Nonprofits are created to solve problems or meet needs that for-profits are not addressing because there is no profit in it. Yet nonprofits cannot be successful unless they can generate revenues in excess of expenses, whether from grants, donations, contracts, sales, or fees. The truth is that it can be difficult to generate more revenue than expenses in the nonprofit world. In almost all cases, we cannot total up our costs, add a slice for profit and new investment, and charge it back to a customer. In fact, for most nonprofits, our programs are an expense, rather than revenue.
Adding to the difficulty of our business model, there are many reporting requirements and rules attached to money in the nonprofit sector. Nonprofits are subject to special tax rules at the federal, state, and local level, and are required to follow specific accounting rules.
Four Essentials of Nonprofit Financial Management
There are four essentials to managing your nonprofits' finances:
- Periodic outside review by an independent professional
- Clear policies and procedures, and strong internal controls
- Transparency, accuracy, and careful monitoring of financial conditions
- Board and leadership understanding of the financial reports
Audits and Other Outside Reviews
Neither donors nor boards and managers should rely on the audit process alone to ensure the organization is managing its finances appropriately. Most organizations should receive some level of independent financial assurance service. Annual audits are highly recommended for large organizations and those with federal contracts, while a two-to-three year cycle of audits and financial reviews are suggested for smaller organizations. If your organization is preparing for a financial audit, you will find some helpful information in this Nonprofit Audit Guide from the National Council of Nonprofits.
In addition, the National Council of Nonprofits article Cost of an Independent Audit provides factors to help you negotiate audit fees and plan for the cost.
An organization that does not have the financial capacity to pay for an audit should periodically find an accountant or bookkeeper familiar with nonprofit financial requirements to review their books, financial reports, and processes. This will not be the same as an audit, but it can help you recognize and rectify major problems.
If you need to select an auditor, search under "Financial Management - Audits" in the Resource Directory. The audit firms listed there have been screened and come recommended by other nonprofits.
Get several Practical Tips for a Smooth Nonprofit Audit (even when it’s over Zoom), published by Nonprofit Finance Fund.
Policies, Procedures, and Internal Controls
The resources below provide guidance and tools regarding key policies and internal controls for your organization. Small and/or all-volunteer groups: check out the resources below that are especially geared for you.
- Financial Controls Recommendations for Small Nonprofits, Oregon Department of Justice, Charitable Activities
- What is a Nonprofit Treasurer?, an Overview, Roles and Responsibilities by Gina Guy, OnBoard, December 2022
- Controls for Small Nonprofit Organizations - A Guide for Board Members, from Idealist and ClarkNuber
- Internal Controls Checklist, from CompassPoint Nonprofit Services
- Sample Policies for 990 Questions - Conflict of Interest, Document Retention, Whistleblower, & Private Inurement
- Nonprofit Fiscal Policies & Procedures: A Template and Guide, developed by CompassPoint Nonprofit Services
- Effective Nonprofit Financial Management, published by Wallace Foundation
- Checklist for Monthly Closing Process, published by Wallace Foundation
- Five Ways to Address Equity in the Finance Function, by Ruth Marcus and Jessica Huey, BDO(r)
- How CFOs Can Drive Diversity, Equity, and Inclusion, by Christina Brodzik, Deloitte US Firms, March 2022
Monitoring Practices and Performance
The leadership and board must monitor the organization's financial performance to confirm it is:
- Fulfilling grant and donor requirements
- Complying with GAAP financial practices (Nonprofit Accounting Basics)
- Managing cash position and cash flow (see below for more information)
- Monitoring the budget
- Meeting all tax obligations
- Ensuring staff have the right resources to perform their jobs effectively and efficiently
It is of vital importance you closely monitor both your organization's cash position, and cash flow. Cash position refers to the cash available to your organization. Cash flow projects the amount your organization expects to receive and pay out over a period of time.
501 Commons has created this workbook to help you determine your cash position, and forecast cash flow: Cash Position & Cash Flow Workbook
For more information, see:
- Cash Flow in the Nonprofit Business Model (Nonprofit Quarterly)
- Cash Flow Management (Propel Nonprofits)
- The Nonprofit Cash Flow Cliff (Not For Profit - Beyond the Numbers)
- Introduction to Nonprofit Accounting (4 part series from Accounting Coach)
- Cash Flow Projection Template (Nonprofit Finance Fund)
- Understanding 5 Key Nonprofit Financial Documents (MissionBox)
Understanding Your Financial Reports
Your financial statements tell your story to government, donors, volunteers, and foundations. If you do not understand the story the statements are telling, your fundraising activities may not be as efficient as they could be.
- The income statement, also known as the statement of activities, reports on the organization's income and expenses for a period (for example a month, quarter, or year). It can hurt your fundraising efforts if this shows an unexplained large deficit or large surplus.
- The balance sheet, also known as the statement of financial position, describes the organization's assets, liabilities, and net value. If you have high liabilities compared to your cash, the organization may be seen as unstable.
- Funders and donors are also interested in understanding how broad the organization's sources of income are, and the ratio of administrative and fundraising expenses to direct program expenses.
This one-page Financial Red Flags Checklist gives you some ideas about concerns a foundation, government contract officer, or individual donor may have based on a review of your financial statements.
Tax Compliance
- What Not-for-profits Need to Know About Tax Compliance, Jacobson Jarvis & Co
- A Beginner's Guide to Filing a Form 990, Blue Avocado May 2023
- Non-Profit Tax Compliance: Three Things You Need to Know, Wild Apricot Dec 2023
Additional Resources
Financial Management - National Council of Nonprofits; see 2018 Tax Law Checklist - New Federal Tax Law - Now What for Nonprofit Board and Staff Members? updated April 17, 2018; and, watch the information rich hour long webinar Now What: How the New Federal Tax Law Impacts Charitable Nonprofits, from January 11, 2018
The Nonprofit Association of Oregon (NAO) Financial Oversight website provides Professional Development & Learning networks, workshops & webinars, plus resources
Board Members Finance and Accounting Booklet, provided by Jacobson Jarvis & Co
Nonprofit Finance Resources, Nonprofit Finance Funds(r) Learning Library
Nonprofit Accounting Basics, from the Greater Washington Society of CPAs Educational Foundation
The Wallace Foundation's Toolkit for strong nonprofits: StrongNonprofits Toolkit
Does your organization have the right bookkeeping software on hand? Check out this list of best accounting software for nonprofits.
Read about Virtual Accounts Payable Solutions for your organization, compiled by 501 Commons.