Managing Your Nonprofit’s Finances and Taxes

Sections of this topic

    Free Nonprofit Micro-eMBA Module #8: Managing Your Nonprofit’s Finances and Taxes

    © Copyright Carter
    McNamara, MBA, PhD, Authenticity Consulting, LLC
    .

    This module is in the nonprofit organization development program.
    However, this module can also be used by anyone as a self-study
    exercise to learn more about managing nonprofit finances and taxes.

    Sections of This Module Include the Following

    Introduction
    Outcomes
    Materials for Review
    Suggested Topics for Reflection and Discussion
    Activities to Build Systems and Practices
    Assessments
    Tracking Open Action Items


    INTRODUCTION

    Financial management is a major responsibility of the board
    and nonprofit chief executive. It’s not uncommon for nonprofit
    founders and chief executives at first to have very limited skills
    in financial management. However, they should quickly develop
    at least basic skills in financial management, including in the
    critical areas of managing operating and program budgets, bookkeeping,
    financial controls, cash management, financial statement generation
    and analysis. This module will help you understand those critical
    areas of financial management, and build the basic systems and
    practices needed in a healthy nonprofit organization.

    The board has final responsibility for the financial health
    of the nonprofit organization. Therefore, it’s critical that new
    nonprofits quickly build up the roles of the treasurer and finance
    committee. The treasurer and finance committee can be wonderful
    assets to the chief executive when managing the finances of the
    organization — however, the board members and chief executive
    should never completely ignore the finances by leaving them for
    the treasurer and other board members to manage. The board’s role
    in ongoing governance of the nonprofit finances can include ongoing
    review of financial reports during board meetings, approving yearly
    budgets and financial statements, approving a set of fiscal policies
    (guidelines for managing the nonprofit’s finances), reviewing
    results of a yearly audit conducted by an outside auditor, co-signing
    checks that are over certain limits and approving contracts.

    NOTE ABOUT LEARNING FINANCIAL MANAGEMENT: At first, when learning
    financial management, many people might react that the learning
    experience seems mostly like filling one’s head with strange concepts
    and processes. Typically, the learning process starts with this
    experience — it probably isn’t until the learner actually enters
    an accounting transaction and analyzes a financial statement that
    learning about financial management seems more “real”.
    But the learning process almost always starts by reviewing concepts
    and processes. Financial management almost always tells the truth
    about the situation of a nonprofit — so the learning process
    is well worth the effort.

    NOTE ABOUT BOARD COMMITTEES: Consider establishing a Board
    Finance Committee to review and help guide implementation the
    information in this learning module. Major activities and goals
    from this learning module could be incorporated in that Committee’s
    Committee
    Work Plan
    .


    OUTCOMES

    Financial Management

    1. Learn Basics of Bookkeeping and Finances
    2. Understand Budgeting and Deviation Analysis
    3. Understand Basic Cash Management Practices
    4. Recognize Major Nonprofit Financial Statements
    5. Know Basics of Nonprofit Financial Analysis
    6. Evaluate Your Financial Management Practices

    Managing Taxes

    1. Know Key Steps to Apply for Tax-Exempt Status
    2. Access Form to File Form 990
    3. Know When Unrelated Business Income Applies
    4. Know Terms of Lobby and Advocacy
    5. Evaluate Your Tax Management Practices


    MATERIALS FOR REVIEW

    • The following materials will help you address each of
      the topics and learning activities in this module.
    • Note that additional materials for review are associated
      next to certain topics and activities listed in this module.

    Background Reading

    Quickly get a “big picture” view of the aspects of
    financial management by scanning the types of topics and their
    order at
    All
    About Financial Management in Nonprofits

    Understanding the Basics and Getting Ready

    Basics
    of Financial Management
    — particularly the sections:
    – – – Fiscal
    Sponsorship — Help You Get Started? (read at least 3 of the articles)

    – – – Your
    Board Treasurer — A Critical Resource to Help You Get Started
    (read all)

    – – – Charter
    and Work Plan for Board Finance Committee

    – – – Getting
    and Using Accounting Services (read first 3 articles)

    – – – Getting
    and Using Banking Services (read all articles)

    – – – Software
    to Help Manage Your Finances

    – – – Reviewing
    the Basics of Nonprofit Financial Management

    – – – – – – Basic
    Overview of U.S. Nonprofit Financial Management

    Activities in the Yearly Accounting Cycle

    Bookkeeping and Controls:

