Financial Management for Everyone

Financial management impacts everyone at a nonprofit organization. Becoming comfortable with key terms and concepts will enhance your effectiveness in any role, build the capacity of your organization, and position you for future success. Tomorrow's nonprofit leaders are already active in the sector as program staff, development officers, outreach coordinators, and operations managers.

Notes from Emerging Nonprofit Leaders Network discussion

How do you know a good budget?

  • A budget is a planning tool that is realistic and based on sound assumptions.
  • Narratives are very helpful, they can elaborate and offer needed explanation to the budget
  • We recommend basing budgets on income rather than expenses. This way you start with available resources, then think about your organizational priorities, and make decisions about what can be accomplished given those parameters. Starting with goals can result in plugged income numbers - which can be unrealistic and risky.
  • Costs should be allocated over the entire year
  • Budgets are flexible; they should be revisited throughout the year to see how you are doing throughout the year. Program costs can change, grants or fundraising may not meet expectations, unanticipated expenses may occur. Regularly compare actual expenses to your original assumptions, and make adjustments as necessary to most accurately predict the remainder of the fiscal year. There should be a column where you track these variances.
  • How flexible?
    • Depends on the organization and its circumstances. As a rule of thumb, flexible enough to ensure you have enough money to do what you want/need to do
    • Have conversations about the budget over the course of the year, discuss where you make adjustments/cuts (as necessary) to ensure you meet your organizational goals
  • Use past/current budgets and income statements as a guide for future budgets.

Cost allocations

  • There are two main kinds of costs, program and "overhead" (ie administrative and fundraising)
  • We define overhead as the costs that cannot be identified with a program activity but are needed for the general administration of the organization. It is important to think through your allocation and include appropriate overhead costs in program budgets.
    • Example: We have a large training room/conference area in our office. We primarily use this space for our training program, which is a key part of our mission. Although we use the space for additional activities, we would not have chosen have to rent this office without this program. We separate out the rent for the training room and allocate that expense to our training program.
  • Since 60-80% of a nonprofit's expenses go to payroll, it's important to know how staff time is allocated because this is a nonprofit's biggest resource. We suggest basing these allocations on time studies. A few times a year, ask your staff to submit a weekly timesheet that allot time to different programs and basic administration. Then use this as a guide for the rest of the year, it's a good indicator of what it takes to make your programs work.
  • We offer a workshop called Calculating True Program Cost, which is all about these allocations, ways to find out if you are unknowingly subsidizing your programs, and strategies to ensure your programs are fully funded.

What are the differences between budgets, income statements, and balance sheets?

  • Some financial documents are planning tools that look forward, others are historic documents that record what has happened
  • Budgets are a key planning tool; however, interim budgets should include a variance column - actual expenses/revenue - as well as what was originally budgeted
  • Cash flow forecast/projection allows you to see when money is coming in and going out. This can help you be proactive and plan ahead for tight spots, ensuing you are able to make payroll and achieve top priorities. We suggest doing regular 6-12 month cash flow projections.
  • Balance sheet (called the Statement of Financial Position in an audit) is a historical document that takes a financial snapshot of a single moment in time. For your audit, this is the end of the last day of your fiscal year. For that moment, it lists your assets, liabilities, and net assets (nonprofit term for equity or fund balance).
  • The income statement (also called profit and loss or the Statement of Activities in the audit) is another historical document that summarizes all financial activities for an organization, usually over a 12 month period. It includes your income (or revenue) and expenses.
  • The surplus/loss on the bottom line of your income statement should show up on the balance sheet as Change in Net Assets

If you are a start-up organization, how can you craft budgets from scratch, without historical documents as a guide?

  • This is a time when having an income based budget is especially critical
  • We have seen organizations that receive a large loan in their first year, and this can create huge holes in year two. Paying it back can also create a lot of trouble (loans are a useful financial tool, but they're not appropriate for every organization or every situation).
  • We encourage organizations to try and be self-sustaining and grow at a pace where expenses match revenue

One-time expenses

  • Some expenses are a one-time (or once a year) thing.
  • Plan ahead - ensure there is enough cash to pay for the expense when it is incurred. Looking at the previous year's income statement and budget can be helpful.
  • If the board has questions about why an expense is particularly high at one time, explain that the entire expense for the year is paid during a single month.
  • Budget narratives that accompany the financial reports can help explain and clarify the numbers

How often do you look at multi-year trends?

