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:

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):

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

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