All Nonprofit Decision Makers Need to Be Financially Literate
By Kevin McConnell
Everyone involved with running a nonprofit, from managers and board members to staff and volunteers who are involved in financial decision-making at any level, should be fully conversant with the organizations finances.
However, many of these people often are not as financially literate as they need to be.
Your board members have a fiduciary responsibility to regularly review your organizations finances to ensure proper management, so their financial literacy is essential.
Staff members, too, need to understand the larger financial picture and how they can positively affect it, even if their day-to-day responsibilities do not involve accounting. Their good business decisions can help ensure there is enough money to support the mission and vision that drew them to your organization in the first place.
With so much competition for charitable dollars, nonprofits are under greater pressure to prove funding will be used to deliver viable programs to the communities or members they serve. Just as stock investors analyze a companys numbers before buying its shares, potential donors often look for evidence of funding-worthiness in your financial statements, which can tell them everything from the amount you receive in government grants to the dollars you spend on member retention.
Financial literacy ensures that good decisions are made daily, but it also strengthens future sustainability by making your organization more appealing to potential funders.
Although the road to financial fluency can be long, there are a few fundamental concepts that you can easily communicate to board members, employees, and volunteers who make major decisions:
Accounting Accounting is simply keeping track of an organizations money. When nonprofits are in startup mode, many manage funds on a cash basis writing checks and recording payments as they occur.
But as an organization grows, so does the sophistication of its tracking systems. Typically, more established nonprofits use accrual-based accounting, in which costs are recognized as they are incurred rather than paid, and income is recognized when it is earned rather than received. Accrual accounting is generally regarded as the standard for all but the smallest nonprofits. When training new employees, explain to them which system you use and how it affects your operations.
Budgeting On a basic level, budgets provide a strategy for managing money within an organization. The most effective and realistic budgets are created at the individual department levelthey are not simply handed down by accounting personnel. It is often the people working in the trenches that are best able to foresee future needs and potential cost savings.
Your employees should know their budget parameters, of course, but they also need to understand how individual department budgets are related to one another and how changes in income from grants, donations, and member fees alter your organizations ability to function. If, for example, dues payment processing is delayed, how does that affect your nonprofits ability to pay the rent or cover the expense of an event?
Reporting Financial statements provide an in-depth look at an organizations fiscal state over a specific period of time. In particular, the statement of activities (or income statement) shows how financial resources are coming in and going out.
Revenue might include grants, donations, member fees, sales of materials, and client services. Revenues that are restricted by donors for a specific use or time period must be reported as temporarily restricted or permanently restricted. Expenses generally are reported as program, management and general, or fundraising.
The statement of financial position (also known as the balance sheet) totals all assets and liabilities for an organizations net worth or net loss as of a particular date. Assets might include cash, accounts receivable or real estate. Liabilities could include accounts payable, unpaid salaries, loans and unearned revenue.
The statement of cash flows measures cash generated from and used for operating, investing, and financing purposes, such as paying suppliers and repaying loans.
Finally, the statement of functional expenses shows the amounts spent on program services, general costs, and administrative costs by expense classification, such as salaries and occupancy.
DISCERNING FROM THE NUMBERS
You can tell a lot about an organization by asking just a few questions about key financial statement items. For example:
Does the organization have adequate reserves? Typically, nonprofits should strive to keep a net asset cushion equal to six months of expenses.
What does the organization spend on programs compared to spending for general costs? Charity Navigator reports that the majority of nonprofits spend at least 75 percent of their annual budgets on program activities.
How much cash is available? There should be enough money on hand to meet current financial obligations as well as keep the organization running smoothly into the near future.
Is the budget realistic? If budgeted expenses are substantially lower than actual expenses, cost containment measures may be in order.
Nonprofits all strive to provide the most services possible with the resources available. Having members of your organization at all levels understand their impact on the finances will help ensure you are running a tight ship.
To ensure that you will have smooth sailing for years to come, consider providing financial training to staff and board. Encourage board members in particular to attend convenings that provide a broader perspective of the nonprofit sectors financial situation and that introduce them to a variety of financial management strategies.
Kevin McConnell is tax manager at Robert C. Alario, Certified Public Accountants, PC.