ARTICLE
Beyond Donations: A Guide For Effective Nonprofit Financial Management
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Financial management is possibly the most important aspect of your nonprofit’s operation. The services and programs your organization delivers are vital, but improper or ineffective fund management is a disservice to your donors and the people and cause you serve. So, how can you be sure that the funds you receive are used most effectively? By learning about and prioritizing nonprofit financial management.
The importance of financial management for nonprofits
Unlike many for-profit businesses, nonprofits don’t answer to shareholders who are focused solely on increasing revenue. That doesn’t mean having stable financials isn’t crucial for nonprofits too, though.
Your nonprofit’s purpose and mission cannot be fueled by passion alone; your organization needs funds to do the good work you’ve set out to do. Effective nonprofit financial management helps you maximize the value of the donations you receive and fulfill the vision of your nonprofit.
8 strategies for effective nonprofit financial management
There’s more to managing your charity or nonprofit’s finances than collecting donations, although that is a critical part. Nonprofits must consider how best to:
- Develop a nonprofit financial policy
- Create a budget
- Find a dedicated nonprofit bank account
- Collect and store financial data
- Track Donations
- Stay compliant with tax exemption IRS regulations
- Maintain financial transparency and integrity
- Plan for the future or worst-case scenarios
These and numerous other factors combine to create healthy financial management practices for nonprofit organizations. Plus, your board of directors has a fiduciary duty to ensure the donations and funds received go toward furthering your mission.
It isn’t easy to know where to start when creating a plan for your nonprofit’s funds because each step is important to the overall effectiveness of your financial management. If your nonprofit is just starting out or doesn’t have solid financial policies in place, now is the time to start!
1. Nonprofit financial policies
An organization’s financial policies provide a framework for many of the essential aspects of managing funds. Nonprofit financial policies should clearly outline the following:
- Who will be responsible for each financial management decision and task
- The organization’s conflict of interest policy
- Who has the authority to negotiate and sign contracts
- How the organization’s financial records will be maintained
Nonprofit financial policies will provide clarity and guidance for many of the decisions involved in financial management of your nonprofit. They will set downtime policies in place that ensure that your nonprofit’s funds are safe and being spent responsibly.
2. Nonprofit budget
Even nonprofits who have years of operation under their belt can struggle to predict how much money they will need for each operational category. That makes it even more crucial for each nonprofit to create a budget where they can estimate how much money they will need to operate that year, and what programs and personnel they have the funds for.
Preparing a budget isn’t an exact science, but some guidelines are better than none when it comes to your nonprofit’s operations and finances. Creating a budget can be challenging for new nonprofits when you don’t have past performance to use as a reference for future financial projections, but planning ahead is crucial nonetheless.
3. Nonprofit bank account
Not all banks are created equal, and nonprofits have unique needs that are rarely met by traditional banks. Using a nonprofit banking account can simplify nonprofit financial management and provide benefits that personal and business accounts do not offer.
For example, Crowded, one of the leading nonprofit-centered financial institutions, offers free fundraising tools and donation collection for its nonprofit account holders. Banking and financial features that are targeted to the ways nonprofits collect, track, and spend funds help organizations better manage their finances.
4. Data collection and storage
Not only is some financial data required by the IRS, but tracking your donations and expenses is also vital to effective financial management. Knowing which fundraising campaigns were most successful can help you plan future efforts. Understanding where your donations come from can also guide your outreach strategies for upcoming months. By creating an accessible and organized system to track fundraising and donation data, you and your team can easily understand how each task affects your organization’s finances.
5. Tracking donations
Carefully tracking donation data is a good idea, but many organizations are unsure about what specific information to prioritize. This is an understandable challenge because nonprofit management and donations involve a substantial amount of data. In terms of donation data, consider focusing on the following:
- Who donated, if known
- The amount of the donation
- How the money was donated (online, fundraising event, etc.)
- Payment method (cash, check, etc.)
Nonprofit organizations receive donations in numerous ways – special events, website pages, peer-to-peer fundraising, and corporate giving, to name a few. Effectively managing these donations and donors requires careful planning and targeted tools.
When donations are coming in from multiple sources, it can be challenging to track and allocate the funds. The ways people prefer to give are constantly changing. Whether your donors are giving to your organization through the mail, in-person, or online, the constant in any scenario is where you deposit that money: your nonprofit bank account.
6. Stay compliant with IRS tax exemption requirements
When your nonprofit is fully compliant with the IRS guidelines for nonprofits, you avoid fines, audits or tax exemption revocation. If your nonprofit collects donations, you must maintain your tax-exempt status in order to issue tax deductible donation receipts to your donors. Many US-based donors will only consider donating to your nonprofit if their donation will be tax deductible, so it is crucial to maintain this status for the overall financial health of your nonprofit.
7. Maintain financial transparency and integrity
Your nonprofit can achieve financial transparency by sending out annual reports to your supporters, publishing your annual tax information on your website, and being listed on trusted charity websites like Charity Navigator. Transparency inspires long-term donor loyalty, and attracts the right people into your nonprofit.
8. Plan for the future or worst-case scenarios
Once in a while, take a step back to think about your nonprofit’s future. Create a best case scenario long-term plan for fundraising activities and programs for your nonprofit. Take into account any future big expenses or popular donation periods (ex. GivingTuesday) to plan out your nonprofit’s finances for the future.
When your nonprofit relies largely on donations to function, your nonprofit is not only relying on the generosity of others, but also on the overall financial health of the economy. In a time of recession, the cost of living rises, and your nonprofit’s supporters may not have the same capability to donate to your nonprofit. It is smart to create a plan for your nonprofit in a time of recession.
Using each of these financial management methods will help your nonprofit manage your financials better, utilizing your supporters’ donations in the most efficient way possible!
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