Founders of nonprofit organizations rarely have a strong interest in fiscal management. Their passion is for the nonprofit’s mission. Most nonprofits start with rudimentary accounting and budgeting that provides just enough information to know if they’re raising enough money to pay their bills.
Fiscal management is a chore. Then someone realizes changes are needed to generate information required by the Internal Revenue Service and track early grants.The system becomes a bit more sophisticated. Fiscal management is still seen as a chore.
Thriving organizations get beyond this stage. They recognize that a well-designed fiscal management system creates information that improves strategic decision-making.
A first essential step is to connect budgeting and accounting. Financial statements should let an organization see if money has actually flowed in the way planned. This may seem like a no-brainer, but I routinely encounter nonprofits where this isn’t the case. Yet, connecting accounting and budgeting is only a first step.
The bigger step is to ask what categories of revenue and spending would generate information valuable for making future strategic decisions. These are almost never “line items” that focus on what is being bought: printing, postage, salaries, taxes, etc.
Instead, organizations should also use functional categories that track the purpose of the expenditures. These usually reflect the organization’s programs; every nonprofit will have a unique set of program areas. The breakdown for a group working to end homelessness, for example, won’t be anything like that of a land trust.
How does your organization decide what to use? Start with your strategic plan if you have one. Think about your strategies if you don’t. The question to ask is: a year or two from now when I’m looking back and evaluating my strategies, where would knowing how much something costs be valuable?
Fundraising shouldn’t be treated as single functional category, but should be separated out into major fundraising strategies. Yet, time and again, I see financial statements for organizations that lump all fundraising expenses into one fundraising category.
Your fundraising database may distinguish between types of revenue. But evaluating a fundraising strategy by only looking at revenue is like evaluating a basketball player by how many shots she makes, irrespective of how many she takes.
Remember: gross revenue is a poor indicator of what’s working. Net revenue is what matters.
As you perform functional fiscal management, special attention must be paid to tracking staff expenses, which is often a nonprofits’ largest expense. A strategically focused fiscal management system needs to break down staff salaries (and associated taxes and benefits) into the program areas you’re tracking. This means staff filling out timesheets, perhaps with more categories than they'd prefer. But the payoff is huge in providing information by which to make strategic decisions.
In an organization’s first two years, you can get away with a simplistic accounting system. You need to maximize time going into raising resources and delivering on your mission, but by year three, I’ve found that thriving organizations are taking meaningful steps to create a robust system that’s designed to generate information that is valuable in making strategic decisions.
Jonathan Poisner (firstname.lastname@example.org) is a Pacific Northwest based organizational development consultant, with a focus on strategic planning, fundraising, communications, coalition building, and other organizational development challenges. He is the author of Why Organizations Thrive: Lessons from the Front Lines for Nonprofit Executive Directors. You can find Jonathan's profile in the Resource Directory.