As a CPA that is entrusted with the finances of a great many nonprofit organizations, the team at Lumix frequently finds itself fielding questions related to nonprofit finances. We gathered five top tips to point your nonprofit in the right direction on where to focus financially based on our in-depth understanding of the nonprofit sector and the challenges organizations face. Nonprofit accounting is nuanced, of course, but getting these five areas airtight is a great step toward clean nonprofit financial management.
- Establish Strong Financial Policies and Procedures
When nonprofits do not take extra care to maintain tight and open financials they may find themselves being scrutinized. As an organization relying on donors, and thus the public, people (understandably) expect to be able to understand and see a nonprofit’s financials and further, to be satisfied with what they see.
To do this, nonprofits should create and maintain clear financial policies and procedures to ensure transparency and accountability. This includes guidelines for budgeting, expense tracking, and financial reporting. These policies help prevent financial mismanagement and instill confidence in donors and stakeholders.
- Diversify Revenue Streams
We’ve all heard the phrase, “don’t put all your eggs in one basket.” This sentiment rings true for nonprofits who sometimes tend to go “all in” with a successful avenue for funding. The problem is, change and uncertainty are inevitable. What happens if the source of funds you thought you could rely upon goes away? Or the economy takes a nosedive, as we all know can happen with surprising speed? Operations, and thus your organization’s impact, could dry up overnight.
This can feel counterintuitive and even counterproductive. Not to insert another metaphor here, but as they say, “if it isn’t broken, don’t try to fix it.” Diversifying doesn’t mean moving away entirely from known successful sources of revenue. It just means branching out to new ones, too and thus, increasing your available funds and impact, making it a great investment of time and resources.
Overreliance on a single funding source can pose a significant risk to nonprofits. To ensure financial stability, a nonprofit should diversify its revenue streams. This may involve exploring grants (but not always saying “yes” to them), individual donations, corporate sponsorships, events, and fee-based services. A diverse income base can help your organization weather economic fluctuations and changes that occur within your donor base.
- Monitor and Analyze Financial Performance Regularly
Accounting and forecasting are ongoing efforts, not just an annual (or longer) event you can check off a list. It’s a process that provides insight and guidance for your organization’s future. This activity can be outsourced to a qualified CPA or financial advisor that has experience digesting a nonprofit’s financial statements and using them to provide insightful, strategic advice. This is one of the ways Lumix works with nonprofits.
Rather than being forced to be reactive, stay proactive by regularly reviewing your nonprofit’s financial statements and performance or enlisting the help of someone who can do this for your organization effectively. Compare actual financial results to budgets and forecasts, and use key financial ratios to assess your organization’s health. This ongoing analysis can help identify potential issues early and enable informed decision-making.
- Comply with Regulatory and Reporting Requirements
Compliance is a huge issue in the world of nonprofits and can be a quick way for a nonprofit to make the news in an unflattering light. Nonprofits are subject to specific regulations and reporting requirements, depending on their size and activities. Ensure that your organization complies with all relevant laws.
It’s not just the filing of an annual IRS Form 990, either. Each state has its own charitable solicitation regulations and grant reporting obligations. Noncompliance can lead to legal issues and loss of public trust, both of which carry heavy consequences for nonprofits.
- Build and Nurture Relationships with Donors and Supporters
Your organization is relying on the ongoing support of your donor base. Nonprofits fare much better when they have repeat donors who continually provide funds rather than having to find new sources of funding over and over again. The key to doing this successfully is to build relationships with your donor base.
Cultivate relationships with donors and supporters by showing gratitude, such as thank you gifts or personalized cards and letters. Keep them informed about your organization’s impact so they know what good they are doing by supporting your organization. Demonstrate transparency in financial matters so they never have a reason to doubt you and stop giving. Engaged donors are more likely to continue their support and become advocates for your cause, growing your donor base in the process.
Successfully managing nonprofit finances requires a combination of sound financial practices, diversification of revenue, ongoing monitoring, regulatory compliance, and fostering strong relationships. These are topics we address with our nonprofit clients regularly. From there, we go deeper, illuminating a path forward to finding the greatest success, and impact, that a nonprofit can make. Lumix can help you fulfill your mission with confidence. Get in touch with our team today to get started.