An Essential Guide to Nonprofit Financial Management (Best Practices and Tips)

Managing a nonprofit organization has its unique challenges. Nonprofits demand more from managers, especially when it comes to finances. You have more than a few boxes to tick to comply with the IRS and other agencies. 

Money comes into the organization from completely different channels than for-profit enterprises. Nonprofit financial management requires greater transparency and increased contingency planning of your budget.

With so much to maintain, how can you hope to stay afloat financially? Don’t worry, this guide will help you understand the main financial management best practices for nonprofits like yours. 

Understanding Nonprofit Financial Management

Most businesses seek revenue and growth. Managing 501(c) nonprofit organizations, on the other hand, requires a different approach. Making money is not a business priority, but it’s an important way to keep the organization running and pursuing its goals. 

Unlike for-profit businesses that chase customers to boost their profits, your nonprofit depends on fundraising that comes from donors, events, grants, and other channels. Instead of selling a product or service, you sell a mission.

Fundraising channels are some of the first to dry up when times get tough, such as during a recession. When people’s living costs go up, they can’t afford to donate as much or as often, if at all. 

Your nonprofit needs to manage its finances responsibly to be prepared for these thin donation times. Having a financial surplus helps you stay operational during rough patches. You also need policies to stay up-to-date with compliance and reporting requirements. Any oversights might lose your tax-exempt status or your next grant renewal.

Key Elements of Nonprofit Financial Management

In 2022, religious, charitable, and social welfare organizations eclipsed 1.49 million in number. As the number increases, that’s more competition for funds such as awards. 

It’s vital to make sure your organization is open, transparent, and attractive to donors by following the best practices and tips we’re going to cover. But first, let’s examine each of the key elements of nonprofit financial management. 

Financial Planning and Budgeting

The first areas to consider for management are financial planning and budgeting. Both elements help you keep the lights on. More importantly, they keep your organization aligned with its mission. 

Financial Planning

The planning process includes economic forecasting, expense management, and financial projections. What are your current finances, and where do you expect to be next quarter, next year, and the following five years?

Before you start planning finances, you’ll need to have clearly defined goals and outcomes for your organization. Let’s say you build houses for impoverished families. Your planning should center around the number of people you plan to house. 

Budgeting

Budgeting is more focused on day-to-day operations. How much can you afford to spend on overhead each month, quarter, and year? Daily expenses need to be highly detailed and specific. Accurate record-keeping is crucial for compliance and informed decision-making.

Your nonprofit budget is also flexible. By tracking and monitoring results in real time, you can adjust and optimize spending to stay on track and accomplish your mission. How do you best monitor financial KPIs? Use nonprofit accounting and management software with built-in compliance and real-time reporting.

Accounting and Record-Keeping

Nonprofit accounting involves record keeping, planning, and reporting your finances. The key to nonprofit accounting is accountability.

You’ll need to work with your accounting team to develop an easy-to-manage record-keeping system. Develop protocols for accurate reporting and complete traceability of every transaction. 

Worry less about balance sheets: the main purpose is standardization for compliance and reporting. Use fund accounting, meaning sources such as membership dues are handled in separate accounts.

Funds can also be classified as:

• Restricted: reserved for projects and events.
• Temporarily restricted: based on time or milestone completions; any surplus afterward becomes unrestricted.
• Unrestricted: funds that form the budget of any spending needs that fall outside of planned activities.

Financial Reporting

Your nonprofit organization is held to higher standards than a for-profit business. This is never more apparent than when you file financial statements and reports. 

The IRS requires you to file no fewer than four audited financial statements. These are the following:

1. Statement of financial position: share what you own and what you owe. Add it to your Form 990 to account for your assets and liabilities.
2. Statement of activities: your yearly revenue and changes in net assets. You’ll tally up your gross receipts as revenue and subtract overhead and other expenses.
3. Statement of cash flow: how cash moves in and out of your organization. When reporting cash flow, you’ll use three categories: operating, investing, and financing.
4. Statement of functional expenses: provides transparency for donors and is required for your Form 990.

