A Guide to Financial Management for Nonprofit Organizations

Nonprofit organizations face various financial challenges, from tax obligations to accurate budgeting and understanding financial statements. Many nonprofits today face the challenge of unpredictable funding that can lead to financial instability. This guide provides comprehensive insights into effective financial management practices essential for the sustainability and growth of nonprofits.

Understanding Nonprofit Financial Management

Financial management determines the direction and sustainability of your nonprofit organization. Managing finances can look like planning, organizing, directing, and controlling a nonprofit’s financial activities. It includes managing resources, budgeting, investing, and overseeing expenditures to achieve financial stability and growth. 

The goal is to ensure efficient and effective utilization of financial resources to meet objectives and maximize profits or sustainability. Having a nonprofit organization can have significant benefits in terms of fulfillment but it can also be a cause of headache if you aren’t prepared about the financial implications and technicalities. 

Before going to the specifics of financial management, it’s important to understand the basic terms of financial management. 

Key Elements of Financial Management for Nonprofit

Assets

In the context of nonprofits, assets refer to anything of value that the organization owns and can use to further its mission. Physical buildings, cash, collections, investments, and even intellectual properties are some examples of a nonprofit organization’s assets. Properly tracking and valuing assets ensures that the organization can make informed decisions about resource allocation, investment, and potential growth opportunities.

Liabilities 

Liabilities in a nonprofit context are the financial obligations the organization owes to others. These can include loans, accounts payable, accrued expenses, and deferred revenue. Managing liabilities is essential to maintaining financial health and stability. Nonprofits must ensure they have sufficient funds to meet these obligations when they come due, avoiding excessive debt that can strain resources. 

Equity

In business, equity refers to the ownership interest held by shareholders in a company. It represents the residual value of the company’s assets after all liabilities have been paid off. Nonprofit organizations often refer to equity as “net assets”. 

Cash Flow

The ins and outs of your cash are labeled as cash flow. The nonprofit organization’s financial health is dependent on factors affecting cash flow. Revenue streams, expense management, and operations efficiency are some examples associated with cash flow.

Budgeting 

Budget planning is a step that can’t be missed in the planning process of a nonprofit organization. A set budget helps nonprofits plan their finances by projecting income and expenses for a specific period, usually a fiscal year.

Your budget plan can be a measurement basis for the financial performance of your nonprofit events. The elements of a nonprofit budget include revenue projections like donations, grants, and fundraising events and expense projections like program, administrative, and fundraising expenses.

How to do budgeting for nonprofits: 

• Align your budget with your organization’s yearly or long-term goals
• Form a budget committee or team and delegate responsibilities
• Evaluate previous and historical data to set a workable goal or budget
• Identify one-time or recurring items (Event registration fees, venue rentals, etc)
• List all potential revenue-generating sources
• Check your budget from sponsors or partnerships if any
• Align with your team on projected fundraising targets
• List down all expected and unexpected expenses like salaries, organization’s operations, ticketing fees, gifts for sponsors, program fees, etc
• Include projections as you plan for the program
• Compute for the organization’s net income potential by subtracting revenue from expenses
• Present to board members and stakeholders and get reviews or approval
• Implement and monitor the approved budget 

Sample template for nonprofit budgeting

Accounting

Nonprofits can choose between two accounting methods: cash basis or accrual.

In cash-based accounting, revenue and expenses are recorded only when cash is received or paid out. This method is straightforward to manage, making it suitable for smaller nonprofits with simpler financial activities. 

However, it may not provide a complete picture of the organization’s financial health, as it does not account for receivables or payables.

Accrual basis accounting, on the other hand, records revenues and expenses when they are earned or incurred, regardless of when cash transactions occur. This method offers a more accurate representation of the nonprofit’s financial position, capturing all financial obligations and resources.

Whichever method you choose, your finance team needs to have an accurate account of records to avoid problems like auditing challenges or compliance issues. 

Sample Financial Reporting for Nonprofit

There are three types of financial statements that you should know about. First, is the income statement or the Profit and Loss statement which contains the profit and expenses of your nonprofit in a given period of time.

The second type is the balance sheet which shows you the things you own, and what you owe others. Balance sheets are an indicator of financial health because it shows your capacity to grow, expand, take on more debt, etc. 

The third type is the Statement of Cash flows which lists down where your money is coming from and where it is going. Your cash flow will indicate if you are bringing enough cash to pay bills, what category in your expenses you spend the most, etc. 

Here are samples of the financial statements for your reference. You can get a Google Spreadsheet version of this and make a copy here. 

 

Compliance for Nonprofit Organizations

Understanding the 501(c)(3) designation is crucial for nonprofits. This IRS-approved status exempts nonprofits from federal and state taxes on received donations, providing significant financial benefits. Adhering to compliance requirements ensures the continuation of this tax-exempt status.

A book by Atty Chrisholm Esq on how to start a 5013c profit that does not ruin your life lists these documents to be in compliance with the law. 

