Nonprofit financial management is not fun nor easy, but it is necessary. As government and private donor requirements become more stringent, nonprofit organizations are implementing new software and procedures to manage and report on their financials correctly. While fund accounting software can help organizations vastly improve upon nonprofit financial management, there are some simple steps nonprofit organizations can take now to plan for a financially successful year.
Re-evaluate your current nonprofit accounting software solution
Before you begin making any changes, ensure that your current nonprofit accounting software solution is the right fit for your organization. Effective nonprofit accounting software will:
- Be easy to use for even the most inexperienced user
- Provide accurate reports and financial data
- Adapt to your other software solutions
- Provide your organization with real-time access to important data
If your current nonprofit accounting software allows you to create timely and accurate reports to help you manage your organization, you are working with the right solution. If not, you may want to consider investing in a fund accounting solution designed to meet your unique nonprofit needs.
The most important part of your nonprofit accounting software solution when it comes to nonprofit financial management is the chart of accounts. The chart of accounts is an organized system that tracks funds as they go in and out of your organization and classifies your financial transactions. It is the tool used to create budgets and important financial reports. For this reason, a properly designed chart of accounts is crucial to a nonprofit’s financial management.
Implement an Effective Annual Budget Process
Effective nonprofit financial management requires you to evaluate your financial standing at any moment in time compared to what was predicted. An effective annual budget process will help your organization to define your plans and expectations for the upcoming year, as well as address program planning and fundraiser planning. Budgeting is a proactive step to nonprofit financial management.
Keep in mind that your annual budget should be created based on the information in your nonprofit accounting system with the help of board members, general staff members, and employees from the accounting and finance department. Your annual budget should be a collaborative effort based on accurate facts and figures in your nonprofit financial management system.
There are typically two types of annual budgets: one based on the operations of the organization (productivity) and the other based on the cash flow of the organization. The operating budget will include all expected income for the upcoming year, as well as the expenses for the year. The cash flow budget will take actual cash into consideration and delegate restricted funds. This budget usually covers a smaller time frame, such as a month or quarter.
At the end or beginning of each year, your organization should sit down and create the above budgets. While you cannot entirely predict your financial situation for the upcoming year, you can plan ahead and prepare for unexpected costs.
Develop a clear financial strategy
Also known as a fundraising strategy, a clear financial strategy answers the important questions of how you will finance your organization and activities, as well as where that money will come from. Your financial strategy should address your current financial situation and describe how you plan to move toward your financial goals.
Start developing your financial strategy by asking yourself the following questions:
- Where are we now financially?
- How did we get here (list challenges, opportunities, etc.)?
- What are our financial goals for the future?
- How do we plan on meeting those goals?
- What are the risks and how will we respond?
- What can we do today to guarantee success in the future?
Remember, in order to create an effective financial strategy, you must take into consideration where your funding will be coming from. This means having a clear fundraising strategy in place in addition to your newly developed financial strategy.
While these steps may seem logical, many nonprofit organizations forget to incorporate them in their nonprofit financial management. Knowing where you are headed and how you are planning on getting there is crucial to the financial success of your organization.
Proper nonprofit financial management consists of a good nonprofit accounting software solution, properly trained employees, clearly developed strategies and an effective budgeting process. Your funds are important, so treat them with the best care possible.