    Understanding
    and Setting Up Your Nonprofit Bookkeeping and Accounting (read
    all article — they’re important)

    Addressing
    Financial Controls and Risk Management (read at least 2 articles)

    – – – Sample
    Financial Procedures Manual

    Critical Operating Activities in Yearly Accounting Cycle:

    Designing
    and Managing Budgets (read all — understand basic format and
    terms in budgets)

    Managing
    Cash Flow (read all — understand cash flow, petty cash and board’s
    role)

    Credit
    and Collections (read all)

    Budget
    Deviation Analysis (read all)

    Financial Statements and Analysis:

    Financial
    Statements

    – – – Cash
    Flow Statements (read all)

    – – – Statement
    of Activities (Income Statement) (read all)

    – – – Statement
    of Financial Position (Balance Sheet) (read all)

    Financial
    Analysis (scan articles)

    Financial
    Reporting

    – – – Annual
    Reports (read at least 2 articles)

    Nonprofit Taxation

    Taxation
    — particularly the sections: – – –
    – – – Do
    I Need Help to Get Started? (read all)

    – – – Getting
    Tax-Exempt Status (read all — this is important stuff!)

    – – – Federal,
    State, Sales, Payroll Taxes, etc. (read all)

    – – – Preparing
    and Filing Form 990s (read all)

    – – – Donations
    and Taxes (read all)

    – – – Unrelated
    Business Income Taxes (UBIT) (read all)

    – – – Lobbying
    and Taxes (read articles in “basics”)

    – – – Special
    Topic — When Hiring, Need Independent Contractor or Employee?
    (follow links out to “start here”)


    SUGGESTED TOPICS FOR REFLECTION
    AND DISCUSSION

    • Learners are strongly encouraged to discuss the following
      questions with peers, board members, management and staff, as
      appropriate.

    Preparation for Financial Management

    1. What is fiscal sponsorship? When is it appropriate to consider,
    that is, when might it be helpful to someone who is founding a
    nonprofit? (See Fiscal Sponsorship.)

    2. What is the role of the board treasurer? (See Have a Treasurer to Help You?)

    3. What is the role of the finance committee? (See Charter and Work Plan for Board Finance Committee.)

    4. What needs to be considered when selecting an accountant?
    (See Getting and Using Accounting Services.)

    5. What needs to be considered when buying accounting software?
    (See Software to Help Manage Your Finances.)

    6. What needs to be considered when selecting a banker? What
    services might a nonprofit need from a bank? (See Getting and Using Banking Services.)

    7. What is the board’s role in financial management? (See Basic Overview of U.S. Nonprofit Financial Management.)

    Basics of Accounting

    1. What is the accounting cycle? (See Basic Overview of U.S. Nonprofit Financial Management.)

    2. What are the elements of an accounting system? (See Elements of Accounting: Assets, Liabilities, and Capital)

    3. What is a fiscal policies and procedures manual? (See Sample Financial Procedures Manual.)

    Bookkeeping and Financial Controls

    1. What general activities are included in bookkeeping? (See
    and Basic Overview of U.S. Nonprofit Financial Management.)

    2. What is cash-basis vs. accrual-basis accounting? (See Basic Overview of U.S. Nonprofit Financial Management.)

    3. What bookkeeping journals might you start out with? (See
    Basic Overview of U.S. Nonprofit Financial Management.)

    4. What is a Chart of Accounts? (See Basic Overview of U.S. Nonprofit Financial Management.)

    5. What is the purpose of financial internal controls? What
    are some practices in internal controls (HINT: think about signing
    checks, opening mail, how to verify that account totals are accurate,
    etc.)? (See Basic Overview of U.S. Nonprofit Financial Management.)

    Operating Budget, Cash Management, Credit and Collections,
    and Budget Deviation Analysis

    1. What is a yearly (or operating or annual) budget? How is
    a yearly budget prepared? (See How Do We Prepare a Budget? (scroll
    down to this topic)
    .)

    2. What is a cash flow and how should cash be managed? (See
    What is Cash Flow and How Should
    We Manage It?
    )

    3. What is a cash flow statement? (See Nonprofit Cash Flow Statements.)

    4. What is a budget deviation analysis? What information is
    considered during this analysis? (See Budget Deviation Analysis.)

