Even if finances aren't your strong suit, you can learn the fundamentals
Not every nonprofit leader comes to the job prepared to manage finances. In fact, few are selected solely for their financial expertise. But since financial management is the foundation of what makes many aspects of a nonprofit tick — hiring, programs, fundraising, facilities, equipment, technology and more — having a thorough grasp of the basics is critical.
Know the scope of your nonprofit's finances
Understanding your organization's finances will tell you if programs are cost effective, if your budget is balanced and if fundraising can keep pace with growth. Common issues that require a full understanding of organization finances include:
- How much fundraising efforts cost over the course of a year or more
- Staffing constraints in light of current and projected revenues
- Costs of operating core programs and developing new initiatives
- Costs of employee benefits
But the benefit of understanding finances goes far beyond knowing what things cost and the assurance that you can pay for them. It also increases the likelihood that your nonprofit will be successful in other ways, including:
- Using resources effectively and efficiently
- Aligning finances with core values
- Having the means to achieve key objectives
- Demonstrating accountability to donors and stakeholders
- Earning the confidence of funding agencies, partners and beneficiaries
- Increasing employee morale
- Building long-term financial sustainability
Put another way, money and your nonprofit's mission are closely intertwined — making financial management a lens through which virtually every decision should be assessed.
If financial planning, budgeting and monitoring aren't your strong suit, there are numerous opportunities to learn the fundamentals. Consider taking a local or online class, or look for organizations that offer training specifically for nonprofits. In addition, seek out people who have demonstrated expertise in these areas. This can be select members of the board or executive committee, staff members, or an outside consultant or financial manager.
Sharing financial accountability in a nonprofit
Typically, financial accountability doesn't fall solely on the shoulders of the boss. Even in the smallest nonprofits, responsibility is shared with the board of directors. In larger organizations, financial management responsibilities tend to become more defined. Here's how they're often broken down.
Boards provide oversight
Among other things, the role of the board is to steer the organization toward a sustainable future by adopting sound financial management policies and ensuring that the nonprofit has the resources to advance its mission. Specific responsibilities may include:
- Approving the annual budget
- Ensuring adequate funds to operate on an annual basis
- Making sure that all financial reports, taxes and other government requirements are met
- Establishing policies and procedures to ensure accountability for programs and finances
- Reviewing finances at least monthly
- Choosing an accountant to conduct an annual audit
- Ensuring ongoing fiscal monitoring
Executive directors or chief executives ensure accountability to the community
Primary responsibilities of the executive director or chief executive are to understand the organization's finances, interpret them for stakeholders and ensure the nonprofit's financial accountability to its community.
To do all this, the executive director should have at least a working knowledge of bookkeeping and nonprofit financial management. This includes the ability to read and understand a budget, monthly financial statements, audit reports and financial projections.
In smaller organizations, the executive director or chief executive may take on the work of the financial manager. But even if you're skilled in financial management, it's best to get support from someone who has in-depth expertise in this area. Also, it's never a good idea to take on the bookkeeping role directly, since this doesn't allow for adequate separation of control and would be a red flag to funders and other stakeholders. If you're in this situation, ask a local auditor or accountant to analyze your financial management system and recommend a system of checks and balances. That way, you'll protect yourself and your organization from undue scrutiny.
Bookkeepers and financial managers handle routine tasks
If your organization is large enough, a bookkeeper or financial manager can handle tasks that might otherwise fall to the executive director or chief executive, board treasurer or finance committee.
A bookkeeper can:
- Record income and expenses
- Create and maintain simple financial systems
- Prepare billings to funders and other customers
- Produce monthly reports and documents required for an annual audit
A financial manager can:
- Maintain the general ledger and budget drafts
- Develop financial management and monitoring systems
- Address the financial aspects of HR issues
- Monitor monthly expenses by line item
- Generate financial reports
- Complete basic bookkeeping tasks (if you don't have a dedicated bookkeeper)
The larger your nonprofit, the more help you need
If you're wondering how to best handle financial management tasks, it depends in large part on the size of your organization, staff and budget.
In the smallest organizations, an executive director or chief executive who has various responsibilities may be able to dedicate only a day a week or so to financial management — even though this will only cover the basics. Growing or mid-sized nonprofits may consider hiring a full-time financial manager or experienced bookkeeper, especially if the organization's finances are fairly complex. Larger nonprofits typically require a finance department with a controller, staff accountant and bookkeeper.