one of the most important practices in management. This topic will help you understand basic practices in financial management, and build the basic systems and practices needed in a healthy business.
Sections in This Topic Include
The following links are to sections included further below in this Web page.
Basics and Getting Started
Basics of Financial Management
- - - Reviewing the Basics of Nonprofit
Financial Management
- - - Use Fiscal Sponsorship?
- - - What Type of Bookkeeping System
Should You Use?
- - - Your Board Treasurer and Board
Finance Committee -- Critical Resources to Help You Get Started
- - - Getting an Accountant, If Needed
- - - Buy a Software Package to Automate
Your Financial Management?
- - - Getting a Bank and Banker
Understanding and Setting Up Your Nonprofit
Bookkeeping and Accounting
Addressing Financial Controls and Risk
Management
Activities in the Yearly Accounting Cycle
Planning and Cash Management
Financial Planning
Budgeting and Managing Budgets
Managing Program Finances
Managing Cash Flow
Credit and Collections
Budget Deviation Analysis
Financial Statements, Analysis and Reporting
Financial Statements
- - - Statement of Activities (Income
Statement)
- - - Statement of Financial Position
(Balance Sheet)
Financial Analysis
- - - General Information
- - - Ratios
Financial Reporting
- - - Overviews
- - - Annual Reports
Special Topics
Cutting Costs
Lease Versus Buy
Assessments and Audits of Nonprofit Financial
Management Practices
- - - Various Assessments to Check the
Financial Health of Your Nonprofit
- - - Financial Audits
General Resources (assistance, banking, software, accounting, etc.)
Also see
Related Library Topics
Also See the Library's Blogs Related to Nonprofit Financial Management
In addition to the articles on this current page, also see the following blogs that have posts related to Nonprofit Financial Management. Scan down the blog's page to see various posts. Also see the section "Recent Blog Posts" in the sidebar of the blog or click on "next" near the bottom of a post in the blog. The blog also links to numerous free related resources.
Library's
Nonprofit Capacity Building Blog
Library's
Social Enterprise Blog
Library's
Strategic Planning Blog
BASICS AND GETTING STARTED
Basics of Financial Management
Reviewing the Basics of Nonprofit Financial Management
To manage your finances as effectively as possible, you should
at least have an understanding of the basic accounting process.
To get an overall sense for the recurring financial activities
in the typical nonprofit, carefully read the following article.
Basic
Overview of U.S. Nonprofit Financial Management
Other sites that you might benefit from are:
Barton's Bookkeeping Tutorial
All Bookkeeping resources
Online Learning Center's tutorial
Use Fiscal Sponsorship?
In some cases, you might want to pursue finding a fiscal sponsor.
For example, if you're not sure you want to start a nonprofit,
or if your nonprofit may not need to exist for long, then a fiscal
sponsor may be useful for you. A fiscal sponsor might oversee
your financial management activities until your organization is
more developed or terminated. See
Fiscal Sponsorship -- Is it For You?
What Type of Bookkeeping System Should You Use?
Small organizations might use a single-entry bookkeeping system,
although some might choose to use a double-entry.
What Type of Bookkeeping System Should
You Use?
Also, see the cash-basis or accrual-basis in
Basic
Overview of U.S. Nonprofit Financial Management
Your Board Treasurer and Board Finance Committee -- Critical Resources to Help You Get Started
An active board treasurer can be the most important resource
in the long-term financial health of your nonprofit. As a new
nonprofit organization, you must get accounting expertise somehow,
if you don't have strong skills in this area yourself. You (or,
ideally your board chair) should get someone on your board with
accounting skills to be your treasurer. See
Role of Your Board Treasurer
Make Good Use of the Treasurer & Finance Committee
Board Finance Committee
Getting an Accountant, If Needed
You might choose to do the basic bookkeeping activities yourself.
You should get an accountant initially to help you set up your
bookkeeping system, generate financial statements and do some
basic financial analysis.
Getting and Using Accounting Services
How to Hire an Accountant
Nonprofit Bookkeeping Test
What to Look for When Hiring an Accountant
Buy a Software Package to Automate Your Financial Management?
There are a number of very useful software packages that will
help you automate bookkeeping, generation of financial statement
and their analysis. See
Buy Accounting Software to Help You?
