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Guide to Financial Management for Nonprofits

Nonprofit Financial Management Explained
Susan Guillory
Susan GuilloryUpdated September 5, 2023
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A successful nonprofit depends on smart financial strategies. Because a nonprofit operates differently than a for-profit business, it must make careful decisions about nonprofit financial management and allocation of funds.Understanding your nonprofit’s finances is just the first step toward a long-lasting opportunity to help your target audience. You also need to develop solid practices for managing your nonprofit funds to ensure you always have the capital you need to make a difference.

Why Is Nonprofit Financial Management Important?

Once you have started a nonprofit, you begin to realize the heavy responsibility you have taken on. Groups, communities, and/or individuals rely on the services your nonprofit provides, and you need a constant stream of funding to ensure you can continue to provide those services.This is why financial management for nonprofits is so important. Unlike with a for-profit business, which sells products or services for a profit, a nonprofit often relies on fundraising, grants, and donations to fund its cause. Grant money can dry up. Donors can stop donating. Managing the funds your nonprofit has and continually adding more is essential for the longevity of the organization.Recommended: Getting Startup Grants for a Nonprofit

Financial Management for Nonprofits vs. Businesses

Financial management for nonprofit organizations, while similar in some ways to that of financial management for other types of businesses, does have some key differences.
Nonprofit Financial ManagementFor-Profit Financial Management
Has a Board of Directors to report toMay or may not have a Board of Directors to report to
Raises funds through donations, grants, and fundraisingEarns revenues by selling products or services
Has strict financial reporting requirementsMay have less strict financial reporting requirements
Is tax-exemptIs not tax-exempt

Nonprofit Financial Management

A nonprofit generally has a Board of Directors who must approve larger financial decisions. This, along with the fact that nonprofits have strict financial reporting requirements and are tax-exempt, means that financial management can have more protocols and rules to follow.To raise money, a nonprofit relies on grants, donors, and fundraising, none of which are guaranteed.Recommended: 12 Fundraising Platforms for Nonprofits

For-Profit Financial Management

It is not required for most businesses to have a Board of Directors, and there are fewer requirements for financial reporting. For-profit companies pay taxes on profits, which are earned by selling products or services.

8 Nonprofit Financial Management Practices to Consider

Let’s look at some nonprofit financial management best practices that will ensure your nonprofit always has a positive financial outlook and can stretch its funds to continually cover expenses.

1. Create a Budget

Whether you’re a for-profit company or a nonprofit, having a budget is essential to your business. Creating and updating an annual and quarterly budget helps the nonprofit stay on top of upcoming expenses and maintain a plan to cover them through various fundraising efforts.Budgeting and financial management for nonprofit organizations can also be used to plan for periods when funding isn’t coming in. For example, if your big fundraising event happens in the fourth quarter, you’ll want to plan accordingly to ensure that those proceeds will carry you through the following year.Understand that a budget may change depending on fluctuations in expenses and availability of funds. Review yours quarterly and amend as necessary.

2. Set Procedures and Policies

Nonprofit financial management relies on having solid policies and procedures in place. Policies might cover topics such as:
  • Gift acceptance
  • Internal controls
  • Conflict of interest
  • Expense reimbursement
It can be beneficial to create a handbook for employees, volunteers, and the Board of Directors that contains all the policies you establish, as well as procedures around financial reporting, audits, and financial management.

3. Know Your Financial Statements

Make sure to familiarize yourself with important financial statements for nonprofits. Even if you have an accountant (and you should), it’s important that you and other executives understand what statements, such as the cash flow statement and annual report, tell you about the nonprofit’s financial health.These documents can also help you make strategic decisions about the future of the nonprofit, such as when to seek additional funding or where to invest current funds.

4. Keep Stakeholders Apprised

There are several individuals who have a vested interest in the financial wellbeing of your nonprofit, including the Board of Directors, Executive Director, and donors. Each board meeting should include a review of the finances and the status of any fundraising efforts. And while it’s not required, you might consider sharing your annual report with donors so they can see how their funds are making a difference.

5. Be Audit-Ready

While not every nonprofit is required to have an independent audit, it’s always a good idea to have your finances in order in the event that you do need one. That means keeping accurate financial records and having transparency for every expense and donation.The added perk of being audit-ready is that you will also be tax-ready.Recommended: Tax Deductions for Business Donations

6. Be Transparent with Donors

Receiving donations from individuals depends on your nonprofit being open about how it’s using those funds. Transparency helps donors feel more connected with your organization and more inclined to help when they see how you’re using the funds. Think beyond the annual report — you can also create videos showing your efforts in the community or interview people you’ve helped. It’s also a great public relations tool.

7. Build Up Operating Reserves

Sometimes fundraising is inconsistent throughout the year, and that’s when you need to ensure you have an operating reserve to cover expenses when money isn’t coming in.Establish how much you need in this account, what it will be used for, and how to save up that amount.

8. Diversify Fundraising

Yes, your nonprofit likely depends on donations, grants, and fundraising events, but don’t limit your options to these.You can also explore nonprofit fundraising platforms and crowdfunding for nonprofits to attract more donors from all around the world online, even if you’re a local nonprofit. The benefit to crowdfunding is that it doesn’t have to be repaid and it builds awareness of your organization. The costs, if any, are much lower than setting up a physical fundraising event like a gala, and crowdfunding requires less manpower.Another option for funds is to look at nonprofit business loans. A loan or line of credit can provide access to funds that can be used for normal operations and expenses or to cover other costs, like putting a new roof on the office or purchasing computers or equipment for employees.

Compare Business Loan Rates

Nonprofit financial management is essential for any nonprofit organization. With careful planning and attention to financial statements, you can ensure that your nonprofit never struggles to find the funds it needs to serve its audience.Get the financing your nonprofit needs with Lantern. A single application will give you a quality business loan offer from one of the top lenders in our network, all with no obligation to you.

Frequently Asked Questions

What do financial managers do for nonprofits?
What is a nonprofit financial management strategy?
How are finances handled differently in nonprofits compared to businesses?
Photo credit: iStock/Pekic

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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