Basics of Nonprofit Finance
It’s that time of year again. Many nonprofit leaders like yourself are in the process of crafting their budgets for the upcoming year. Nonprofit finance is about maintaining the practices and policies that build a strong financial future and help nonprofits achieve their mission. Even if you are the most seasoned administrator, it is sometimes necessary to review the basic foundations. Below are some tips for understanding nonprofit finances.
Roles and Responsibilities
As an Executive Director, you draft the annual budget in collaboration with staff and finance committee members, oversee the implementation of the annual budget, and report to the Board of Directors regarding financial realities. Therefore, it is essential that you know and follow nonprofit financial standards. Executive Directors also Vet and select appropriate accounting software, receive bids on external auditors and work collaboratively with external auditors.
If you are a board member, then your role is to approve the annual budget, monitor budget progress, approve financial policies and audits, and hire an external auditor.
While these roles are different, they are accomplished best with a high level of collaboration. Essentially, the board of directors provides strategic direction and oversight while the Executive Director manages the day-to-day operations.
Budgeting Basics
When crafting your upcoming year’s budget, you will outline projected sources of income—how much will you receive in individual donations? Memberships, grants? Next, think about the projected costs of various line items. For example, what will it take to fund your staff, programs, activities?
Use previous year’s data or comparable nonprofit data to make sure your projections are as accurate as possible and include items like taxes, insurance, and office supplies. It is also wise to have a reserve fund for emergencies. Consider a goal of setting aside at least six months of operating expenses.
Budget Calendar
The budget creation process is typically spread out over several months. To create the next FY budget, you need up-to-date data on the previous year, to receive insight from program staff, and to meet with the finance committee.
Following a predictable annual budget, calendar allows you to provide ample time for these conversations and ensure you cover all the steps. Your sample calendar might look like this:
August: Solicit data from staff regarding actual costs from the previous year and projected costs for the upcoming year
September: Meet with your finance committee to review the input and draft a recommended budget for the board to review
October: Review and approve the upcoming year’s budget at a board meeting.
Financial Reporting
At least quarterly, you will need to review the approved budget, how much was spent and raised since the last financial report, and the year-to-date totals for income and expenses.
It is also helpful to have a line in your finance report that shows the percentage of the budget spent and potential overages. Make notes on any expense are income in excess of 5% of the projection. As an Executive Director, you want to be prepared to answer questions about the finances from the board of directors. For example, if someone asks, “Why did this program exceed our projections by 8%?” it is your responsibility to respond with, “Well, construction costs increased due to the pandemic and therefore our expenses reflected that increase as well.”
Internal Controls
Make sure that your finances are protected from fraud by setting up appropriate procedures. Here are a few tips:
Have separate individuals, receive funds, deposit donations, and write checks
Develop and articulate policies that protect whistleblowers
Document petty cash and expenses by creating logs and collecting receipts
Have a board member or finance committee member conduct random internal audits
If you are interested in learning more about best practices for nonprofit finance, contact Spark Group Consulting today for a free 30-minute chat.
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