How to Automate Payroll
Getting a Bank and Banker
You'll need to start a checking account. Probably the best
way to find a good bank is to ask for advice and references from
other nonprofits, especially other nonprofits that are of the
size and nature of yours. If you're just starting out, you probably
don't have much money. You may be able to get buy with a non-interest-bearing
checking out that has no, or minimal, fees.The following link
may be useful
Getting and Using a Banker
Understanding and Setting Up Your Nonprofit Bookkeeping and Accounting
Now that you have a sense for the overall, recurring activities in nonprofit financial management. Let's take a closer look at what happens in nonprofit accounting. Accounting is identifying, organizing and reporting financial transactions. It's useful to understand the basics of accounting before reading the next major section on financial planning -- that planning requires some understanding of the accounting process. One of the biggest challenges is knowing how to enter each type of transaction in the journal and ledger. The following links are very useful for this challenge. Before reading them, do read Basics of Nonprofit Financial Management.
Quick Overviews of Bookkeeping / Accounting
Bookkeeping and accounting is all about identifying, organizing and reporting your financial transactions. Scan this information to further clarify your understanding of bookkeeping and accounting.
Critical Issues in Financial Accounting Regulation for Nonprofit Organizations
Setting Up Your Chart of Accounts
Deciding to Use Cash Basis or Accrual Basis for Accounting
What is the difference between the cash basis
and the accrual basis of accounting?
What is petty cash?
Deciding Which Expenses Are Direct and Indirect (Overhead)
Can a cost be both a direct cost and an indirect
cost?
Nonprofit Overhead Costs: Breaking the Vicious
Cycle of Misleading Reporting, Unrealistic Expectations, and Pressure
to Conform
Cost Analysis to Determine Costs of Activities
The following series gives you a well-structured overview of how to analyze the financial data, especially to associate costs with the activities in your organization. That information is extremely important if you ever need to cut costs.
Nonprofit Cost Analysis: Introduction
Nonprofit Cost Analysis - Step #1: Determine Purpose
and Scope of Analysis
Nonprofit Cost Analysis - Step #2: Gather Financial
Data
Nonprofit Cost Analysis - Step #3: Allocate Direct
Costs
Nonprofit Cost Analysis - Step #4: Allocate Indirect
Costs
Nonprofit Cost Analysis - Step #5: Check Your
Data
Nonprofit Cost Analysis - Step #6: Apply This
Knowledge
Deciding How Much to Allocate to Fringe Benefits in Payroll Expenses
What is a fringe benefit rate? | AccountingCoach.com Q&A
Deciding How Much to Document as Depreciation
Addressing Financial Controls and Risk Management
There are certain practices that you should consistently follow
to ensure that financial transactions are consistently recorded
in an accurate fashion. These controls also help to minimize risk,
including employee theft.
6
Strategies to Ensure the Security of Your NGO's Financial Resources
Minimizing Financial Fraud
Avoid Common Accounting Missteps
Also see:
Assessments and Audits of Nonprofit
Financial Management Practices
Insurance
Information for Nonprofits
Risk
Management Information for Nonprofits
Risk
Management on Boards of Directors
ACTIVITIES IN YEARLY ACCOUNTING CYCLE: Budgeting (Financial Forecasting) and Cash Management
Financial Planning
Financial planning works from the strategic and business plans to identify what financial resources are needed to obtain and develop the resources to achieve the goals in the two types of plans. Typically, financial planning results in very relevant and realistic budgets -- budgets are addressed later on in this topic. So be sure to consider business planning for each of your products and services.
Financial
Planning and Budgeting in Nonprofit Organizations
How to Create SMART Attainable Financial
Goals
Strategic
Planning
Business
Planning
Budgeting and Managing Budgets
A budget depicts what you expect to spend (expenses) and earn
(revenue) over a time period . They are useful for projecting
how much money you'll need for a major initiative, for example,
buying a facility, hiring a new employee, etc. They also help
track whether you're on plan or not. There are yearly (or annual
or operating) budgets, cash budgets, capital budgets (for major
assets, such as equipment, buildings, etc.) and proposal budgets
(for fundraising), etc. The following links are about annual budgets.
