Basic Guide to Non-Profit Financial Management

Written by Carter McNamara, MBA, PhD, Authenticity Consulting, LLC. Copyright 1997-2008.
Applies to nonprofits unless otherwise noted.

New nonprofit leaders and managers have to develop at least basic skills in financial management. Expecting others in the organization to manage finances is clearly asking for trouble. Basic skills in financial management start in the critical areas of cash management and bookkeeping, which should be done according to certain financial controls to ensure integrity in the bookkeeping process. New leaders and managers should soon go on to learn how to generate financial statements (from bookkeeping journals) and analyze those statements to really understand the financial condition of the business. Financial analysis shows the "reality" of the situation of a business -- seen as such, financial management is one of the most important practices in management. This topic will help you understand basic practices in financial management, and build the basic systems and practices needed in a healthy business.

Sections in This Topic Include:

The following links are to sections included further below in this Web page.

Basics and Getting Started

- - - Fiscal Sponsorship -- Help You Get Started?
- - - Your Board Treasurer -- A Critical Resource to Help You Get Started
- - - Getting an Accountant or Bookkeeper to Help You, If Needed
- - - Getting a Banker
- - - Buy Accounting Software to Help You?
- - - Reviewing the Basics of Nonprofit Financial Management

Activities in the Yearly Accounting Cycle

Bookkeeping and Controls:

Nonprofit Bookkeeping (in Accounting)
Financial Controls

Critical Operating Activities in Yearly Accounting Cycle:

Designing a Budget
Managing Cash Flow (including managing your checking account)
Credit and Collections
Budget Deviation Analysis

Managing Program Finances

BASICS AND GETTING STARTED

Basics of Bookkeeping, Accounting and Financial Management

Fiscal Sponsorship -- Another Nonprofit Initially Supports Your Taxes and Finances?
In some cases, you might want to pursue finding a fiscal sponsor. For example, if you're not sure you want to start a nonprofit, or if your nonprofit may not need to exist for long, then a fiscal sponsor may be useful for you. A fiscal sponsor might oversee your financial management activities until your organization is more developed or terminated. See
Fiscal Sponsorship -- Is it For You?

Your Board Treasurer -- A Critical Resource to Help You Get Started

An active board treasurer can be the most important resource in the long-term financial health of your nonprofit. As a new nonprofit organization, you must get accounting expertise somehow, if you don't have strong skills in this area yourself. You (or, ideally your board chair) should get someone on your board with accounting skills to be your treasurer. See
Role of Your Board Treasurer

Getting an Accountant, If Needed

You might choose to do the basic bookkeeping activities yourself. You should get an accountant initially to help you set up your bookkeeping system, generate financial statements and do some basic financial analysis.
Getting and Using Accounting Services

Buy a Software Package to Automate Your Financial Management?

There are a number of very useful software packages that will help you automate bookkeeping, generation of financial statement and their analysis. See
Buy Accounting Software to Help You?

Getting a Bank and Banker

You'll need to start a checking account. Probably the best way to find a good bank is to ask for advice and references from other nonprofits, especially other nonprofits that are of the size and nature of yours. If you're just starting out, you probably don't have much money. You may be able to get buy with a non-interest-bearing checking out that has no, or minimal, fees.The following link may be useful
Getting and Using a Banker

No Matter Who Does Your Finances, YOU Should Know Basic Accounting Principles

To matter your finances as effectively as possible, you should at least have an understand the basic accounting process. To get an overall sense for the recurring financial activities in the typical nonprofit, read the following article. (You'll soon get more basic information below in the section titled "Nonprofit Bookkeeping (in Accounting)".)
Basics of Nonprofit Financial Management

Now, to Expand Your Learning of the Basics ...
Next, look at the wonderful range of information at the site of the Alliance for Nonprofit Management FAQ's. This site provides an excellent overview of the aspects of nonprofit bookkeeping, accounting and financial management! Although links to that site are included throughout this topic in the library, the reader might best be served to review all of the FAQ information at that site. Two key links to review now are:
Click on Financial Management and scroll down to "Basic Elements of an Accounting System"
Click on Financial Management and scroll down to "Differences Between Nonprofit and For-Profit Accounting"

Other sites that you might benefit from are:
Barton's Bookkeeping Tutorial
All Bookkeeping resources
Online Learning Center's tutorial

ACTIVITIES IN YEARLY ACCOUNTING CYCLE: Bookkeeping and Controls

Nonprofit Bookkeeping (in Accounting)

answers to a variety of questions about accounting in the Nonprofit FAQ
Critical Issues in Financial Accounting Regulation for Nonprofit Organizations

