BEST FINANCIAL MANAGEMENT PRACTICES FOR NONPROFITS
Every nonprofit organization works for a particular cause and dedicates its funds to it. Most of its executives worry about accomplishing that fundamental goal and may neglect financial management. Unfortunately, this negligence results in the negative financial growth of that enterprise, leading it to suffer from monetary loss. Effective financial management is crucial since nonprofit organizations typically lack funds and have unpredictable cash flows throughout the year.
Regardless of the type of business, you need money to run your organization smoothly. Effective financial management provides your firm with the resources and money necessary to accomplish its missions.
Below are a few practices nonprofits can implement for better financial management.
● Maintenance of internal policies:
The most crucial financial procedure for nonprofit organizations is to track their internal policies. Internal policies cover everything from the security of financial information to the application procedure, division of roles, and recurring account statements. Maintenance of internal policies prevents misuse of assets by employees, vendors, and board members. Your internal policy should also monitor restricted gifts. One of the worst things that can happen to a nonprofit is a breach of trust. If a donor learns that someone misused their money within your organization, they will withdraw their funding and may also bad mouth you.
● Creation of a multi-year financial plan:
A multi-year strategy gives charitable organizations the much-needed guidance to manage their finances successfully.
It acts as a check on annual budgets, ensuring the organization is making steady progress toward achieving its objectives and vision each year.
For instance, you can be part of a Donor Advised Fund (DAF). It is an account set up to help organizations or individuals give donations to NPOs of their choice. This account, according to Crewe Foundation, serves as a funding resource for nonprofits helping them achieve their goals easily. You could advise your trusted donors to create accounts, making the donation process easier for them and your NPO.
Efficiently managing finances and the potential funding resources help in assessing your organization’s sustainability.
● Adopt transparency:
Transparency is the act of making deals in an accessible and understandable manner. You can determine the transparency of the financial situation at your company by observing if your funders and other shareholders can clearly understand the number of funds coming in and going out of the organization. These people should also know the purpose for which their funds are being used and how they are distributed. This way, they are more likely to have faith in your organization.
Always provide comprehensive information on how you use donations and other income in your financial statement, website, donor letters, or any other document that needs to be disclosed.
● Making internal data accessible:
To manage the finances effectively, every nonprofit must maintain accurate and thorough records. Accessing relevant financial data is crucial for the executive team, the board, and other stakeholders in making decisions. Your accounting software may need up-gradation to allow access to your internal data in customizable dashboards that display your organizations performance.
Financial dashboards show information such as how many more people you served this year compared to last year, how many new donors you attracted this year, how many previous donors chose not to give this year and the cost of each program in comparison to past years.
● Understanding Audit and 990 reports:
For many federally tax-exempt organizations, the submission of form 990 is an annual requirement that needs to be presented to the Internal Revenue Services. It is helpful documentation for comprehending and assessing a nonprofit organization since it contains details about its finances, operations, and goals.
Submitting that form is only the start. Board members and nonprofit executives have a legal responsibility to clearly present the organizations finances, which requires a routine analysis of Form 990 and many other financial statements.
Your accounting and finance staff should have the resources and assistance to deliver yearly statements and monthly as well as quarterly reports of financial data.
● Monitor programs separately:
Examine the expenses and revenues for each initiative separately, along with your organizations overall performance. It is necessary to review each campaign and event and check whether they succeed enough on their own. If the program is not meeting the set goal, try to put in some extra efforts or funds to make it successful before considering the program’s termination altogether. On the other hand, if any program or campaign meets the required result, expand it and make improvements.
Considering each project would help make wise decisions regarding its extension or termination, which will directly affect the organizations economic health and help it to grow.
● Build a reserve:
Keep a particular reserve to enable your nonprofit to continue operating throughout a financial crisis. Your company can manage economic challenges during unanticipated events with the help of this reserve. Building a reserve helps you manage your organization’s finances as it provides a helping hand in times of need and guarantees that business operations will continue as usual. It also prevents downsizing, salary reductions, and service limitations. To build a reserve, save aside money that will last for at least three months. You should limit its usage to dire situations when your nonprofit organization faces a severe crisis.
Set up and expand a budget reserve as a top priority to counter situations where you might experience significant fluctuations in donations, grant money, private trusts, and other non- guaranteed funding sources.
Adopting financial rules and processes is crucial regardless of the size of your organization and the services it provides. Having proper financial standards and procedures has several advantages for your charity. Nonprofit organizations typically lack funds and have irregular cash flows throughout the year. The most crucial financial procedure for nonprofit organizations is to track their internal policies and to ensure their proper application. You could also look into special donation services such as DAF and teach your donors about these services. Following these practices might ensure better financial management of your nonprofit organization, helping to accomplish its goals and mission.
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