Nonprofit Cash Flow: Nine Tips for Better Financial Management
Tuesday, February 16, 2021
Good financial management is a crucial part of nonprofit strategy, ensuring the continued existence of the organization and the services they provide. Budgets can be more complicated because of additional barriers to raising money, regulations governing how money is used, and a focus on service over profit. All of this requires that nonprofits exercise exceptional financial control. Whether you manage all aspects of your finances internally or utilize external contractors and organizations for things like nonprofit accounting, managing your cash flow is crucial.
If you’re looking for some easy ways to better manage your nonprofit finances, read on!
Know your costs
Often, we make guesses about how much things cost and consider it ‘good enough’. When it comes to establishing good finances within your organization, a guess isn’t going to cut it. Spend some time truly identifying what your exact costs are so that you’re in a better position to fundraise appropriately. Plan for your future programs and services and get the best estimate of costs that you’re able to.
Make a budget
We’ve all heard that budgets are important for finances, but people and organizations aren’t always good at enforcing and maintaining a budget. One of the best things you can do to protect your financial health is to be strict about budgeting. Of course, there’s room for some flexibility within a budget (it is only a guide, afterall), but treating it seriously is essential.
Although your internal staff will likely create the budget, once you’ve created it, you’ll need to get board approval. This helps hold organizations accountable and ensures a thoughtful, thorough document. Once your budget passes review, it will guide your decisions in the months to come, especially if you commit to reviewing it with regularity. Build in some space for flexibility, but also approach the year knowing you’re going to do your best to keep close to your budget.
Focus on accountability
One of the places nonprofits get into financial trouble is in having too little visibility in their finances. It might make sense that an organization wouldn’t want to showcase things like budgets and operating expenses, but this isn’t actually the case. One of the ways you can protect your organization is by ensuring that everything happens out in the open. What does this do, exactly? It helps prevent theft, curtail spending, and even enforce federal rules.
When there are a lot of eyes on finances, it can reduce disappearing money, whether from theft or mistakes. This doesn’t mean that your volunteers and employees have access to everything, merely that multiple individuals act as checkpoints at certain places in the budgeting process. This might include contracting with an outside organization for certain aspects of your nonprofit finances, or it may simply be involving board members or leadership in multiple steps. There is no exact right way to do this, as it will depend upon your organization, but ensuring that all the dollars don’t end up under the control of one individual is key for all organizations, big or small.
Share the responsibility
Making sure that every person within your organization is financially literate can be a great way to improve the organization’s finances for a number of reasons. The first is that you’ll be better able to catch mistakes and assign oversight within your organization. The second is that your employees will likely have better control over their own finances, which will make them less likely candidates for internal theft.
Generally, it cannot hurt to make sure each employee and volunteer that spends significant time in your organization has a good handle on money management. Consider hiring a trainer to come in and give a few classes or rely on the plethora of great, free tools available throughout the internet. Often, board members are great resources for this sort of thing, so don’t hesitate to ask for the kind of help you need.
Maintain a reserve
A great way to make sure to limit the chances of being caught in a precarious financial situation is to maintain a financial reserve. For new or small nonprofits, this can feel like an unreachable challenge. If you’re operating on a shoestring budget, saving money feels impossible. But, like many things, financial wellbeing is cyclical. By putting aside a rainy day fund, you’ll reduce the chance of needing to dip into personal accounts, reduce services, or downsize staff.
Make sure you’ve identified how much money you have in your financial reserve and why you have it there so it is clear you aren’t trying to get away with anything. Be transparent here as in every other area of your organization. Finally, don’t overdo it out of an abundance of caution. For some people, the need to protect oneself in case of emergency can overwhelm the more pressing need for dollars that go toward services. Decide what you need (enough to cover an emergency, enough to sustain business in the absence of a grant you usually receive, etc.) and find ways to save a little each month to meet your goal–and then maintain it unless absolutely necessary.
Keep your eyes on funding opportunities
Obviously, nonprofits need to raise money to operate since they aren’t profiting off of the sale of something. Their dollars go right back into the services they’re providing, so evaluating new and old fundraising opportunities is absolutely essential to maintaining financial health. Nonprofits can get into trouble by accepting grants and other funds simply because they are offered. Before you jump in with an enthusiastic yes, make sure you aren’t being held to standards you are unable or uncomfortable with meeting. Often, grants come with a set of rules, so you need to be sure you can accommodate them.
Don’t be afraid to say no if the payoff for a funding source isn’t worth the time and effort it takes to accept it. There are a lot of opportunities available to organizations who are doing good work, so be discerning, even if it feels like walking away from free money.
Make some investments
You’ve probably heard that you have to spend money to make money, and that can be true, even for nonprofit organizations. While you may not be throwing your nonprofit budget at the stock market, it's a good idea to thoroughly evaluate products and services that can help you better manage your organizational finances. Simple and inexpensive software can help monitor cash flow with less human oversight, and a financial accountant can catch mistakes before they become costly. Look at the possible options outside your organization that might be available to help make your life easier and your finances more sound. Don’t rule out paying for something on the basis of potentially being able to do it for free. Time and accuracy are important financial considerations you may not be thinking about, so take them into account.
Nonprofit organizations are subject to a lot of rules, and these rules change quite frequently. If you’re handling finances in house, make sure you’re keeping up with potential changes. This is especially important during times in which many things are in flux, as is the case during a global pandemic, for example.
You’ll also want to make sure that the organizational leadership within your nonprofit knows of state, local, or industry changes or fluctuations that might impact your business and the way you spend and receive money. Examples of this can include new nonprofits offering similar services, the implementation of government programs that may change what type of services are needed in your area, local ordinances, or new offerings that accompany the hire of someone with a different skill set. No matter the reason for change, make sure you’re in the know and able to adjust accordingly.
No matter how careful and financially literate you are, financial hardships are an inevitable part of all business, even for nonprofits. When mistakes, accidents, or oversights occur, learn to respond well. This can be difficult sometimes, especially depending on the mistake. You can ensure your good reaction by preparing for it and having a gameplan, should something go wrong.
A financial reserve is part of this, but take it a step further and gameplay a few scenarios so that you know how to react. Know how to research transactions to find information, confront employees, and report to (and rely on) your nonprofit board. Focus on maintaining good leadership, practicing solid and open communication, and exercising the decisiveness and generosity that may be required of you.
Finally, in the case of mistakes or success, make sure you’re holding regular evaluations of your process to make sure they’re working for you, your employees and board, and your organization. Regular check-ins help keep policies in place that work for everyone, so take the time to reflect on how things are and are not working.
Financial management requires constant flexibility and a willingness to learn, but ultimately results in stronger, healthier organizations that are better able to help their communities succeed.