Managing Nonprofit Finances

Managing household or business finances directly impacts your and your family’s future. Managing nonprofit finances is just as impactful, with one big difference. Household and business finances involve your funds. Nonprofit finances consist of other people’s funds – contributions entrusted to the nonprofit by community members and other donors.

Managing nonprofit finances involves fiduciary responsibility for donor funds, which boils down to treating entrusted funds with due care, and only using funds to support the nonprofit’s mission. Effectively managing finances is one way that a nonprofit fulfills its fiduciary responsibility.

So, what does “effectively managing” mean? It starts with these three fundamentals:

  1. Actual vs. Budgeted Performance

Every month, the nonprofit’s year-to-date actual financial performance should be compared to the budget. Variances between budgeted and actual performance should be explained, especially for key income and program expense categories. Identify why variances are occurring and take remedial action, as needed. For example, assess the potential for overreliance on one individual funding source, indicating the need to diversify.

  1. Cash Flow

A monthly review of checking and money market account balances should be performed to determine whether cash reserves are adequate. The cash reserves target should be based on the amount needed to cover operating expenses without any funds coming in and without liquidating any investments. Another method to assess the nonprofit’s cash flow health is to assess unrestricted net assets vs. total liabilities.

  1. Long Term View

At least once a year, nonprofits should assess whether the financial aspects of long-term financial objectives are being met. Long-term financial objectives are often reflected in the strategic plan, the annual budget, and in Investment Policy and Board Resolutions. If established financial objectives are not on track to be met within the defined time frame, remedial action should be taken.

Managing nonprofit finances means fulfilling the fiduciary responsibility for the contributions entrusted to the nonprofit by community members and other donors. That boils down to treating entrusted funds with due care, and only using funds to support the nonprofit’s mission. Starting with the three fundamentals – year-to-date performance, cash flow, and long-term view – helps nonprofits keep promises to donors and make solid financial decisions.