  • As often as possible
  • Some nonprofits are focused right now on keeping their heads above water, but once you stabilize your organization, the next step is to plan for the future.
  • Multi-year trends should be a part of any strategic planning process
  • When do you usually start strategic planning?
    • Often strategic plans have an "expiration date," which prompts the process of drafting a new plan
    • Sometimes the board or executive director initiates because of outside factors
    • Often occurs every 3-5 years

Topics for learning/career checklist:

  • Understand how finances impact your role at the organization and the entire nonprofit
    • If your organization has a finance committee, one option is to observe its meetings
  • Involvement in other nonprofit boards (active involvement)
  • Various trainings offered by Nonprofits Assistance Fund and others
  • Ask questions! Actively participating in full staff meetings, team meetings, or check-ins, and especially asking questions about anything you are unsure of, is an important way to develop your financial skills.
    • If you don't already attend these meetings, ask if you can have a seat at the table. Being present (and asking clarifying questions as appropriate) for discussions of the budget and current financial condition is really helpful.

Boards

  • Board members have the ultimate fiduciary responsibility for nonprofits. Remember, the board has the responsibility for finances & the strategic plan; the ED and staff execute. The board should understand the financial statements and how they relate to the strategic plan.
  • Don't be a rubber stamp - talk, converse, ask questions. Important to create a culture of oversight & fiduciary responsibility
  • There should always be someone who can answer any questions about the financial statements
  • Generally, boards should see the current budget (actuals vs original budget), current income statement, and the balance sheet on a regular basis (ideally at every board meeting)
  • Boards hire the auditor (any nonprofit with annual revenues of more than $350,000 are required my MN law to conduct a GAAP audit). This should be an active process. According to SAS 112, each board should now have an audit committee (which may or may not be the finance committee) to ensure oversight and board approval of the audit. We strongly recommend you get copies of the audit to the entire board at least one week before the meeting to approve the audit.
  • Nonprofits with annual revenue of more than $25,000 must file the IRS form 990
  • For more guidelines, you can check out the Charities Review Council

Thinking about the current economic conditions

  • Generally, nonprofits experience economic trends one year later, so nonprofits will begin to be significantly impacted by the current economic downturn next year and our sector will rebound about a year after the for profit sector. However, how your nonprofit is affected by the economic downturn will greatly depend on its specific funding sources.
  • It's important to understand the risks in your budget - especially on the income side. Identify your risks and where you can be flexible in your budget and expenses.
  • You can't predict the economy, but you can assess your risks and craft contingency plans
  • One strategy can be to look at diversifying your income sources; however, it's important to remain true to your mission and not just chase money. It's also useful to remember that different income sources may require different infrastructure, for example grant writing and donor relations involve different skills and relationships to be successful.
  • Endowments: The Chronicle of Philanthropy just posted their study on endowments, so if you are curious how the current economy may impact your endowment visit
    • The endowments surveyed earned a median return of 15.7 percent in 2007.
    • Colleges and universities saw their endowments perform best (median return of 21.3 percent)
    • "In 2008, even the largest endowments, which tend to have more-sophisticated investing strategies, will be lucky to eke out a positive year, experts say."
    • The Chronicle of Philanthropy hosted an online discussion about endowments, the transcript is available on their website.

Is there value in sitting down with my Executive Director to discuss a program budget?

  • Yes, you'll gain a better understanding of where your program fits in with the overall organization budget. It will help put your program in the context of the larger organization and its goals
  • Better sense of program expenses - when you know the costs, you can run the program better
  • Would hope that executive directors or managers would welcome this kind of conversation

Network Lunch Series

Nonprofits Assistance Fund was pleased to participate in this Emerging Leaders Network. The Minnesota Council of Nonprofits hosts a range of networking lunches, please visit MCN for more details. If you are interested in learning more about financial management, we offer a range of workshops as well as host a monthly peer-learning opportunity, the Financial Management Network.

Interested in Learning More?

View our Resource Collection or check out the Discussion Archive for notes from other networks.