    Managing Program Finances

    1. What is a functional or program budget? (See
    What is a functional budget?)

    2. What are program direct costs?
    (See Allocate Direct Costs)

    3. What are program indirect costs?
    (See What Are Indirect Costs?)

    Financial Statements and Analysis

    1. What are three major forms of financial statements used
    by nonprofit organizations? (See Financial Statements.)

    2. What general information is included a Statement of Financial
    Position? Statement of Activities? Statement of Cash Flows? (See
    Financial Statements.)

    3. What can be detected from analysis of a Statement of Financial
    Position? Statement of Activities? Statement of Cash Flows? (See
    Financial Statements.)

    Financial Reporting

    1. What reports do the board and management need to see? (See
    Financial Reporting.)

    2. What information should be included in an annual report?
    (See Annual Reports.)

    Nonprofit Taxation

    1. What does tax-exempt mean? (See Do I Need Help to Get Started?)

    2. How does a nonprofit obtain tax-exempt status? (See
    How to Become a Tax-Exempt 501(c)(3) Non-Profit Organization.
    )

    3. What is a Form 990? What nonprofits must file this Form
    and how often? (See Preparing and Filing Form 990s (including about
    public disclosure)
    .)

    4. What kind of substantiation does the IRS require for contributions?
    (See IRS Requires Substantiating Charitable
    Contributions
    .)

    5. What is unrelated business income? How much can you earn
    without reporting it? How is it calculated? (See Unrelated Business Income Defined.)

    6. How much lobbying can a 501(c)(3) do? Electioneering? (See
    Lobbying.)

    7. Name at least five of the major considerations the IRS makes
    when determining if someone is a contractor or an employee of
    an organization. (See Understanding Employee vs. Contractor Designation)


    ACTIVITIES TO BUILD SYSTEMS AND
    PRACTICES

    • Learners are strongly encouraged to complete the following
      activities, and share and discuss results with peers, board members,
      management and staff, as appropriate.
    • As you proceed through the following activities, be sure
      to note any incomplete actions in the Action Item Planning List.

    Building Role of Treasurer and Board Finance Committee

    1. One of the greatest assets to a chief executive can be the
    board treasurer and finance committee. Do you have a board treasurer
    and a finance committee? If not, make it a high priority to recruit
    a treasurer and organize a board finance committee. (See Your Board Treasurer — A Critical Resource to
    Help You Get Started
    and Charter and Work Plan for Board Finance Committee.)

    Bookkeeping and Financial Controls

    1. Select the journals with which you will be working. If you
    are a small nonprofit that is just starting out, then you’ll likely
    only need a cash journal. (See and Basic Overview of U.S. Nonprofit Financial Management.)

    2. Will you be using a cash-basis or accrual-basis accounting?
    If you’re a small nonprofit, then you’re likely to use the cash-basis
    to record transactions and an accrual-basis for generating your
    financial statement. (See and Basic Overview of U.S. Nonprofit Financial Management.)

    3. Devise a Chart of Accounts. (See How to Design a Scalable Chart of Accounts.)

    4. Adopt a preliminary set of financial internal controls.
    Consider practices about signing checks, opening mail, verifying
    that account totals are accurate, etc.) (See Sample Financial Procedures Manual (find the link to click “here”.)

    Designing an Operating (Annual or Yearly) Budget

    1. Your operating budget depicts the revenue the nonprofit
    expects to earn or be granted, and the expenses it expects to
    incur. It also depicts how that revenue will be spent. Budget
    development starts from strategic planning. If you completed Module 6: Developing Your Strategic Plan.
    then you already have designed a basic yearly operating budget.
    If you completed Module 7: Designing and Marketing Your Programs,
    then you’ve updated your operating budget to include functional
    budgets for each of your programs. If you have not completed these
    two modules, you should review information and materials in those
    modules to draft a basic operating budget and associated functional
    budgets for each of your programs.

    2. Obtain authorization of the operating budget (including
    functional budgets for each program) by the board. Board members
    should receive copies of the operating budget for their review
    and authorization in a board meeting. The minutes of the board
    meeting should reflect members’ approval of the budget. Approval
    indicates that the board expects the nonprofit to operate over
    the coming year according to the expected expenses and revenues
    depicted in the approved operating budget. Note that if board
    members have been involved in previous strategic and program planning,
    then their approval of the budgets should be very straightforward
    at this point.

