Breaking Down Finances: 5 Top Considerations for NonprofitsSeptember 19, 2022
When you consider your nonprofit’s finances, the first thing that comes to mind is likely your fundraising initiatives. After all, fundraising provides the money necessary to make your programs work and keep your organization afloat. That’s why your team works so hard to drive donations from your supporters.
In order for your nonprofit to make the strongest impact possible, fundraising needs to work side by side with a more holistic view of financial management. Many nonprofits get so wrapped up in raising as many funds as possible that other vital financial activities end up taking a backseat. But understanding, tracking, and allocating your organization’s finances will ensure you have the funding you need to further your mission.
In this guide, we’ll break down five of the most important financial considerations for nonprofits:
- Creating Your Nonprofit Budget
- Cultivating Reliable Revenue Sources
- Developing Financial Policies
- Compiling Accounting Statements
- Investing in Financial Management Resources
The strategies in this article provide a starting point for managing your organization’s finances, but nonprofit finance can quickly become complicated. We recommend reaching out to a nonprofit accountant to answer any questions and help you compile statements and plans. That way, you can get back to what really matters: making an impact.
1. Creating your Nonprofit Budget
Your organization’s first financial consideration of each fiscal year will likely be creating a comprehensive budget. A nonprofit budget is a planning document used to predict revenue and allocate resources to different aspects of your mission. To this end, your budget will include two main sections: a breakdown of your anticipated revenue and its sources, and a prediction of necessary expenses for your organization’s overhead, programs, and campaigns.
Jitasa’s guide to nonprofit budgeting suggests several tips to make your budget more effective including clearly defining activities, budgeting for specific time periods, and setting realistic, measurable goals. Let’s dive into each of these in more detail:
Clearly defining all activities
Your nonprofit’s budget should line up with the activities laid out in your strategic plan. Every expense of your day-to-day operating budget should have a specific goal associated with it.
For example, an animal shelter might need to cover annual veterinary costs for their dogs and cats. Let’s say they estimate these costs at $30,000. This estimate should be made according to previous years’ veterinary expenses and the number of animals they expect to treat. Then, this $30,000 expense will be included as a line item in the budget.
Budgeting for specific time periods
Most nonprofits create a budget for each fiscal year. However, this is only one important time-based consideration when it comes to budgeting. You’ll also need to consider the times during the year when you bring in the most and the least revenue.
For example, many nonprofits bring in a large sum of their revenue during their year-end campaigns. However, they often have a dry spell during the summer months. Therefore, they may need to set aside some revenue generated at the end of one year to cover expenses the following summer. Plus, they may plan to complete major projects just after the most lucrative times of year.
Finally, you should consider the timing of your long-term campaigns. If you’ve launched a capital campaign or plan to do so, that funding should be set aside until the campaign is complete. That’s why these types of campaigns often require a separate budget that defines multi-year goals, known as your capital budget.
Setting realistic, measurable goals
Along with defining your annual activities and establishing a timeframe, you’ll need to incorporate your fundraising goals into your budget. Each activity will be associated with specific revenue sources and amounts of money.
Consider the amount of funding you’ve received from different sources over the last year (or last few years) to inform your estimates for the coming year. For example, if your nonprofit raised $80,000 in major gifts during each of the past three years and continues to have strong relationships with all your major prospects, it’s reasonable to assume you’ll raise a similar amount this year.
Your goals in your budget should be realistic or even slightly conservative. If your fundraising team raises your goals and brings in more revenue, that’s a great situation to be in as it provides extra room in your budget. But if you overestimate your budget, you might run into a deficit and not have enough to cover your expenses throughout the year.
2. Cultivating Reliable Revenue Sources
Naturally, fundraising is a major focus for nonprofits. However, effective fundraising isn’t just about bringing in as much revenue as possible all at once. It’s about cultivating sustainable revenue so you can fund your mission every year and grow over time.
Getting Attention’s guide to nonprofit funding lists a number of sources where your nonprofit might receive funding. You can make each of them more sustainable by following these tips:
- Individual donations. As this revenue source is often one of the largest for nonprofits, making it sustainable is especially important. Expanding your recurring donation program and promoting it to your supporters can help you bring in more reliable funds. Also, focus on retaining your existing donors as it’s typically less expensive than always acquiring new ones.