Meaningful Budget Work by the Board
Managing Program Finances
Usually, there are two major types of costs to consider: indirect
costs and direct costs. Indirect costs are what we sometimes call
"administrative" or "overhead" costs, for
example, costs to run the central facility. Direct costs are those
that fund resources which directly produce services to clients,
for example, supplies and materials for books provided to clients.
Usually, the lower your administrative costs, the more it looks
like your resources are going directly to services to clients.
In addition, you may have restricted grants (that is, grants that
are dedicated for certain programs), which require you to report
monies spent on overhead and directly on the program. Therefore,
it's wise to track carefully how much money each of your programs
requires to operate and how much revenue it generates, as well.
A major challenge is to analyze how much of the indirect costs
are associated with each program.
Allocate Direct Costs
Allocate Indirect Costs
Also see Basic Guidelines for Nonprofit Program Design and Marketing.
Managing Cash Flow
As a new or small nonprofit, your biggest challenge is likely to be managing your cash flow -- probably the most important financial statement for a new business is the cash flow statement. The overall purpose of managing your cash flow is to make sure that you have enough cash to pay current bills. Nonprofits can manage cash flow by examining a cash flow statement and cash flow projection. Basically, the cash flow statement includes total cash received minus total cash spent. Cash management looks primarily at actual cash transactions. (Note that nonprofits must file a financial statement called Cash Flow Statements or Statements of Cash Flow -- this statement is not the same as a cash flow budget.)
Basics of Cash Flow Management -- article specific to nonprofits
How to Make Cash Flow Projections
More Basics of Cash Management
Note that cash management activities, whether nonprofit or for-profits, are essentially the same.
Basics of Cash Management
The Importance of Cash Management
Techniques
for Improving Cash Flow
Cash
Management Basics Resources
Preparing a Cash Flow Statement
Preparing Your Cash Flow Statement
Cash Flow Worksheet
cash flow worksheet
Preparing Cash Flow Projections and Forecasts
More information on doing cash flow forecast
How to Make Cash Flow Projections
Short-Term
Cash Flow Projections
Managing Your Bank Account
For a new nonprofit, your check register very likely will be
your primary means to record and track cash. Whether yours is
a new nonprofit or an established nonprofit, you'll need to know
how to manage your bank account. See
Reconciling
Your Bank Account
Managing Your Bank Account Resource Centre
Credit and Collections
Matters of credit and collections are similar between for-profit
and nonprofit organizations, other than that nonprofits obviously
grant free services much more than for-profit organizations. Consequently,
nonprofits are not nearly as likely to utilize credit and collections
procedures.
Debt Collection-Know Your Rights
Credit Granting Authority
Nonprofits and Electronic Payments
Budget Deviation Analysis
You learned above that a budget depicts what you expect to spend (expenses) and earn (revenue) over a time period. Budget deviation analysis regularly compares what you expected, or planned, to earn and spend with what you actually spent and earned. The budget deviation analysis can help greatly when detecting how well you're tracking your plans, how much to accurately budget in the future, where there may be upcoming problems in spending, etc. A budget deviation analysis report might include columns with titles:
|
Planned for Month |
Actual for Month |
Difference |
% Deviation |
ACTIVITIES IN YEARLY ACCOUNTING CYCLE: Financial Statements and Analysis
Financial Statements
In order to know how your nonprofit is doing, you'll do some
ongoing financial planning and analysis. In this planning and
analysis, you'll likely use your bookkeeping information to produce
various financial statements, including a cash flow statement,
statement of activities and a statement of financial position.
Financial
Statements of Nonprofit Organizations
What Nonaccountants Should Know About Nonprofit Financial Statements
How to Understand a Nonprofit Financial Statement
Statement of Activities (Income Statements)
These statements include much money you've earned (your revenue)
and subtracts how much you've spent (your expenses), resulting
in the total of your unrestricted net assets. The statement of
activities includes how much money you've earned (your revenue)
and subtracts how much you've spent (your expenses), resulting
in how much you've made money (your profits) or lost money (your
deficits). Basically, the statement includes total sales minus
total expenses. It presents the nature of your overall profit
and loss over a period of time. Therefore, the Income Statement
gives you a sense for how well the nonprofit is operating.