• Articles of Incorporation
• Federal Employer Identification Number
• Application for Tax-Exemption
• IRS Determination Letter
• Bylaws
• Meeting Minutes
• Letters and Correspondence with IRS
• Nonprofit tax returns
• Resolutions

While it is best to consult with your CPA, here is a point of reference you can come back to for filing to the IRS to avoid getting your nonprofit tax-exempt status revoked. 

• Form 990 Annual Exempt Organization Tax Return (Federal)
• Form 990 T-Unrelated Business Income (Federal Filing)
• Annual Report (State Filing)
• State tax exemption 
• Fundraising Registration

Practice Financial Planning and Forecasting

Proper financial management is achieved through effective financial planning and accurate forecasting.

Unlike for-profit entities, nonprofits must balance their mission-driven goals with financial sustainability, making accurate forecasting crucial for effective planning and decision-making.

Developing multiple scenarios—best-case, worst-case, and most likely—based on these variables helps to anticipate potential challenges and opportunities. In the worst-case scenario, stress testing should be applied to simulate extreme financial strains, like a sudden drop in donations or unexpected increases in operational costs. This involves creating detailed financial models to assess the impact of these adverse conditions on the organization’s budget and cash flow. 

Data to be used for forecasting can be historical financial trends, Key Performance Indicators (KPI), donor and fundraising data, program and operational data, and economic and environmental factors. 

These forecasts support informed decision-making, strengthen donor relations, and ensure the organization’s long-term sustainability and success.

Set up Revenue Generation Activities and Fundraising

Revenue is important because it will sustain the operations of your nonprofit. Here are some ideas and fundraising strategies that can help you get the finances you need. 

The first step is to diversify revenue streams to reduce reliance on a single source of funding. Some examples of revenue generation activities and fundraising:

• Application for Grants
• Donations
• Charity galas
• Auctions
• Benefit concerts
• Corporate Partnerships
• Garage Sales
• Membership programs
• Fee-for-service programs
• Fundraising events

With a lot of competition today, you need to have the marketing skills to promote your event and activities to your prospective participants. 

Additionally, nonprofit organizations should invest in learning grant writing as securing grants from foundations and government programs can provide crucial funding. Mastery in grant writing involves understanding the priorities of grantmakers, crafting compelling narratives, and demonstrating the impact of previous projects.

Expense Management and Cost Control

Little things add up. If you do not take into account your expenses, you might be shocked at your financial status at the end. 

Identify the key categories and major expenses that constitute their financial outflows. Common expense categories include salaries and wages, office supplies, rent and utilities, program supplies, marketing and promotional activities, travel and transportation, and technology and software. Another thing to evaluate is the cost of your tools and subscriptions.

An example is the expenses on ticketing fees for your fundraising events. Control unnecessary expenses like ticketing fees or commission fees by choosing an event ticketing platform like Event Smart. 

Practice being mindful of all the investment you put in for your fundraising events or activities. Analyze the cost of each program whether direct or indirect. Be conscious about the return on investment (ROI) of your various activities. 

Tools That Can Help Your Financial Nonprofit Management

Event Smart

Event Smart is an event registration and management platform specifically designed for organizations hosting events, fundraisers, and activities. This tool allows nonprofits to efficiently handle registrations, ticket sales, and attendee management, making it easier to organize successful events. Unlike other ticket-selling or registration platforms, Event Smart collects no commission fees on an unlimited number of tickets sold for your fundraising events. 

Nonprofits enjoy features like customizable registration forms, secure payment processing, automated confirmation emails, and collecting donations. 

QuickBooks

QuickBooks is a widely used accounting software that offers robust financial management capabilities for nonprofits. It helps organizations track income and expenses, manage payroll, and generate detailed financial reports. QuickBooks’ nonprofit-specific features include fund tracking, donation management, and grant tracking, making it easier to monitor restricted and unrestricted funds. 

Kindful

Kindful is a comprehensive donor management and fundraising platform designed to help nonprofits build strong relationships with their supporters. The tool offers features like donor tracking, online giving, and campaign management, all in one user-friendly interface. Kindful integrates seamlessly with accounting software, email marketing tools, and event management platforms, providing a holistic view of an organization’s financial and donor data.

Best Practices for Financial Management for Nonprofit Organizations

 

Invest in technology and financial management tools

Financial management can be overwhelming. However, with the right tools and platforms, you can manage finances easier. As mentioned in the previous section, you can consider tools like QuickBooks for accounting, Event Smart for event management, and Kindful for donor management that can streamline operations and improve accuracy. These tools provide real-time insights into financial data, automate routine tasks, and facilitate better decision-making. 

Continuous Financial Education

Stay updated on trends and continue reading on resources like this. Invest in training and workshops that can equip you and your team with financial literacy –  from budgeting and forecasting to auditing and reporting. 

