By Jon Osterburg, guest author
When it comes to nonprofit finances, the first thing your organization probably thinks about is your fundraising strategy. Oftentimes, fundraising and winning grants help your organization form the backbone of your income generation.
But that’s not all there is to financial management. Your organization also needs to be able to collect and analyze financial information in reports to ensure you are on the right track with revenue and expense generation.
In this guide, we’ll take a look at some tips and strategies you can use to better inform your organization’s financial decisions. We discuss the following tips:
Don’t think too much about overhead.
Budget for a surplus.
Effectively plan for growth initiatives.
Conduct regular audits.
Provide transparency with finances.
Ready to dive in to learn more about nonprofit accounting best practices? Let’s start.
1. Don’t think too much about overhead.
For years, nonprofits have faced backlash on their overhead costs. Supporters were disappointed to learn that their precious donations were being used to pay employees, pay rent and cover other operating costs for the organization. This resulted in nonprofits not paying their staff as well as they could, increasing revenue and stunting the organization’s growth.
However, this mindset is changing. Nonprofits find a better balance between their overhead and program costs, keeping the organization healthy and even investing in growth.
According to Jitasa’s Budget Guide for Nonprofits, the recommended amount of overhead for organizations like yours is about 35%. However, it is also noted that this is a loose percentage and the actual ideal percentage is entirely dependent on your particular nonprofit. Some organizations don’t require high overheads to operate, while others can exceed 35% while still making the difference they want to see in the community.
Don’t think too much about overhead. It is necessary to run your organization and should be a balanced part of your regular budget expenditure.
2. Budget for a surplus.
When your organization creates your annual budget, you should always build in some flexibility. Not only does this allow you to cover any unplanned expenses that may arise, but it also provides the financial flexibility to plan for future growth as an organization. You can use this money to grow and continue your business in the future (which we’ll discuss further in the next section).
Many nonprofits recognized the need to budget for a surplus during the economic crisis that emerged in 2020 due to the COVID-19 pandemic. Those who had a little more financial flexibility found it easier to come back and adjust their budgets for additional marketing to bring in new donations.
When your nonprofit develops your budget, build a 10% surplus into your plan. This means that you have planned expenses for 90% of your revenue, which should cover the operations and typical program costs.
Then if you spend more than expected on one of your organization’s fundraising events or programs, you can adjust it elsewhere in the budget. The goal is to have the padding available in your budget in case you need it, but to try and avoid using it if possible. This also offers some built-in flexibility, even the best fundraising strategies still cannot accurately predict how much revenue will be raised.
3. Effectively plan growth initiatives.
Building a 10% surplus into your budget isn’t the only factor to consider when determining the growth initiatives your organization can take. You also need to consider additional aspects of your organization’s financial position.
That’s why non-profit organizations preparing the financial position as part of their accounting reports. You can then use the statistics in this financial report to calculate the organization’s months of liquid unlimited net assets (LUNA).
In fact, this calculation shows how long your organization can cover your regular expenses without going into debt. If your months of LUNA are:
In the minus or at 0, you should immediately re-evaluate your finances. That means you don’t have the financial liquidity to cover your ongoing expenses.
Between 1 and 3 you are in a stable temporary position. However, if it lasts long without increasing your LUNA months, you’ll need to rethink your finances to increase this metric.
Equal to 3 months, be well! This is recommended for a healthy and stable financial position.
After 3 months of LUNA, your organization is very healthy and can start thinking about how you will implement growth initiatives in the future to expand your organization and advance your mission.
Determining when you will start working on your growth and development as an organization is just as important as actually doing it. When you take on these projects at the right time, you ensure that your organization can not only implement growth initiatives more effectively, but also sustain them for the long term.
4. Conduct regular audits.
“Audit” is an inherently scary word for many people. Often this means that the individual can get into some sort of trouble or owe money in taxes. However, for nonprofits, that stigma needs to be adjusted. Because registered nonprofits do not pay federal taxes, audits are not intended to mislead them or force them to pay additional fees and funds. Rather, they are designed to help non-profit organizations improve their financial management.
The Alliance for Nonprofit Management says the purpose of an audit is:
“To test the accuracy and completeness of [the] information presented in an organization’s financial statements. This testing process allows an independent certified public accountant (CPA) to make what is called an opinion about how fairly the agency’s financial statements reflect its financial position and whether it adheres to generally accepted accounting principles (GAAP).
That said, there are many benefits to it not-for-profit financial audit. It can help your organization increase transparency among donors and funders, provide regular accountability for effective financial management, and identify opportunities to improve your processes.
You may not need to perform an annual check. However, you can still consider doing one on a regular basis to reap all the benefits of these assessments.
To determine whether you are required to conduct an audit, review your organization’s statutes, state requirements, federal funding (organizations receiving more than $750,000 from the federal government must audit), and the requirements for grant applications. Next, determine which timeline works for your organization to conduct any required (or optional) financial audit and mark on your calendar the day when you need to start preparing your materials. This will keep you on a good schedule and take the stress out of regular checkups.
5. Provide transparency with finances.
The finances of non-profit organizations are not secret. Your organization submits your Form 990 each year, which outlines the essential elements of your organization’s finances. This form is publicly available to anyone who wishes to view it. Often, large supporters will review nonprofit’s Form 990s before submitting their contribution to make sure the overall numbers look healthy. No donor wants to feel that their money is being misused.
While this is standard practice, your standard Form 900 is missing one thing: context. If you’ve spent more on one of your programs this year as the need in the community increased, the donor will miss that extra context. That’s why we recommend supplementing your Form 990 with an additional annual report that is intended to inform your donors about the whole story.
Annual reports provide the context behind the financial numbers and encourage supporters to review your financial information each year.
Bloomerang’s Annual Report Guide explains that honesty is always the best policy, even when things go wrong. If you know your finances aren’t looking the way you want them to, discuss them openly with your supporters in this guide, which includes information such as:
What caused the setback that you experienced as an organization? For example, if your program was more expensive than budgeted because of a greater need.
What corrective actions you will take to resolve the problem that has arisen. For example, if you re-allocate funding for one of your growth initiatives and temporarily suspend the organization’s growth strategy to fund the program.
How and when the setback will be dealt with and future expectations for the donor. For example, you can explain that your budget will be adjusted in the coming years to meet the increased need in the community.
Supporters will never question whether your organization is financially ill if they regularly review your transparent financial information. It provides additional trust in your organization, which is essential for fundraising and gaining support in the community.
Most people didn’t get into the nonprofit world to collect numbers and manage finances; they did this to make a difference in the world. However, for an organization to operate effectively and efficiently, they need someone to handle the accounting needs of the organization.
Consider the tips listed here to make sure your finances are in order to effectively fund your operations and pursue your nonprofit’s mission. Good luck!
Jon Osterburg has helped more than 100 nonprofits around the world with their finances as a leader in the past nine years Jitasaan accounting firm that provides accounting and bookkeeping services to non-profit organizations.