Statement of Activities
A Sample Income Statement
Sample Statement of Activities
What is the statement of activities?
Statement of Financial Position (Balance Sheets)
Whereas the statement of activities depicts the overall status
of your profits (or deficits) by looking at income and expenses
over a period of time, the balance sheet depicts the overall status
of your finances at a fixed point in time. It totals your all
your assets and subtracts all your liabilities to compute your
overall net worth (or net loss). This statement are referenced
particularly when applying for funding.
Statement
of Financial Position
Sample Balance Sheets
Another Sample Balance Sheet
Statement of Financial Position (Purpose, Key
Numbers, Assets, Liabilities, & Stockholders' equity)
What is the difference between a balance
sheet of a nonprofit organization and a for-profit business?
Financial Analysis (individual statements, ratios, break-even analysis, etc.)
Financial analysis can tell you a lot about how your nonprofit is doing. Without this analysis, you may end up staring at a bunch of numbers on budgets, cash flow projections and financial statements. You should set aside at least a few hours every month to do financial analysis. Analysis includes cash flow analysis and budget deviation analysis mentioned above. Analysis also includes balance sheet analysis and state of activities analysis. There are some techniques and tools to help in financial analysis, for example, profit analysis (yes, these can be used even in nonprofits), break-even analysis and ratios analysis that can substantially help to simplify and streamline financial analysis. How you carry out the analysis depends on the nature and needs of you and your business. The following links will help you get a sense for the "territory" of financial analysis.
General Information
Financial Statement Example
Beginner's Guide to Financial Statements
The Busy Person's Guide to Four Essential Finance
Reports
How
Financial Sustainability is So Misunderstood
5
Strategies for Non-profits to Use to Get Rid of a Deficit
Financial Planning and Analysis -- Ratios
There are a variety of ratios that can be used to help determine
the current and future condition of a nonprofit. The following
links provide explanation and procedures for using those ratios.
The ratios are produced from numbers on the financial statements.
Note that the usefulness of ratios often are from comparing ratios
from different time periods in the same nonprofit or from standards
for a type of nonprofit, eg, social services, associations, civic
organizations, etc.
Nonprofit FAQ's questions about ratios (find them
in this section)
Financial Ratio Analysis (Definition)
Financial
Ratios (different types)
The following articles are in reference to for-profits, but
the principles behind the ratios also apply to nonprofit organizations.
Overview
of major types of ratios and how they're computed
Financial Planning and Analysis -- Break-Even Analysis
The break-even analysis uses information from the statement
of activities and cash flow statements to compute how much sales
or revenue much be accomplished in order to pay for all of your
fixed and variable expenses. Fixed expenses are expenses that
you'd have regardless of the level of sales of products or services
(eg, sales, rent, insurance, maintenance, etc.). Variable expenses
are incurred according to the level of sales of products or services
(eg, sales commissions, sales tax, freight to ship products, etc.).
Break-even analysis can help you when deciding how much to charge
for a service, how much to ask for from donors, etc.
Break-Even Analysis
How to Do a Breakeven Analysis
Break-Even Analysis Definition
Break-Even Analysis
Financial Reporting
The types and frequency of reports depend on the nature of the nonprofit and its situation. Banks might want reports to verify financial strength to pay back loans. Foundations, individuals, or other donors may want reports to verify that donations are being spent as expected by the foundation or donor. The Internal Revenue Service will want certain reports when filing yearly tax forms.
Overview
Basics of Nonprofit Financial Management
Annual Reports
Tips
for Creating a Good Annual Report
Tips
for Reading an Annual Report
The
Annual Reports Library
How to Write a Nonprofit Annual Report
What a Great Idea! – The Nonprofit Annual Report
General
Nonprofit
Resource Center
Have You: Met Your Financial Reporting Obligations?
