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Feb 13, 2014 | Insights

Nonprofit Financial Management

When asked what keeps them awake at night, you can be sure that one of the most frequent answers from nonprofit executives and senior managers will be short and simple: Money.

Certainly, it’s no surprise to learn that raising money and getting the most bang for the nonprofit buck are challenging in an economy that has never fully recovered from the recession. But many executive directors and their top managers find handling the finances of a nonprofit on a day-to-day basis just as daunting.

In Daring to Lead, Jeanne Peters and Timothy Wolfred reveal that the majority of nonprofit executive directors have “program” backgrounds, and have less experience with the financial responsibilities of their job than they themselves would like. But according to the Executive Directors Guide, financial management is the foundation of planning and managing every aspect of the organization, including people, programs, buildings, equipment, fundraising, technology, printing and insurance. Thinking strategically when managing money is essential because it is interlinked with every other function.

Macro Level Oversight

Do your funding sources support the program mix you need?

It makes sense to approach financial management at both an operations and macro level. On the macro level, it’s asking yourself if your organization has the right “kind” of money to support the programs that you want to provide. In other words, you need to look at your nonprofit’s funding sources to be sure that your mix of restricted and unrestricted funds, individual (including major) donors, foundation and government funding sources align with your program initiatives. The latter may be direct services, education, technical assistance, outreach or advocacy.

For instance, government and foundation funding may limit the amount of advocacy your organization can do and how you do advocacy. Unrestricted funds from individual donors provide more opportunities for advocacy. Similarly, most grants and even government contracts don’t cover what it really takes to run a program. So you really want to make sure that you have a mix of private and public grant money and other sources of funding to deliver a financially healthy, viable program.

Are you investing in your organization’s future?

Similarly, you want to have enough of an unrestricted fund balance going forward to invest in your organization. For some nonprofit organizations, that may mean improving your infrastructure or increasing your board and staff development. For others, investing in the future may involve adding new programs and/or expanding your constituent base. Still others may want to have enough of a funding cushion so that they can respond to crises or emerging needs in their communities.

Therefore, sound financial management requires that you broaden your focus beyond having a fund balance large enough to finance cash flow (typically 3 to 12 months of operating expenses is considered adequate for cash-flow management). Your financial plan must include investing in your program’s improvement, expansion and modernization, including keeping up with technology advances, if you are to meet your nonprofit’s long-term goals.

And if you’re always coming in at break even, you’ve got to figure out how to manage self investment, whether through an endowment, a major donor campaign or an annual fund. That will allow you to connect your current situation to where your organization wants to be.

Are you doing enough to build your infrastructure to match what will be needed in the future?

The area that suffers most from underinvestment is “infrastructure,” not just administrative and fund-raising needs but also evaluation, technology and marketing. Most executive directors and their senior team figure out how to strengthen their programs and expand their constituency base. This often results from underestimating the costs of NOT investing in infrastructure. Funders also play a role, hesitating to fund capacity-building, marketing and outreach, staff development and IT. These are all critical for developing a viable program and financial sustainability.

And make sure you understand your balance sheet, known as the Statement of Financial Position in the nonprofit sector. The information on the balance sheet can give you excellent insights on a number of important areas of financial management: cash-flow needs in the short and long term; your organization’s ability to fund expansion; the funding needed to maintain your equipment and facilities in future years; the soundness of your cash-management strategy (or if you need one!); and future debt payment requirements, to name a few.

Operational Level Needs

Are you “in the mix” when it comes to financial systems and details?

On a more operational level, executive and senior directors need to be “in the mix” when it comes to financial systems and information. Know what’s going on. Look at the details, the systems, and the checks and balances, the management letter from the audit report. Have you made progress on the issues raised? Are your finance professionals trying to address those issues, or are they resisting? Can you get detail and backup when you want them in a format that you can quickly read and understand?

Ask yourself if there is anything in your expenditure or salary base that it would embarrass you if it ever made the day’s headlines. Can you defend any questions about your budget with a response that would feel ethical and grounded to you – and to your board, supporters and colleagues? If you cannot, change it.

Are you “in the mix” on the programmatic and organizational level?

That’s on the detail level. Are managers getting the information that they need to understand some fundamental aspects of their programs on a financial level? First, is the program paying its way, including its share of the overhead and administrative costs? Is the cost per unit delivered, however that is defined in your field, a reasonable cost, and does the information from your finance department allow you to compare it to similar organizations?

Perhaps most important, the financial reports that you receive must clearly show which funds you do and do not have discretion over. For example, financial statements should indicate which program components are covered by restricted and unrestricted funds. This is critical for knowing what you can and cannot change if the budget requires adjustment. This also guides your decision making in deciding what cuts can be made without compromising your program.

Do your financial statements pass the “logic test”?

The bottom line for your financial statements is that they need to pass a logic test. For example, if you have a government contract that requires that certain services be performed by a specific staff member, your financials need to show a portion of that person’s salary apportioned to those contract funds. Otherwise, the statement has a logic gap.

If the financials are not easily understood by the executive director and managers, figure out what it will take to rectify this problem quickly. Does the format need to be more accessible? Do you need training on it?

How do you address problems with financial reporting?

Especially for executive directors, if your finance department is constantly getting reports, reimbursements or billings out late – or if they consistently have errors in them – you’ve got to start by fixing the systems. If that doesn’t rectify the problem, then you’ve got to deal with deeper issues, be they your expectations, lack of resources allocated for this work or the limitations of the people producing the information.

Perhaps you need to have more realistic expectations of what a finance operation for an organization your size can produce in terms of complexity and timeliness. See what other similar organizations are doing. If most require a few more days to produce their financial statements, and giving your finance professionals the same timeline would provide you with better information, then change your due date. If that doesn’t work, then you’ve got to put more resources into the effort, get training for your staff or make some personnel changes. Whatever is needed, you’ve got to address the problem. Tolerating it is just a house of cards.

You also need to make sure that your development professionals, including those in marketing, are getting what they need from the financials. These staff members need to know the cost of their efforts. How much does it take to raise a dollar, including personnel time? They also need to be able to tell donors and funders what your organization is able to accomplish with their contributions.

The Forest for the Trees

To make sure your nonprofit organization is financially healthy, you need to know the details, ask questions, demand answers and understand the big picture. The benefits? You will be able to be more entrepreneurial. You’ll understand where you can be creative, how you can invest, and where you have or can get the freedom to pay for programs or activities not covered by most funders. You will better meet your mission, and you’ll be doing the most with the funds – and the public trust – you receive as a nonprofit organization.

An added benefit for you? Having a firm grasp on your finances on a day-to-day or at least month-to-month basis will relieve a lot of tension. You will understand your organization at a deeper, more holistic level. You might not always get a great night’s sleep, but your nonprofit’s finances won’t be to blame. And, anyway, couldn’t we all benefit from a better night’s sleep?

[1] Peters, Jeanne and Wolfred, Timothy. Daring to Lead: Nonprofit Executive Directors and Their Work Experience. San Francisco: CompassPoint, 2001.

[2] Linnell, Deborah, Radosevich, Zora and Spack, Jonathan. Executive Directors Guide: the Guide for Successful Nonprofit Management. Boston: TSNE, 2002.