By
Jim Simpson, CPA and
president of Financial Technologies & Management
Finances are
what keep nonprofit leaders up at night. Will they be awarded a grant for the
new programming? Will the upcoming fundraising event be successful?
And while
most realize that sound financial management is linked to every function of the
nonprofit and is essential for organizational success, many leaders have less experience
in finance and accounting areas.
Just as
personal health depends on our behaviors, so the financial health of a
nonprofit depends on board and management behavior and actions.
As public
charities, nonprofits have an obligation to act as responsible stewards, ensure
fiscal responsibility and build public trust in managing its financial
resources.
Nonprofit should
adhere to sound accounting principles to produce timely and reliable financial
information. By establishing clear
financial practices and policies, resources will be used and monitored
efficiently and effectively.
The following
are signs that your nonprofit will be financially healthy over the long term.
Board and
management hold themselves accountable and responsible for the long-term
stability of financial and program performance.
Leaders need to focus on long-term sustainability of the nonprofit
ROLES
Board and management
understand their roles and responsibilities in financial matters, which are not
just limited to the treasurer and director. Regular and consistent
communication about fiscal matters is critical. Financial literacy helps to
encourage board participation and understanding, including asking donors to
give to the organization.
PROFESSIONAL DEVELOPMENT
PLANNING
Budgets need to be
realistic and well-considered during the preparation and approval process. If last year revenues were down 25 percent, a
budget that increases those projected dollars by 10 percent is probably not
realistic.
Budgets need to be
prepared in tandem with the operating and program needs. Financially healthy nonprofits engage in
income- or revenue-based rather than budget-based spending. An income- or revenue-based budget will
include realistic income projections and realistic cost projections.
Nonprofits need to review
the historical and future trends of ensure budges are as accurate as possible
and anticipate revenue shortfalls before they exist.
REVENUES
Board and management are
committed to having a surplus each year.
These financial reserves are important to finance program growth,
capital replacement and cash shortfalls.
If a deficit does occur, a financially healthy organization maintains an
operating surplus and positive cash balances.
The operating surplus needs to be readily accessible in times of
shortfall or deficits. Separating cash, investment accounts or loans can ensure
that reserves are easily accessible. However, a reserve policy should specify
the approval process and reserve usage.
REPORTS
Board and management must
ensure that they have adequate capacity and qualified financial staff.
Consistent, accurate and
timely financial reports are prepared and analyzed by qualified individuals. Financial
reports need to be accurate and timely. Establish firm financial reporting
expectations and deadlines that are met without excuses. This is an indication
of lack of organizational capacity or qualifications of finance and accounting
staff.
ACTIONS
Board and management monitor financial
results compared to budget and continue to modify programs and operations in
response to these variances. It is
important to know when to modify programs and operations to ensure stable
program and operations performance. Nonprofits should review program financial
performance quarterly to ensure that financial results are on track.
Board and management
monitor cash flow and realistically plan to be able to meet obligations and
ensure stable program and operations performance. It is important that organization has the
ability and knows when to perform cash flow projections and ratio analysis.
Nonprofits need to develop
these financial reporting and analysis tools and anticipate when cash flow may
become an issue by reviewing upcoming liabilities and debt payments. Cash flow
and budget projects should be ongoing tools to help plan and manage cash flow.
Board and management
practices and policies establish adequate and appropriate internal controls and
segregation of duties to ensure fiscal stewardship, responsibility and ensure
public trust.
These practices and
policies should include operating reserve and other major financial decisions. Financial policies and procedures help to define
clear expectations, promote operating efficiencies and help with training and
professional development. Developing a financial policies and procedures manual
software training can ensure ongoing compliance.
Leadership is committed to
comply with all required legal and funder reporting. This includes application
of prompt payment standards and familiarization and compliance with contract
and grant requirements. It is important that contract and grant management are
being performed to ensure stable program and operations performance.
Board and staff leadership regularly
review plans and develop goals and strategies for the future. Regular
communication regarding financial matters should include financial reporting,
budgeting, taxes, auditing and financial compliance. It is important that
financial reporting and analysis tools are customized to the nonprofit’s
specific needs and purposes.
Resources
used to prepare this article include:
- Stevens Group at LarsonAllen, St. Paul, MN.
Seven characteristics of financially
healthy nonprofits.
Jim Simpson, CPA and president
of Financial Technologies & Management, is a financial leader and trainer,
CFO advisor, and forensic accountant to nonprofit organizations since 1999, serving over 350 nonprofit clients. He has worked as a CFO, controller and
software advisor for over 20 years.