Consider Ethical Investing and Manage Endowments

Ethical investing involves selecting investments that reflect the nonprofit’s mission, such as investing in companies with strong environmental, social, and governance (ESG) practices. This not only supports responsible corporate behavior but also appeals to donors who are increasingly concerned with social impact. Additionally, ethical investing can mitigate reputational risks associated with holding investments that contradict the nonprofit’s values

 

Managing endowments is another crucial aspect of nonprofit investment strategies. Endowments are funds where the principal amount is kept intact while the investment income is used for operations or specific purposes. Effective endowment management involves a diversified investment portfolio to balance risk and return, ensuring the endowment grows over time while providing a stable income stream. 

Foster a culture of accountability and transparency

Practice the value of accountability and transparency from your organization’s top to bottom. Remove potential areas of doubt from volunteers, members, and donors. Ensure regular internal and external audits, and maintain accurate and timely nonprofit financial reporting. 

You may also choose to have an auditor for a third party to manage your financial statement. An audited financial statement not only enhances credibility with donors, grantmakers, and stakeholders but also reinforces financial transparency and accountability.

Set strong foundations and policies

Document your foundations and policies to avoid miscommunication. The areas where you can set policies could be on who gives approval for functional expenses, and who is in charge of budgeting, cash management, event planning, and investing activities.

Diversify revenue streams

Relying on a single source of income can leave nonprofits vulnerable to fluctuations in funding. Nonprofits should explore various fundraising strategies, including grants, donations, events, and corporate partnerships. Developing earned income opportunities, such as social enterprises or fee-for-service programs, can provide additional revenue.

Manage Financial Risks

Conduct assessments and evaluations to identify potential financial risks which can include market volatility, funding shortages, and internal fraud. Developing a comprehensive risk management plan that includes preventive measures and response strategies is crucial.

Checklist for Documents on Nonprofit Financial Management 

This checklist is credited to the book Nonprofit Management Forms by William Postador.

Financial Planning and Management

• Annual Budget
• Financial Policies and Procedure
• Cash Flow Projection

Nonprofit Financial Statements

• Income Statement
• Balance Sheet
• Cash Flow Statement

Banking and Transactions

• Bank Reconciliation Statement
• Chart of Accounts
• General Ledger

Accounts Payable and Receivable

• Invoices
• Bills and Receipts
• Aging Reports

Employee and Payroll

• Payroll Records
• Employee Expense Reports
• Payroll Tax Forms (W-2, W-4)

Donor Relations:

• Donation Acknowledgement Letters
• Grant Proposals and Agreements
• Fundraising Campaign Reports

Taxes and Compliance

• Form 990 (Annual Information Return)
• W-9 Forms for Vendors and Contractors
• State and Local Tax Filings

Internal Controls:

• Internal Controls Documentation
• Fraud Prevention Policies

Records and Logs:

• Petty Cash Log
• Mileage Logs
• Fixed Asset Register

Investment and Endowments:

• Investment Records
• Endowment Fund Documents

Audit and Review:

• Audit Reports
• Financial Review Documents

Insurance and Risk management

• Insurance Policies
• Risk Management Plan

Financial Software

• User Manuals for Financial Software
• Login Information and Access Details

Board Reports

• Financial Report for Board Meetings
• Executive Director’s Financial Report

Meeting Minutes and Resolutions

• Board Resolutions Related to Finance
• Minutes of Finance Committee Meetings

Tax-Exempt Status and Filings:

• Determination Letter for Tax-Exempt Status
• IRS Correspondence Related to Tax-Exempt Status

Set up your nonprofit organization for financial success

We hope this guide was helpful in giving you financial information for your nonprofit’s financial health. Event Smart offers a robust event registration platform that can help you maximize your ticket sales and secure a steady stream of income. With better financial management through consistent revenue, your organization can focus more on its mission and less on financial stress.

Nonprofits can apply for a nonprofit discount and enjoy higher margins because Event Smart does not collect any commission fees for an unlimited number of tickets sold.

Take the next step towards financial stability by integrating Event Smart into your nonprofit today. Try the 14-day free trial with no credit card required. 

Sources:

Postador, W. (2024). Nonprofit Management Forms: For Operating, Managing, and Running Your 501c3 Tax-Exempt Organization, Includes Templates, Worksheets, Checklists, and More (Nonprofit Success Series) [Kindle]. https://www.amazon.com/gp/product/B0CXNMPFLP/ref=ku_mi_rw_edp_ku#detailBullets_feature_div

 

Chisholm, A., & Chisholm, A. K. (2018b). Start a 501c3 Nonprofit That Doesn’t Ruin Your Life. http://books.google.ie/books?id=dpUTvgEACAAJ&dq=Start+A+501c3+Nonprofit+That+Doesn%E2%80%99t+Ruin+Your+Life:+How+to+Legally+Structure+Your+Nonprofit+to+Avoid+I.R.S.+Trouble,+Lawsuits,+Financial+Scandals+%26+More!+Kindle+Edition&hl=&cd=1&source=gbs_api