Managing your household or business finances is a big job. Your financial decisions impact the financial health of your family’s or business’s future. Sure, those financial decisions have an impact, but we’re talking about your funds. It’s an entirely different story when decisions are being made about funds entrusted to you by community members and other donors.
Managing nonprofit finances is an even bigger job. One significant part of that job is fiduciary responsibility for donor funds. Fiduciary responsibility involves treating funds entrusted to you with duty and care, and to only use them to support the nonprofit’s mission. Regularly monitoring finances is one way that a nonprofit fulfills its fiduciary responsibility.
What does “regularly monitoring” mean? It starts with focusing on these three areas:
- Budget vs. Actual Performance
Every month, the nonprofit’s year-to-date budget should be compared to actual financial performance. Variances between budgeted and actual performance should be explained, especially for key income and program expense categories. Identify why variance from plan are occurring and take remedial action, as needed. Assess the potential for overreliance on one individual funding source, indicating the need to diversify.
- Cash Reserves and Liquidity
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. Other methods to assess the nonprofit’s financial health are to assess current assets vs. current liabilities and total liabilities vs. unrestricted net assets.
- Long Term Objectives
Once or twice a year, nonprofits should monitor whether the financial aspects of long-term objectives are being met. Long term objectives are often stated in the organization’s strategic plan, and may also be reflected in the annual budget, Investment Policy and Board Resolutions. Monitoring activities should address whether long term objectives are on track to be met within the defined time frame. Remedial action should be taken, as needed.
Nonprofits have fiduciary responsibility for donor funds to use them in support of the mission. Monitoring finances as a nonprofit involves focusing on budgeted vs. actual performance, cash reserves and long-term financial objectives. Focusing on these three areas gives nonprofits the information necessary to fulfill fiduciary responsibility and make prudent financial decisions.