Nonprofit financial management is the strategic process of planning and organizing an organization's financial resources to support its mission, ensure long-term sustainability, and maximize its impact.
Why Should Your Nonprofit Have a Financial Management Plan?
Nonprofits, just like for-profit businesses, need to have a financial management plan. In doing so, they can ensure their long-term success, through:
- Financial stability: A plan helps maintain healthy cash flow, enables better budget forecasting, and allows for the creation of financial reserves. This stability ensures your organization can weather unexpected challenges and continue operating smoothly.
- Strategic decision-making: With a solid financial plan, you can align resources with organizational goals, make data-driven decisions about programs and services, and prioritize spending effectively.
- Accountability and transparency: A financial management plan demonstrates responsible stewardship to donors and stakeholders. It facilitates clear financial reporting and supports compliance with legal and regulatory requirements, building trust and credibility.
- Risk mitigation: By identifying potential financial threats and enabling the development of contingency plans, a financial management plan helps protect your organization from unforeseen circumstances. It supports the creation of robust financial policies and procedures.
5 Must-Have Elements for Your Nonprofit’s Financial Plan
While every nonprofit is different, there are a few financial documents that most organizations must have handy.
- Economic forecasts: This forward-looking element involves predicting future economic conditions that could impact your nonprofit. It includes analyzing trends in funding sources, potential changes in government policies, shifts in donor behavior, and broader economic indicators. By incorporating economic forecasts, you can better prepare for future challenges and opportunities, adjust your strategies proactively, and ensure your organization's financial resilience in varying economic climates.
- Projected surplus or deficit: This projection estimates whether your organization will end the year with more income than expenses (surplus) or vice versa (deficit). It's based on your budgeted income and expenses, taking into account historical data and anticipated changes. This forecast helps you plan for financial sustainability, make informed decisions about program expansion or contraction, and set realistic fundraising goals to maintain or improve your financial position.
- Projected cash flow: This document predicts the timing and amounts of cash inflows and outflows over a specific period, usually monthly for the upcoming year. It's crucial for ensuring you'll have enough liquid assets to cover operational costs, meet financial obligations, and avoid cash crunches. By anticipating periods of low cash flow, you can plan mitigation strategies such as adjusting payment schedules, timing major expenses, or securing bridge funding.
- Balance sheet: Also known as the Statement of Financial Position, this document provides a snapshot of your organization's financial health at a specific point in time. It lists assets (what you own), liabilities (what you owe), and net assets (the difference between assets and liabilities). Including a projected balance sheet in your financial plan helps you anticipate changes in your organization's overall financial position, plan for long-term financial stability, and make decisions about acquiring or liquidating assets.
- Standard ratios: These financial metrics provide quick insights into your organization's financial health and performance. Key ratios for nonprofits include the program expense ratio (program expenses / total expenses), fundraising efficiency ratio (fundraising expenses / contributions), and liquidity ratios (current assets / current liabilities). By tracking these ratios over time and comparing them to industry benchmarks, you can identify trends, pinpoint areas for improvement, and demonstrate your organization's financial efficiency to stakeholders.
5 Nonprofit Financial Management Best Practices
Merely having the right financial documents isn’t enough. When creating your nonprofit financial management plan, be sure to follow a few best practices, too.
- Develop a process: Implement a thorough, collaborative budgeting process that aligns with your strategic plan. To do so, create detailed, realistic projections for both income and expenses and regularly review and adjust the budget throughout the year to account for changing circumstances.
- Implement strong internal controls: Establish a system of checks and balances to safeguard your organization's assets and ensure the accuracy of financial reporting. This includes segregating financial duties (e.g., the person who records transactions should not be the same one who approves them), requiring dual signatures for large expenditures, and conducting regular internal audits. Strong internal controls not only prevent fraud and errors but also boost donor confidence in your financial stewardship.
- Maintain adequate cash reserves: Build and maintain a cash reserve fund to cover unexpected expenses or revenue shortfalls. This financial cushion provides stability during challenging times and allows your organization to seize growth opportunities when they arise.
- Diversify revenue streams: Don't rely too heavily on any single income source, whether it's grants, individual donations, or program fees. Explore new fundraising strategies, consider earned income opportunities that align with your mission, and cultivate a broad donor base. A diverse revenue mix enhances your organization's resilience and provides more stable funding for long-term growth.
- Invest in Financial Literacy: Ensure that all key stakeholders, including board members, executive leadership, and program managers, have a solid understanding of nonprofit finance. Provide regular training on reading financial statements, understanding key financial metrics, and making data-driven decisions, so your team can make informed choices that support your organization's financial health.
The 8 Best Nonprofit Financial Management Training Courses And Where To Find Them
- Nonprofit Finance Fund (NFF) Workshops: Offered online and in-person, these workshops focus on financial management, planning, and sustainability. They're ideal for nonprofit leaders and finance staff, featuring a practical, hands-on approach with real-world case studies.
- Candid Financial Management Courses: Available online via Candid Learning, these self-paced modules cover budgeting, financial planning, and grant management. They're particularly useful for grant seekers and nonprofit financial managers, offering interactive exercises for skill development.
- National Council of Nonprofits Webinars: These online webinars address various financial topics tailored to nonprofits. Suitable for professionals at all levels, they provide regular updates on current issues affecting nonprofit finance.
- Harvard Kennedy School's Financial Management in Nonprofit Organizations: This online course focuses on strategic financial management and decision-making. It's best suited for senior nonprofit leaders and board members, offering Ivy League-quality instruction with a global perspective.
- Coursera's Nonprofit Financial Stewardship Webinar: An online, self-paced course covering financial governance, transparency, and accountability. It's ideal for nonprofit board members and executives, offering flexible learning from top universities.
- State Nonprofit Association Workshops: Offered by various state associations, these workshops (often both online and in-person) focus on state-specific nonprofit financial regulations and best practices. They're excellent for local nonprofit professionals, providing networking opportunities with peers.
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Nonprofit Financial Management FAQs