With so many reports to file, you don’t want to wait until the end of the tax year. 

Update your financial and accounting records regularly to keep an eye on potential issues. You can also find free financial statement templates to ensure you file correctly. Use intuitive accounting software to secure financial data in the cloud and track metrics in real-time.

Internal Controls and Audits

Internal controls are put in place to direct the use and prevent the misuse of donated funds and assets. They are security measures to eliminate theft or embezzlement. For example, you could require multiple people to sign off on a transaction that uses organizational funds.

Internal controls aren’t only for your team; they’re also to be followed by any third parties that interact with your assets.

Other examples of internal controls include:

• Requiring team members to log out of applications or computers when not using them.
• Making it compulsory to use company devices or networks for work activities.
• Segregation of duties for transactions.
• Requiring two or more staff members to record and comply with cash donation rules.

You can find more information on internal controls by following the guidelines set forth in the COSO framework and the GAAP.

A separate area of internal controls is audits. Audit financial reports such as balance sheets and cash flows for accuracy and completeness. Conduct audits internally and outsource to independent third parties. Document all of your controls for team member clarity and periodically audit the controls themselves.

Fund Management

Fund management encompasses how you handle your monetary resources. It is sometimes referred to as investment management. Your aim is sustainability to operate. You want to achieve your objectives rather than maximize shareholder value. 

Write policies and processes that encourage oversight, control, and transparency. The responsibility to manage funds typically falls to the board members. They will make the ultimate decisions on what resources are used for operations and when and where to invest surpluses.

Follow these fund management best practices:

• Consult with a Registered Investment Advisor (RIA), professionals who are regulated and obligated to give you the best advice.
• Create a comprehensive fund management plan that fosters collaboration with key stakeholders and aligns policies with your goals.
• Use accounting software and other tools to access real-time information and boost fund visibility.  
• Adhere to UPMIFA (the Uniform Prudent Management of Institutional Funds Act), which dictates the handling of donated funds. Get familiar with these regulations and save potential headaches down the road.

Tax Compliance and Legal Issues

As a nonprofit, you are normally exempt from paying corporation or income tax (you have receipts, not revenue). But that doesn’t mean you avoid the long arm of IRS tax compliance and other regulations. 

What can make things difficult is change. Policymakers constantly review and propose changes to nonprofit tax compliance. Stay up-to-date with current regulations. You don’t want to threaten your charitable or tax-exempt status. 

Other compliance advice to consider includes:

• Always confirm you’re filing the right Form 990 for your organization.
• Use tax reporting software to keep accurate, complete records for every transaction.
• Avoid supporting political or lobbying campaigns. 
• Make sure your mission and purpose fall within an approved IRS code for a nonprofit.
• Comply with state tax requirements as well as federal.
• Use payroll solutions to withhold and manage employee tax.

Technology and Tools for Financial Management

You have a lot to keep track of to maintain your nonprofit status, stay afloat, and accomplish your mission. Why make things difficult by trying to do everything manually with outdated methods? 

We’ve mentioned several service types to help with tracking financials, filing, and compliance. What about donation tools or fundraising platforms? Providers such as DoJiggy have you covered for accountable, controlled donor fund management.

There are solutions to help with every aspect of financial management, including:

• Accounting and bookkeeping
• Budgeting
• Financial statements
• Fundraising 
• Payroll management
• Data security and legal compliance.

Many of these solutions are based in the cloud for ultimate flexibility and accessibility. App integrations enable you to connect tools and automate many of the mundane financial management tasks. 

Wrapping Up

Nonprofit financial management pays more attention to detail and takes greater control measures. While it seems like more work in the beginning, the return is well worth the effort. You’ll guarantee compliance with legal requirements, and donor confidence will be boosted by open financial reporting and fund transparency. 

You’ll also keep your tax-exempt status and improve member loyalty. Make your life easier by using the right accounting and financial reporting tools so you can focus your efforts on the mission.

Create a free account and see how we can help your organization smash your fundraising goals!

Start Fundraising