Nonprofit organizations carry a huge responsibility when it comes to managing their assets and finances. Following smart financial management best practices can move your nonprofit toward success and help retain your membership. Meanwhile, you boost trust with your community.
In this blog, we’ll go over the importance of financial management for nonprofits, some of the most common money mistakes your organization can make and tips for cultivating smart financial management for nonprofit organizations.
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Why Is Financial Management Important for Nonprofits?
Competent financial management is critical to the success of nonprofit organizations. They deal with incoming funds from a variety of sources, as well as their own expenses from daily and special operations.
Nonprofits handle money from these sources:
- Conferences and other events
- Publication sales
- Advertising opportunities
- Membership dues
- One-time and recurring donations
Nonprofits process funds for these entities, events and items:
- Conferences and conventions
- Special guests and speakers
- Third-party vendors
- Marketing expenses
- Mission-driven projects
- Training and classes
- Swag and promotional products
- In-office materials (furniture, tools, etc.)
Mismanaging this money can be detrimental to retaining membership. As a result, mismanagement can prevent organizations from reaching their goals and fulfilling their missions.
Successful financial management in a nonprofit can help your organization plan for future growth and overcome many obstacles that could throw wrenches in your plans.
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Common Financial Mistakes Nonprofits Make
Because of limited resources and tight budgeting, it can be easy for nonprofits to make mistakes while managing their finances. Here are some of the most common financial mistakes nonprofits make.
Not Implementing Quality Internal Controls
The most common mistake that many nonprofits make in terms of finances is not implementing quality internal controls. Smaller organizations in particular may get into the poor habit of not implementing internal controls that are necessary to reduce or eliminate opportunities for fraud.
We suggest creating internal controls procedures that document in writing the proper practices for handling financial transactions.
Not Working With a CPA
Another common mistake nonprofit organizations make regarding financial business is failing to work with a certified public accountant (CPA). Many nonprofits think they can take care of financial dealings themselves — but more often than not, that’s when mistakes happen.
Partnering with a financial professional can help make sure your nonprofit files the right reports and required documents, stays compliant with legal laws and requirements, and strategizes for future growth and success. A professional accountant can also offer your organization valuable advice that guides you in the right direction and helps your whole team develop smart financial habits.
Not Recording Financials Correctly (or at All)
An additional financial mistake that nonprofits tend to make is not recording financials correctly, if at all. Recording financial data properly and consistently is key to your nonprofit’s overall financial success.
Experienced accounting professionals can keep you on track and catch any errors that may pop up. Regularly double-checking (and triple-checking) your work is crucial.
It’s also imperative to integrate all software sources holding your organization’s data to avoid mistakes when transporting information from source to source. This is especially important if your nonprofit receives a lot of money from fundraisers or in-kind donations.
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Tips for Smart Financial Management for Nonprofit Organizations
Now that we know why smart financial management is critical and the most common mistakes nonprofits make when handling finances, here are some tips and best practices. They’ll undoubtedly help your nonprofit in the long run.
Create Effective and Realistic Budgets
Creating a realistic budget using sound assumptions and clear accountability makes for an effective financial plan.
Consider every feasible angle you can imagine:
- All your revenue
- Different financial scenarios
- Fixed and variable expenses
- What your intended programs and campaigns will cost
Because smart financial decisions rely on good information, your organization absolutely must understand the real costs of your future programs and events. A realistic budget serves as a helpful financial guide that lets you know how well your organization is performing.
Monitor Cash Flow
Another tip for smart financial management is to monitor cash flow. In some ways, daily cash flow in and out of your organization is more important than any financial statement or long-term plan.
Practice Organization-Wide Financial Literacy
A well-developed sense of financial literacy across your organization is key to a successful nonprofit. This knowledge can include concrete mental markers:
- Being familiar with financial terminology
- Understanding and using financial reports
- Encouraging open communication
- Knowing who is responsible for what financially
When you approach financial planning as a daily responsibility that everyone participates in, it’s easier to catch errors and keep people accountable.
[Related: The Membership Recruitment Plan Every Association Should Implement]
Have Cash Reserves for Emergencies
Unexpected emergencies, surprise expenses and unplanned opportunities happen. In these cases, it’s smart to have some spending cash available in reserves. Setting aside emergency reserve funds makes sure your organization won’t have to halt services to save money and continue operations.
A good rule of thumb is to have one years’ operating expenses available in reserves..
Don’t Leave Success Up to Chance — Partner With CM Services Today
One of the best ways to assure your organization is handling its financial obligations correctly is to partner with an Accredited Association Management Company like CM Services. Accredited Association Management Companies have documented procedures with the proper internal controls to protect your money as well as the professionals on staff to properly handle all your organizations’ financial transactions.
At CM Services, we help associations overcome challenges and meet goals with professional services like these:
- Strategic and operational planning
- Sponsorship and advertising
Contact us today for further information and support. We can guide your nonprofit toward reaching its goals and building a successful, solid financial plan!
Featured image via Unsplash