Financial Management for Small Nonprofits: 4 Tips to Follow
Thursday, January 26, 2023
Effective financial management allows nonprofits to advocate for important causes, pay their employees fair wages, and provide services and resources to their beneficiaries. However, managing overhead costs and finding the right funding sources can be a challenge for nonprofits that operate with limited resources.
In this guide, we’ll explore four financial management tips for small nonprofits so that organizations like yours can succeed well into the future.
1. Maintain a balanced operating budget.
A well-formulated operating budget helps nonprofits set goals for sustainable growth and communicate effective financial management to stakeholders such as corporate sponsors and grantmakers. Plus, breaking down your expected expenses and revenue for a given fiscal year provides insight into how you can make the most of limited resources and invest more strategically in the future.
Your nonprofit budget should include:
- Estimated revenue: Review past fundraising data to better understand and predict how much you expect to raise in the coming year. Categorize your funds by revenue stream, including individual donations, grants, earned income, and investments.
- Expected overhead costs: Even if you expect to receive a large number of donations in the coming year, you still need to factor in the costs associated with running a nonprofit, including administrative costs and campaign-specific costs such as renting an event space and sending out marketing materials.
- Defined activities: Assign a cost and expected return on investment to each activity that you plan on pursuing during the fiscal year. These activities generally include marketing, programming, and fundraising.
- Specific timelines: Consider when your organization expects to collect revenue and when you plan to complete each activity outlined in the document. For instance, if your nonprofit generates more funding during year-end activities, you may use Giving Tuesday as the deadline for reaching a major fundraising goal.
Have your board members and any other relevant staff members review your finances regularly throughout the year to ensure that you’re on track to achieving your goals and that your expenses don’t exceed your revenue.
2. Diversify your funding.
Relying on one source of funding to keep your nonprofit afloat is risky. For instance, if you depend solely on major donors to reach your goals and those funders begin to lapse, then you will be left scrambling to find new sources of funding. Diversifying your funding adds greater stability to your finances.
Here are some steps you maintain a diverse revenue stream:
- Explore corporate giving. Corporate giving initiatives such as sponsorships, matching gifts, and volunteer grants can provide your nonprofit with the financial backing and visibility needed to extend your reach and attract more supporters.
- Conduct prospect research to find major donors. While it’s risky to count on a small handful of donors for your entire fundraising strategy, major gifts should still be a component of your revenue stream. Use direct mail, events, and meetings to connect with individuals who have the capacity to make large contributions.
- Strengthen your grant-seeking approach. Including grants management in your financial plan can bring your nonprofit into a new phase of growth. To secure grant funding, you first need to connect with a grantmaker and write a detailed proposal that lays out your need for support.
Although diversification doesn’t entirely eliminate the risk of losses, it can help you sustain your operations and connect with the businesses, government agencies, and individuals that want you to succeed.
3. File tax forms on time.
Filing your tax returns on time is critical for maintaining your organization’s tax-exempt status and avoiding unnecessary late fees. For most nonprofits, your annual Form 990 is due May 15, or five months after your fiscal year ends. As that date approaches, ensure you have the proper paperwork in place and that you’re filing the correct forms for your revenue bracket.
Small to mid-sized nonprofits are eligible for abridged versions of Form 990, which include:
- Form 990-N: Also known as the “e-Postcard,” this form is reserved for nonprofits with less than $50,000 in annual revenue. Keep in mind that Form 990-N is ineligible for extensions, so prepare well in advance.
- Form 990-EZ: Nonprofits with an annual gross income between between $50,000 and $200,000 may file Form 990-EZ. In addition to the basic information that you would need for the 990-N, you'll also need to provide revenue, expenses, and changes in net assets or fund balance.
Your nonprofit’s financial statements and budget will be helpful resources in filling out any version of the Form 990. Set reminders throughout the year and have regular check-ins with your team to make sure you file the right form before the deadline.
4. Invest in nonprofit-specific accounting resources.
Accounting and bookkeeping can be a challenge, especially when you have limited resources and your staff is overextended. Thankfully, there are software solutions that exist to help small to mid-sized nonprofits optimize their financial practices and streamline their operations.
When searching for nonprofit-specific accounting software, be on the lookout for these essential features:
- Automated budgeting: Manual bookkeeping is time-consuming and prone to error. A modern system will allow you to automate tedious tasks like data entry, migration, and reconciliation.
- Financial reporting: Your nonprofit accounting software should be able to produce financial reports that meet the reporting requirements set by the IRS.
- Data security: Ensure that your sensitive financial information is protected by encryption and handled with the highest level of security.
- Deadline reminders: Set reminders for tax deadlines and. Improved internal controls, providing additional safety for financial information
- Software integration: Choose a financial management solution that connects with other applications like your payment processor and CRM so that you can seamlessly synchronize data.
In addition to investing in technology-powered tools, you may consider working with a nonprofit accounting firm to organize and maintain your finances. These experts know how to support small nonprofits like your own, ensuring that your compliance with nonprofit tax and accounting regulations are up to par. Plus, outsourcing financial management tends to be more affordable than hiring a new team member to handle your nonprofit accounting needs.
When you follow the steps outlined above and invest in the right resources, you’ll set your organization up for ongoing financial success. As a result, you can continue doing what you do best: making a difference.