Financial Controls

There are certain practices that you should consistently follow to ensure that financial transactions are consistently recorded in an accurate fashion. These controls also help to minimize risk, including employee theft.
What is an internal accounting control system and how can we make ours effective?(click on Financial Management and scroll down)
What internal controls are needed for cash disbursement?(click on Financial Management and scroll down)
What internal controls are needed for payroll?(click on Financial Management and scroll down)

Also see:

Assessments and Audits of Nonprofit Financial Management Practices
Insurance Information for Nonprofits
Risk Management Information for Nonprofits

CRITICAL ACTIVITIES IN YEARLY ACCOUNTING CYCLE: Budgeting (Financial Forecasting) and Cash Management

Managing Operating Budgets

A budget depicts what you expect to spend (expenses) and earn (revenue) over a time period . They are useful for projecting how much money you'll need for a major initiative, for example, buying a facility, hiring a new employee, etc. They also help track whether you're on plan or not. There are yearly (or annual or operating) budgets, cash budgets, capital budgets (for major assets, such as equipment, buildings, etc.) and proposal budgets (for fundraising), etc. The following links are about annual budgets.
How Do We Prepare a Budget? (for yearly budgets)(click on Financial Management and scroll down)
How Can We Make a Budget for the IRS Before We Start Work? (multi-year org'l budget)
Variety of answers to questions about budgeting in the Nonprofit FAQ

Managing Cash Flow

As a new or small nonprofit, your biggest challenge is likely to be managing your cash flow -- probably the most important financial statement for a new business is the cash flow statement. The overall purpose of managing your cash flow is to make sure that you have enough cash to pay current bills. Businesses can manage cash flow by examining a cash flow statement and cash flow projection. Basically, the cash flow statement includes total cash received minus total cash spent. Cash management looks primarily at actual cash transactions. (Note that nonprofits must file a financial statement called Cash Flow Statements, or Statements of Cash Flow -- this statement is not the same as a cash flow budget.)

Basics of Cash Flow Management -- articles specific to nonprofits

What is cash flow and how should we manage it? (click on Financial Management and scroll down)
How much cash should we hold in reserve?(click on Financial Management and scroll down)
How Should We Invest Our Short-Term Cash Balances?(click on Financial Management and scroll down)
What is petty cash and how should we handle it?(click on Financial Management and scroll down)
What is the Board's Responsibility in Investments?(click on Financial Management and scroll down)

More Basics of Cash Management

Note that cash management activities, whether nonprofit or for-profits, are essentially the same.

Basics of Cash Management

The Importance of Cash Management
Techniques for Improving Cash Flow

Preparing a Cash Flow Statement

Preparing Your Cash Flow Statement
Cash Flow Worksheet cash flow worksheet

Preparing Cash Flow Projections and Forecasts

More information on doing cash flow forecast

Annual Cash Flow Projections
Short-Term Cash Flow Projections

Managing Your Bank Account

For a new nonprofit, your check register very likely will be your primary means to record and track cash. Whether yours is a new nonprofit or an established nonprofit, you'll need to know how to manage your bank account. See
Reconciling Your Bank Account

Credit and Collections

Matters of credit and collections are similar between for-profit and nonprofit organizations, other than that nonprofits obviously grant free services much more than for-profit organizations. Consequently, nonprofits are not nearly as likely to utilize credit and collections procedures.
Credit and Collections
Debt Collection-Know Your Rights
Getting Paid What Your Owed
Getting Back on Track, including collections

Budget Deviation Analysis

You learned above that a budget depicts what you expect to spend (expenses) and earn (revenue) over a time period. Budget deviation analysis regularly compares what you expected, or planned, to earn and spend with what you actually spent and earned. The budget deviation analysis can help greatly when detecting how well you're tracking your plans, how much to accurately budget in the future, where there may be upcoming problems in spending, etc. A budget deviation analysis report might include columns with titles:

Planned for Month

Actual for Month

Difference
(planned minus actual)

% Deviation
(Difference x 100)

ACTIVITIES IN YEARLY ACCOUNTING CYCLE: Financial Management of Programs, Assets, Inventory, etc.

