HHS Sustainability Toolkit
Part 4: Financial Management
Donors and funders of organizations expect money to be managed well and for the organization to hold itself accountable to produce reliable financial information. Basic financial management begins with cash management and bookkeeping, and an organization needs to know how to generate and analyze financial statements in order to understand its financial health. "Nonprofit organizations should effectively and efficiently use their financial resources to accomplish their missions and should establish clear policies and practices to monitor regularly how funds are used."
Usually the treasurer, or another person on the board with at least a basic knowledge and skill in financial management is best suited for handling and managing finances. "The treasurer develops systems and practices to manage the finances of the organization and its programs in coordination with board members to:
- Ensure accurate recoding, reliable reporting, and the capacity to analyze and interpret historical and current financial data
- Prepare financial plans and reports
- Generate financial statements
- Track spending
A high degree of accuracy, reliability of information, and integrity generate public trust in the organization, and ensures its long-term sustainability. A fiscal officer or program manager is usually responsible for preparing the budget, and he/she may decide to either keep a chart of accounts or buy software to manage the funds. Additionally, an outside consultant or certified public accountant can also be hired for this role. Generally board members lend support to the budget process.
For recordkeeping and financial transaction, community and faith-based organizations typically use either the cash basis or accrual basis.
- Cash basis: Relies mainly on checkbook to track transactions. The amounts for and purposes of the transactions are recorded on the checks.
- Accrual basis: Used more for growing organizations. This system uses journals and ledgers to track transactions (ie. a receipt journal to track cash receipts and a disbursement journal or ledger to track checks) These items are helpful when developing a "chart of accounts" that some funders review when making funding decisions.
The chart of accounts is a listing of all accounts, and each financial transaction is posted to a chart of accounts according to a particular category. The chart usually has five categories: assets, liabilities, net assets (or fund balances), revenues, and expenses. Numbers are assigned to each transaction, and you will have to determine which category the expenditure fits and then assign an account number to the expenditure.
The budget directs fiscal management and operations. To manage the budget properly, organizations must understand revenue, support, expenses, and net operating income.
- Revenue: Income that the organization has earned or received through investments.
- Support: Income that the organization has received through grants and donations.
- Expenses: Usually separated into personnel and non personnel. Depending on the structure of the organization, salaries may be included as part of your expenses for specific programs and administrative costs and fees. Expenses for each program stem from direct costs of delivering services to the client (ie supplies, travel, consultant fees) Some indirect costs, such as rent, may also be be allocated to these programs. Many indirect costs are included in the administrative cost line.
- Net operating income: Amount of income expected to realize after payments of mortgages, taxes, insurance, operating fees, and other such expenditures.
Most funders set reporting requirements for the budget, many requiring independent audits by or 2-year financial reports. Audits should be performed every year by a CPA, and the auditor should be changed every 3 years to ensure accuracy and thoroughness.
Budgets can be used as a diagnostic tool, giving you the predictive intelligence to detect problems before they have major financial consequences and helping you move from reactive to proactive, profitable financial management. The creation and execution of a budget that supports your organization's strategic goals and drives decision-making is an important part of your organization's success in delivering on its mission.
Core elements contained in the budget include:
- Personnel (ie. full-time staff, part-time staff with fringe benefits, volunteers)
- Supplies
- Equipment (if more than $1,000 per item)
- Equipment leases
- Occupancy cost for space
- Travel (local and out of town)
- Training (ie. conferences, workshops, trainers)
- Other expenses that relate to the program (ie. telephone service, postage)
- Samples of other budgets are available online from the Nonprofit Financial Center: http://www.nfconline.org
Best Practices
- Keep good records, including copies of all receipts and expenditures. Make sure that all financial data are kept up to date and use generally accepted accounting principles.
- Meet reporting requirements of funding. Create a monthly report of all financial activities. The report should be made available during each board meeting. Specific reports can also be sent to funders if requested.
- Always use funds as they are budgeted.
- Don't hesitate to ask the funding source for help when preparing your budget.
- Learn to leverage and diversify funds.
- Don't use a signature stamp to endorse checks. Doing so puts an organization at risk of potential criminal activity from board members and staff.
- Speak with the funder about money that can't be spent because of how it was budgeted. The funder may want it back or grant a no-cost extension.
- Involve all key stakeholders in the budgeting process.
- Track the status of the budget against actual performance.
- Monitor direct and indirect costs, including allocation of staff time to the program, administration, evaluation, and fund-raising activities.
- Ensure that the budget is driven by the mission and objectives and supports operations and evaluation.
- Ensure that the annual budget is tied to outcomes; aligns with available resources; includes staff input; and supports programs, administration, evaluation, and fund-raising.
Continue to Part 5: Sustainability Strategies: Fund Development and Fundraising
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