(also see "General Information" in Nonprofit Taxation)
SPECIAL TOPICS
Cost Cutting
What
Nonprofits Can Do to Survive Financial Hard Times
Nonprofit Survival Tips
Cost
Cutting (these are suggestions for for-profits, but most apply
to nonprofits, too)
Also see
Organizational
Sustainability
Lease Versus Buy
The
Basics of Leasing
Cost of Lease vs. Purchase
Leasing
Versus Buying Cars
Leasing Office Space
Assessments and Audits of Nonprofit Financial Management Practices
Various Assessments and Indicators
Financial
Indicators
Minnesota
Council of Nonprofits "Principles and Practices", section
about finances
Seven
characteristics of financial healthy nonprofits
Audits
Nonprofit Audit Checklist
Audits for Smaller Nonprofits
GENERAL RESOURCES
Sources of Online Assistance and Information
Software to Help Manage Your Finances
Getting and Using Banking Services
Setting up Your Bank Accounts
Closing a Bank Account Without Going to the Bank
Choosing
Professionals to Help You
Getting and Using Accounting Services
Ways in Which an Accountant Can Help
How
Do I Select an Accountant?
Keeping Accounting Costs Down
Business
Contracts (this will be useful if you sign any contracts with
the accountant)
Facing Changing Paradigms -- A Nonprofit Accountant
in the Catbird Seat
You should carefully consider whether you should hire an outside
accountant, or hire your own employee. The IRS pays increasing
attention to the hiring of independent contractors.
Potential
Issues in Hiring Consultants (general information and IRS-related
issues)
Have a Treasurer to Help You?
Role
of Board Treasurer
Being a Club Treasurer -- the Basics
What Makes a Great Board Treasurer?
Fiscal Sponsorship -- To Help Get Your Finances Started ...
Fiscal Sponsorship (Wikipedia)
How Fiscal Sponsorship Nurtures Nonprofits
Guidelines for Fiscal Sponsors from the National
Network of Fiscal Sponsors
More Than the Money: Fiscal Sponsorship's Unrealized
Potential
Fiscal
Sponsorship - An Alternative To Creating A Nonprofit
What You Need to Know About Fiscal Sponsorship
Fiscal Sponsorship is Maturing as a Field
Miscellaneous Other Resources
Financial
Calculators (many kinds)
More Financial
Calculators
Financial Resources on the Internet
20 Emergency Funding Sources for Nonprofits
Major Sites of Online Information
Learning Institute
for Nonprofit Organizations
Financial resources for nonprofit financial management
Ethics
and Accountability Code for the Nonprofit Sector
Nonprofit
Resource Center
http://www.jaxworks.com/library.htm
Nonprofits
Assistance Fund - Various tools for financial management
Free,
Online, Self-Paced Program to Completely Build/Strengthen Your
Nonprofit
Basic
Guide to Nonprofit Program Design and Marketing
Various Types of Resources
Various Major Sites of Online Information
Also see
Supersites
For the Category of Financial Management (Nonprofit):
To round out your knowledge of this Library topic, you may
want to review some related topics, available from the link below.
Each of the related topics includes free, online resources.
Also, scan the Recommended Books listed below. They have been
selected for their relevance and highly practical nature.
Related Library Topics
Recommended Books
Basics and General Information
Financial Statements, Analysis and Reporting
Basics and General Information
-
Bookkeeping Basics -- What Every Nonprofit Bookkeeper Needs to Know
- by Debra L. Ruegg and Lisa M. Venkatrathnam, published by Fieldstone Alliance. Explains all aspects of developing and successfully managing systems to track and spend nonprofit finances. This is an easy-to-reference resource that is useful to new or established nonprofits. Today, nonprofits have to be more accountable than ever before about planning, managing and explaining their finances. This accountability now extends beyond just the Board treasurer -- other Board members no longer can expect just one person to handle the finances. This book helps everyone meet their responsibilities about finances!
The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.
Budgeting
The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.
Bookkeeping and Accounting
-
Bookkeeping Basics -- What Every Nonprofit Bookkeeper Needs to Know
- by Debra L. Ruegg and Lisa M. Venkatrathnam, published by Fieldstone Alliance. Explains all aspects of developing and successfully managing systems to track and spend nonprofit finances. This is an easy-to-reference resource that is useful to new or established nonprofits. Today, nonprofits have to be more accountable than ever before about planning, managing and explaining their finances. This accountability now extends beyond just the Board treasurer -- other Board members no longer can expect just one person to handle the finances. This book helps everyone meet their responsibilities about finances!
The following book is recommended because of its highly practical nature and often because it includes a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.
Cash Management
The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.
Financial Statements, Analysis and Reporting
The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.
