All About Financial Management in Nonprofits

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    All About Financial Management in Nonprofits

    Guidelines for nonprofit financial management are included in the book Bookkeeping
    Basics: What Every Nonprofit Bookkeeper Needs to Know
    .

    © 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 consider
    Related Library Topics


    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:
    Bookkeeping 101: A Beginning Tutorial

    Online Learning Center’s tutorial
    An
    Executive Director’s Guide to Financial Leadership

    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
    Makes a Good Board Treasurer
    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

    How to Design a Scalable 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 consider

    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.

    Nonprofit Accountng Basics — Reporting and Operations
    Examples of Financial Plans for Not-for-Profit Organizations
    The Ultimate Guide to Setting SMART 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

    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
    Accounts

    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
    (planned minus actual)

    % Deviation
    (Difference x 100)






    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

    Financial Statements of Nonprofits
    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
    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
    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
    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.
    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 consider
    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 financially healthy nonprofits
    Evaluating Your
    Nonprofit Financial Management

    Audits

    Nonprofit Audit Checklist
    Nonprofit Audit Guide
    Does your nonprofit need to have an independent audit?


    GENERAL RESOURCES

    Sources of Online Assistance and Information

    Resources
    for Nonprofits

    Software to Help Manage Your Finances

    Software
    for Nonprofits

    Getting and Using Banking Services

    Banking Rules for Non-Profit Organizations
    Closing a Bank Account Without Going to the Bank
    How to Open a Bank Account for a Non-Profit Association

    Getting and Using Accounting Services

    How to Hire Accounting Services for Your Small Business
    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

    Duties of the Treasurer of a Nonprofit Corporation

    Fiscal Sponsorship — To Help Get Your Finances Started …

    Fiscal Sponsorship (Wikipedia)
    How Fiscal Sponsorship Nurtures Nonprofits
    Fiscal Sponsorship: A Balanced Overview
    More Than the Money: Fiscal Sponsorship’s Unrealized
    Potential

    Fiscal Sponsorship is Maturing as a Field

    Miscellaneous Other Resources

    Financial
    Calculators (many kinds)

    More Financial
    Calculators

    Financial Resources on the Internet

    Major Sites of Online Information

    Financial resources for nonprofit financial management

    Nonprofit
    Resource Center

    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 consider
    Supersites


    Learn More in 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


    For the Category of Financial Management (Nonprofit):

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    Each of the related topics includes free, online resources.

    Also, scan the Recommended Books listed below. They have been
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