Managing Program Finances

Usually, there are two major types of costs to consider: indirect costs and direct costs. Indirect costs are what we sometimes call "administrative" or "overhead" costs, for example, costs to run the central facility. Direct costs are those that fund resources which directly produce services to clients, for example, supplies and materials for books provided to clients. Usually, the lower your administrative costs, the more it looks like your resources are going directly to services to clients. In addition, you may have restricted grants (that is, grants that are dedicated for certain programs), which require you to report monies spent on overhead and directly on the program. Therefore, it's wise to track carefully how much money each of your programs requires to operate and how much revenue it generates, as well. A major challenge is to analyze how much of the indirect costs are associated with each program.
How can I determine my program costs easily?
How can we allocate indirect costs to programs?(click on Financial Management and scroll down)
How do we develop functional expense classification?(click on Financial Management and scroll down)
Managing Restricted Grants: Routine or Risk Business.

Also see Basic Guidelines for Nonprofit Program Design and Marketing.

ACTIVITIES IN YEARLY ACCOUNTING CYCLE: Financial Statements and Analysis

Financial Statements

In order to know how your nonprofit is doing, you'll do some ongoing financial planning and analysis. In this planning and analysis, you'll likely use your bookkeeping information to produce various financial statements, including a cash flow statement, statement of activities and a statement of financial position.
What Financial Statements are Nonprofits Required to Issue?(click on Financial Management and scroll down)
Financial Statements of Nonprofit Organizations
How to Read a Nonprofit Financial Statements

Statement of Activities (Income Statements)

These statements include much money you've earned (your revenue) and subtracts how much you've spent (your expenses), resulting in the total of your unrestricted net assets. The statement of activities includes how much money you've earned (your revenue) and subtracts how much you've spent (your expenses), resulting in how much you've made money (your profits) or lost money (your deficits). Basically, the statement includes total sales minus total expenses. It presents the nature of your overall profit and loss over a period of time. Therefore, the Income Statement gives you a sense for how well the nonprofit is operating.
Statement of Activities

Statement of Financial Position (Balance Sheets)

Whereas the statement of activities depicts the overall status of your profits (or deficits) by looking at income and expenses over a period of time, the balance sheet depicts the overall status of your finances at a fixed point in time. It totals your all your assets and subtracts all your liabilities to compute your overall net worth (or net loss). This statement are referenced particularly when applying for funding.
Statement of Financial Position

Financial Analysis (individual statements, ratios, break-even analysis, etc.)

Financial analysis can tell you a lot about how your nonprofit is doing. Without this analysis, you may end up staring at a bunch of numbers on budgets, cash flow projections and financial statements. You should set aside at least a a few hours every month to do financial analysis. Analysis includes cash flow analysis and budget deviation analysis mentioned above. Analysis also includes balance sheet analysis and state of activities analysis. There are some techniques and tools to help in financial analysis, for example, profit analysis (yes, these can be used even in nonprofits), break-even analysis and ratios analysis that can substantially help to simplify and streamline financial analysis. How you carry out the analysis depends on the nature and needs of you and your business. The following links will help you get a sense for the "territory" of financial analysis.

General Information

How Do We Interpret Our Financial Statements? (select Financial Management and scroll down)

Financial Planning and Analysis -- Ratios

There are a variety of ratios that can be used to help determine the current and future condition of a nonprofit. The following links provide explanation and procedures for using those ratios. The ratios are produced from numbers on the financial statements. Note that the usefulness of ratios often are from comparing ratios from different time periods in the same nonprofit or from standards for a type of nonprofit, eg, social services, associations, civic organizations, etc.
Nonprofit FAQ's questions about ratios (find them in this section)

The following articles are in reference to for-profits, but the principles behind the ratios also apply to nonprofit organizations.
Basic Financial Ratios
Overview of major types of ratios and how they're computed

Financial Planning and Analysis -- Break-Even Analysis

The break-even analysis uses information from the statement of activities and cash flow statements to compute how much sales or revenue much be accomplished in order to pay for all of your fixed and variable expenses. Fixed expenses are expenses that you'd have regardless of the level of sales of products or services (eg, sales, rent, insurance, maintenance, etc.). Variable expenses are incurred according to the level of sales of products or services (eg, sales commissions, sales tax, freight to ship products, etc.). Break-even analysis can help you when deciding how much to charge for a service, how much to ask for from donors, etc.
Break-Even Analysis
Break-Even Analysis
Break-Even Analysis

Financial Reporting

The types and frequency of reports depend on the nature of the nonprofit and its situation. Banks might want reports to verify financial strength to pay back loans. Foundations, individuals, or other donors may want reports to verify that donations are being spent as expected by the foundation or donor. The Internal Revenue Service will want certain reports when filing yearly tax forms.