- Corporate philanthropy. Possibly the most sustainable type of corporate philanthropy is matching gifts. In these programs, companies will match the donations their staff members make to nonprofits like yours. Encourage your supporters to check their eligibility for a matching gift each time they donate as they’ll be more likely to keep giving if they know their contribution will be matched.
- Event revenue. If your organization runs a particularly successful gala, auction, fun run, or other event, try turning it into an annual tradition. Each year, you can find new ways to improve the event and bring in additional funds. Knowing you’ll have a large amount of funding coming in at a specific time of year will help you plan projects more effectively.
- Grants. While some grants can be difficult to secure, the Google Ad Grant is one of the most reliable ones available. Any eligible nonprofit can apply for and receive a monthly advertising stipend from Google, allowing you to reduce your marketing expenses and reallocate funds to other areas of your budget.
Besides helping with budgeting, having several sustainable revenue streams will increase your organization’s financial security. If financial difficulties arise or unforeseen expenses come up, you may still be able to cover necessary costs and adjust your budget more easily.
3. Developing Financial Policies
As you bring in revenue throughout the year and use it according to your budget, your organization will need to have foundational financial policies in place. These policies are essential for your organization to comply with legal requirements, stay accountable to your supporters, and standardize financial management across your organization for a more effective process.
Some financial policies to enact at your nonprofit include:
- Gift acceptance policy. This policy covers the types of donations your organization will and won’t accept, as well as the circumstances under which you’re allowed to accept contributions. While gift acceptance policies apply to all types of contributions, they’re especially important when it comes to in-kind donations. If someone wants to donate an item that your organization can’t use, you can use this policy to back up your rejection.
- Conflict of interest policy. This policy prevents your nonprofit’s board members, directors, and other key stakeholders from making decisions influenced by outside financial interests. It outlines in writing what situations could be considered conflicts of interest and what steps should be taken if a conflict arises.
- Expense reimbursement policy. This policy outlines how your organization will repay staff members when they spend money from their personal accounts on mission-related activities. It helps prevent fraud by confirming that any and all reimbursed funds were used on the nonprofit’s behalf.
Your nonprofit will need to create a fiscal policies and procedures document to log these policies and other financial management information. This document serves as a reference within your organization and helps ensure financial compliance.
4. Compiling Accounting Statements
Another aspect of compliance is compiling accounting statements. These documents also provide insights about where your funding is going and your nonprofit’s overall financial health. They’re also essential to uphold the generally accepted accounting principles (GAAP), a key aspect of nonprofit accounting.
There are three main financial statements associated with nonprofit accounting:
- Statement of activities. The nonprofit equivalent of a for-profit income statement, this document tracks and categorizes your organization’s revenue, expenses, and net assets.
- Statement of financial position. By comparing your nonprofit’s assets and liabilities, this document helps you assess your organization’s financial health. With this information, you can further determine your capacity for risk-taking and growth.
- Statement of cash flows. This document shows how cash moves in and out of your nonprofit by tracking operating, investing, and financing activities.
Besides serving as a reference for your organization’s financial planning and analysis, these statements help in filling out your annual tax forms. Some nonprofits choose to create an additional statement of functional expenses that parallels the expense categories on the Form 990 to put all necessary information in one place in advance.
5. Investing in Financial Management Resources
To help with budgeting, organizing revenue sources, developing financial policies, and compiling accounting statements in the most effective way possible, you’ll want to invest in some financial management resources for your nonprofit.
There are a number of software options available to help your organization track finances, pull reports, and develop data-driven strategies based on the insights you discover. Consider your nonprofit’s goals, weigh the benefits and cost of several software solutions, and choose the programs that will work best for your organization’s individual needs.
You may also consider outsourcing some of your financial management work to a nonprofit accounting firm. Nonprofit accounting has a lot of moving parts, and an expert in this area will answer your questions and work with your organization to make sure you have what you need to be financially successful as your nonprofit grows.
Managing your nonprofit’s finances is essential to making the impact you envision. Your financial strategy works side by side with fundraising to accomplish your organization’s goals. These five areas of consideration will get you well on your way to understanding nonprofit finances and applying them as you further your mission.
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