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6 Key Principles of Non-Profit Financial Management
Good financial health is the foundation of a strong non-profit. This guide breaks down the 6 key principles you need to know to manage your money well and protect your mission.
A non-profit runs on passion, but it is fueled by money. Being a good steward of the money your supporters give you is one of your most important jobs. Non-profit financial management is simply the process of managing your money in a smart, responsible, and transparent way. It is not just about bookkeeping and numbers; it is about making sure you have the resources you need to achieve your mission, both today and in the future.
Thinking about finances can feel intimidating, especially if you do not have a background in accounting. But the basics of good financial management are built on a few simple, common-sense principles. You do not need to be a math genius to understand them. This guide will walk you through 6 key principles that every non-profit leader should know. Understanding these ideas will help you make better decisions, build trust with your donors, and create a strong, sustainable organization.
Principle 1: Create a Realistic, Mission-Driven Budget
Your budget is your financial plan for the year. It is a story about your priorities, told in numbers. A good budget is not just a list of expenses; it is a tool for making your strategic plan a reality. The process of creating a budget should be a team effort, involving your staff and your board.
How to Build Your Budget
Start by estimating your expenses for the coming year. Be thorough. Include everything from salaries and rent to office supplies and program costs. Then, estimate your revenue. Look at how much you raised last year from different sources, like individual donations, grants, and events. Be realistic and a little conservative in your revenue projections.
The goal is to have your expected revenue be greater than your expected expenses. If it is not, you need to either find ways to increase your revenue or decrease your expenses. This simple process is the foundation of financial health.
Principle 2: Understand Your Financial Statements
Your financial statements are like a report card for your organization’s financial health. There are two main reports that you and your board should review at every meeting.
The Two Most Important Financial Reports
- The Statement of Financial Position (or Balance Sheet): This is a snapshot of your organization at a single point in time. It shows what you own (your assets, like cash in the bank) and what you owe (your liabilities, like bills you have to pay).
- The Statement of Activities (or Income Statement): This shows your financial performance over a period of time (like a month or a quarter). It lists all of your revenue (money in) and all of your expenses (money out). It tells you if you made more than you spent during that period.
You do not need to be an accountant to read these reports. You just need to understand the basic story they are telling about your organization’s money.
Principle 3: Manage Your Cash Flow
Cash flow is the movement of money in and out of your organization. It is possible for a non-profit to have a balanced budget on paper but still run out of cash if a big grant payment comes in later than a big expense is due. Managing your cash flow means knowing how much cash you will have on hand at any given time.
A simple cash flow projection is a spreadsheet that forecasts your cash balance week by week or month by month. It helps you see potential shortfalls in advance so you can plan for them. One of the best ways to improve your cash flow is to build a strong recurring giving program, which provides a predictable stream of income every month.
Principle 4: Build a Diverse Fundraising Plan
Relying on just one source of income is risky. What if that big foundation changes its priorities? What if your annual event has to be canceled? A financially healthy non-profit has a diverse fundraising plan, with money coming in from several different streams. This is like having a well-balanced investment portfolio.
Your fundraising plan should include a mix of strategies, such as:
- Individual Donations: This includes your year-end campaign and other appeals to individual supporters.
- Grants: Money from foundations and government agencies, which requires a strong grant writing program.
- Corporate Support: This can include both grants and corporate sponsorships.
- Major Gifts: Large donations from individuals, which requires a dedicated major gift fundraising effort.
Principle 5: Establish Strong Internal Controls
Internal controls are the basic rules and procedures you put in place to protect your organization’s money and prevent mistakes or fraud. They are a sign of a well-managed organization and are very important for building trust with your board and your donors.
Simple Internal Controls Every Non-Profit Should Have
Separation of Duties: The person who writes the checks should not be the same person who signs them or balances the bank account. Having more than one person involved provides a check and balance.
Two Signatures on Checks: Require two signatures from a board member or senior staff member on any check over a certain amount (like $500).
Regular Board Review: Your board treasurer should review the bank statements every month, and the full board should review the financial statements at every meeting.
Principle 6: Be Transparent
Transparency is about being open and honest about your finances. Your donors have a right to know how their money is being used. Being transparent is one of the best ways to build trust and show that you are a responsible steward of their gifts.
The IRS Form 990
Most non-profits are required to file a Form 990 with the IRS each year. This is a public document that provides detailed information about your finances, programs, and governance. Anyone can look up your 990 online. Think of it as an opportunity to tell your story and show the public what a great, well-run organization you are. You can find official information about this form on the IRS website (.gov).
Share Your Financials
Do not hide your financial information. Make your annual report and a summary of your finances available on your website. This shows that you have nothing to hide and builds confidence in your donors. A dedicated “Financials” page is one of the 10 essential pages for a non-profit website.
Good financial management is not just about avoiding problems; it is about building a strong foundation that allows your mission to thrive.
Conclusion: From Scarcity to Sustainability
Managing your non-profit’s finances does not have to be scary. By following these 6 simple principles, you can create a culture of financial health and responsibility. A clear budget, a good understanding of your financial reports, and a commitment to transparency will do more than just keep you out of trouble. They will build trust with your supporters, give you the confidence to plan for the future, and provide the sustainable foundation your important mission deserves.
Your Questions, Answered
Common questions about non-profit finances.
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