Overviews

What financial statements are nonprofits required to issue?(click on Financial Management and scroll down)
What financial reports do management and the board need?(click on Financial Management and scroll down)
What information are we required to provide to individual donors?(click on Financial Management and scroll down)
AICPA SOP 98-2 and its Impact on Financial Reporting
Basics of Nonprofit Financial Management

Annual Reports

Tips for Creating a Good Annual Report
Tips for Reading an Annual Report
Sample Report: United Way of America
The Annual Reports Library

General

Nonprofit Resource Center
AICPA SOP 98-2 and its Impact on Financial Reporting
(also see "General Information" in Nonprofit Taxation)

SPECIAL TOPICS

Lease Versus Buy

The Basics of Leasing
many articles on leasing
Cost of Lease vs. Purchase
Leasing Versus Buying Cars
Leasing Office Space

Assessments and Audits of Nonprofit Financial Management Practices

Various Assessments and Indicators

Financial Indicators
Minnesota Council of Nonprofits "Principles and Practices", section about finances
Seven characteristics of financial healthy nonprofits

Audits

What is an audit? (click on Financial Management and scroll down)
Should we get an audit?(click on Financial Management and scroll down)
What is an A-133 audit?(click on Financial Management and scroll down)
How do we prepare for an audit?(click on Financial Management and scroll down)

GENERAL RESOURCES

Various Types of Resources

Sources of Online Assistance and Information

Resources for Nonprofits

Software to Help Manage Your Finances

Software for Nonprofits

Getting and Using Banking Services

Finding a Bank that Fits Your Needs, Choosing a Bank for Your Business
Setting up Your Bank Accounts

Getting and Using Accounting Services

Ways in Which an Accountant Can Help
How Do I Select an Accountant?
Keeping Accounting Costs Down
Business Contracts (this will be useful if you sign any contracts with the accountant)

You should carefully consider whether you should hire an outside accountant, or hire your own employee. The IRS pays increasing attention to the hiring of independent contractors.
Potential Issues in Hiring Consultants (general information and IRS-related issues)

Have a Treasurer to Help You?

Does a nonprofit organization need a treasurer?
Role of Board Treasurer
Being a Club Treasurer -- the Basics

Fiscal Sponsorship -- To Help Get Your Finances Started ...

Frequently Asked Questions About Fiscal Sponsorship (from GENIE)
Fiscal Sponsorship FAQ's (from ABOUT.COM)
What is a Fiscal Agent and How Do I Find One?
Guidelines for Fiscal Sponsorship
Charities Must Take Care in Serving as Conduits

Miscellaneous Other Resources

Financial Calculators (many kinds)

Major Sites of Online Information

The Support Center for Nonprofit Management
Learning Institute for Nonprofit Organizations
Financial resources for nonprofit financial management
Ethics and Accountability Code for the Nonprofit Sector
Nonprofit Resource Center

For the Category of Financial Management (Nonprofit):

Recommended Books

Basics and General Information

Budgeting

Bookkeeping and Accounting

Cash Management

Financial Statements and Analysis

Basics and General Information

Bookkeeping Basics -- What Every Nonprofit Bookkeeper Needs to Know: by Debra L. Ruegg and Lisa M. Venkatrathnam, published by Fieldstone Alliance. Explains all aspects of developing and successfully managing systems to track and spend nonprofit finances. This is an easy-to-reference resource that is useful to new or established nonprofits. Today, nonprofits have to be more accountable than ever before about planning, managing and explaining their finances. This accountability now extends beyond just the Board treasurer -- other Board members no longer can expect just one person to handle the finances. This book helps everyone meet their responsibilities about finances!

The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just hover your cursor over the image of the book. A "bubble" of information will be displayed. You can click on the title of the book in that bubble to get more information, too.

Budgeting

Bookkeeping and Accounting

Bookkeeping Basics -- What Every Nonprofit Bookkeeper Needs to Know: by Debra L. Ruegg and Lisa M. Venkatrathnam, published by Fieldstone Alliance. Explains all aspects of developing and successfully managing systems to track and spend nonprofit finances. This is an easy-to-reference resource that is useful to new or established nonprofits. Today, nonprofits have to be more accountable than ever before about planning, managing and explaining their finances. This accountability now extends beyond just the Board treasurer -- other Board members no longer can expect just one person to handle the finances. This book helps everyone meet their responsibilities about finances!

The following book is recommended because of its highly practical nature and often because it includes a wide range of information about this Library topic. To get more information about each book, just hover your cursor over the image of the book. A "bubble" of information will be displayed. You can click on the title of the book in that bubble to get more information, too.

Cash Management

Financial Statements and Analysis

Also See

Taxation (Nonprofit) -- Recommended Books

Source:
http://www.managementhelp.org