When asked what about their organization keeps them awake at night, most nonprofit executive directors and senior managers will give the short and simple answer: money.
While most bring financial management experience to their job, many have less expertise in this area than they would like. All, however, are aware that sound financial management is linked with every function of the nonprofit and is essential for organizational success.
Macro Level Oversight
First, look at the "kind" of money your nonprofit organization has available to provide programs.
For example, foundation and government funding may restrict the type and amount of advocacy your organization can do. Unrestricted funds from individual donors provide more opportunities for advocacy. Similarly, most grants and even government contracts don't cover all program costs.
Your nonprofit needs a mix of private and public grant money and other sources of funding to deliver the financially healthy, viable programs that you want in ways that are best for the communities you serve.
- Investing for the Future
Sound financial management also requires that you broaden your focus beyond having a fund balance large enough to finance cash flow (typically, three to 12 months of operating expenses). Figure out how to manage self investment, whether through an endowment, a major donor campaign or an annual fund. That will allow you to invest in your infrastructure (evaluation, marketing, IT, etc.) and connect your current situation to where your organization wants to be. - Understanding Financial Position
Lastly at the macro level, make sure you understand your balance sheet, known as the Statement of Financial Position in the nonprofit sector. The information on the balance sheet can give you excellent insights on a number of important areas of financial management, including:- Short/Long-term cash-flow needs
- An ability to fund expansion
- Funds needed for future equipment maintenance
- The soundness of your cash-management strategy (or if you need one!)
- Future debt payment requirements
Operational Level Oversight
On a more operational level, are you "in the mix" when it comes to financial systems and information? Can you get details from your finance professionals in a format that you can understand? Would you be embarrassed if anything in your expenditure or salary base made the day’s headlines?
Know what's going on. Look at the details, systems, and checks and balances. Make sure you can defend your budget to your board, supporters and colleagues.
- Budgeting for Programs
It is crucial that managers receive the information they need to understand their programs’ financial viability – information that shows them whether or not programs are paying their way, including overhead and administrative costs.Financial reports must clearly show the restricted and unrestricted funds. This is critical for knowing what can and cannot be changed if the budget should require adjustment.
Similarly, your development professionals need to know how much it takes to raise a dollar, including personnel time. This way they ensure that their costs are at an appropriate level as they support program work – something donors and funders also need and want to know.
- Passing the Logic Test
Do your financial statements pass the “logic test”? If, for example, you have a government contract that requires certain services be performed by a specific staff member, do the financials show a portion of that person’s salary apportioned to those contract funds?If financials are not easily understood, take steps to rectify the problem through a change in format or additional training for those reading the statements.
- Addressing Problems
Are reports, reimbursements or billings going out late or have consistent errors? A different timeline could make a difference, or you may need to provide additional training for those preparing the reports. In some instances, a change in personnel may be in order. Whatever is needed, you've got to address the problem. Tolerating it is just a house of cards.
The Forest for the Trees
To make sure your nonprofit organization is financially healthy, you need to know the details, ask questions, demand answers and understand the big picture.
The benefits? You will be able to be more entrepreneurial. You will understand where you can be creative, how you can invest, and where you have or can get the freedom to pay for programs or activities not covered by most funders. You will better meet your mission and be doing the most with the funds – and the public trust – you receive as a nonprofit organization.
Certainly, having a firm grasp on your finances on a regular basis will help you understand your organization on a deeper, more holistic level. And this knowledge – and power – should help you sleep a whole lot better.