    Managing Program Finances

    1. If you finished the learning modules about strategic planning
    and about program design and marketing, then you probably already
    have a good sense for the revenue and expenses of each of your
    programs. If you have not done so, write a basic functional or
    program budget. The board should review and authorize this budget.
    (See How Do We Prepare a Budget?)

    Financial Statements, Analysis and Reporting

    1. At this point, you’re ready to generate a basic Statement
    of Financial Position, Statement of Activities and Statement of
    Cash Flows. The board should review and authorize these statements.

    2. Attempt a basic analysis of these statements and write the
    conclusions and recommendations from this analysis. The board
    should review the conclusions and recommendations. (See Financial Analysis.)

    Nonprofit Taxation

    1. Have you obtained “tax-exempt” status from the
    IRS? If so, be sure to keep the master copy of the letter safely
    stored away. What taxes are you exempt from? (See Frequently Asked Questions About
    Applying for Tax Exemption.
    )

    2. Attempt to fill in a Form 990? What information do you need
    to complete and file the form? When do you have to file the form?
    (See Preparing and Filing Form 990s (including about
    public disclosure)
    .)

    3. Will you have any unrelated business income? What is the
    source of this income? How will you report it? (See Unrelated Business Income Defined.)

    4. Does (or will) your nonprofit engage in lobbying can a 501(c)(3)?
    How much? Will that be a problem? (See Non-Profit Organizations CAN
    Lobby
    .)

    Develop Your Fiscal Policies Manual

    1. Now that you’ve considered all of the aspects of financial
    and tax management for your nonprofit, you’re ready to compile
    a set of policies to ensure that finances and taxes continue to
    be managed effectively. Work with the Finance Committee to write
    an outline of the content of a fiscal policies manual. The Committee
    should adopt an action plan to develop and authorize the necessary
    policies for the manual. The manual should be reviewed and authorized
    on a yearly basis. (See Basic Overview of U.S. Nonprofit Financial Management.
    and Sample Financial Procedures Manual (find the “click here”).)


    ASSESSMENTS

    1. Conduct a detailed audit of your financial management practices
    and internal controls by answering the questions about “Financial
    Indicators” in the Checklist of Nonprofit Indicators. List an
    action plan to complete items suggested by the audit, but not
    done by your organization.


    REMINDERS FOR THOSE IN THE ON-LINE DEVELOPMENT PROGRAM

    Reminders About You

    1. Are you using your skills learned in previous modules? For
    example, as you using methodical approaches to problem solving
    and decision making? Are you using strong practices of meeting
    management? Are you communicating key information to others throughout
    your organization?

    2. Are you discussing topics and materials with peers, board
    members and others, as appropriate? Discussion and ongoing feedback
    are some of the best methods to really learn new information and
    materials.

    3. Are you helping others to hold you accountable to your times
    that you committed to reading and study in this program?

    4. Are you reflecting on learnings from past modules and how they build on the learning
    in this module? For example, are you seeing your organization from a systems view,
    as explained in the module “Starting and Understanding Your Nonprofit?”


    TRACKING OPEN ACTION ITEMS

    1. One of the first indicators that an organization or a person
    is struggling is that open action items are not tracked and reviewed.
    (Open action items are required actions that have not yet been
    completed.) Instead, people only see and react to the latest “fires”
    in their workplaces or their lives. Whether open action items
    are critical to address now or not, they should not entirely be
    forgotten. Therefore, update and regularly review a list of open
    action items (identified while proceeding through this program)
    that includes listing each open action item, who is responsible
    to complete it, when it should be completed and any associated
    comments. When updating the list, consider action items as identified
    during discussions, learning activities and assessments in this
    module. Share and regularly review this action item list with
    the appropriate peers, board, management and employees in your
    organization. You can use the following Action Item Planning List. (At that Web address,
    a box might open, asking you which software application to open
    the document.)

    2. If you have questions, consider posing them in the national,
    free, online discussion group hr.com, which is attended
    by many human resource and organization development experts.


    (Learners in the nonprofit organization development program
    can return to the nonprofit organization development program.)


    For the Category of Financial Management (Nonprofit):

    To round out your knowledge of this Library topic, you may
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    Each of the related topics includes free, online resources.

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