guest post // From Strategy to Stability: Essentials of Nonprofit Finance
By Jon Osterburg, Jitasa
For most nonprofit team members, daily activities primarily focus on running programs, engaging supporters, and working on fundraising campaigns. Since these tasks are clearly essential for furthering your organization’s mission, it’s no surprise that they would be your main priorities.
However, one mission-critical activity that nonprofits sometimes overlook is financial management. To fuel your programs and other community-centered initiatives, you not only need to bring in enough revenue but also strategically allocate and properly report that funding.
If you’re brand new to nonprofit finance, you’ve come to the right place! In this guide, we’ll look at six of its basic elements, which we’ve categorized into aspects of your organization’s financial strategy and actions that boost its financial stability. Let’s get started!
Nonprofit Financial Strategy Essentials
Goal-Setting
Have you ever set a revenue target for an event or campaign? If so, you’ve engaged in financial goal-setting! In addition to guiding your fundraising efforts in the short term, financial goals are essential to your organization’s long-term strategic plans. To expand your nonprofit, you’ll need to determine how much funding is necessary to pay for new initiatives and save up enough reserve funds to cover everyday expenses while those projects are in progress.
Specific
Measurable
Attainable
Relevant
Time-bound
For example, if you’re setting a SMART fundraising goal for your year-end giving campaign, your target might be “to raise $10,000 for next year’s projects by the end of the day on December 31.” This goal is specific about what you want to achieve, has a metric and time frame attached to it, and is relevant to your organization’s general objectives. Examining your nonprofit’s past financial data will help you determine whether the goal is attainable (more on this later!).
Expense Allocation
In your nonprofit’s annual budget, the two primary expense categories you should see are program costs and overhead. Program expenses are directly related to your mission, while overhead includes both the administrative costs that are necessary to run your organization (staff salaries, utility bills, etc.) and the upfront expenses associated with fundraising (event planning, marketing, etc.)
If you’re familiar with this division, you might have heard of the 65/35 rule of expense allocation, which states that nonprofits should spend at least 65% of their funds on programs and no more than 35% on overhead. In reality, the exact breakdown will look different for every organization. Especially if your nonprofit is just starting out, you’ll likely spend more on overhead, which is completely fine!
Treat the 65/35 “rule” as a guideline to help you put as much of your funding as possible toward your programs and find ways to cut overhead spending where possible. For instance, you could take advantage of free marketing tools to reduce your fundraising costs or test a hybrid office model to lower your utility bills.
Revenue Diversification
On the revenue side of your budget, the most important thing to remember is not to put all of your eggs in one basket. Instead, incorporate a variety of sources into your nonprofit’s funding model, such as:
Individual donations: Small, mid-level, and major gifts; event revenue; in-kind contributions
Corporate philanthropy: Matching gifts, volunteer grants, sponsorships
Earned income: Membership dues, merchandise sales, fees for services provided
Investment returns: Mutual funds, stocks, bonds, cryptocurrency
Grants: Federal and state government grants; private, public, and family foundation grants
Including several of these revenue sources in your budget will increase your nonprofit’s resilience if one funding stream falls through or expenses are higher than expected, enabling your organization to thrive in all circumstances.
Nonprofit Financial Stability Essentials
Financial Policies
Once you have a solid financial strategy in place, you’ll need to implement policies to standardize the way your team handles your nonprofit’s funds while executing that strategy. While you might develop a wide variety of guidelines depending on your organization’s priorities, the most important financial policies to create include:
Gift acceptance policies, which outline the types of monetary and in-kind contributions that your nonprofit can and can’t accept, as well as the conditions under which you can accept each gift.
Expense reimbursement policies, which specify the conditions and procedures for reimbursing employees and volunteers when they spend their own money on behalf of your organization.
Staff compensation policies, which lay out how salaries, benefits, and other aspects of compensation will be determined and increased for your employees.
Compile all of these policies into a handbook, and share it with your entire team so anyone can reference your policies as they go about their day-to-day activities.
Consistent Recordkeeping
As mentioned previously, financial data analysis is essential for effective goal-setting, and comprehensive information is also important for reporting purposes. So, your nonprofit should prioritize detailed, accurate recordkeeping as you work toward financial stability.
Generally speaking, there are two things you need for financial recordkeeping, and the first is a specialized accounting solution. Many nonprofits start out tracking their transactions and related activities in a spreadsheet, but switching to dedicated software will become necessary as your organization’s situation becomes more complex. Look for a platform designed with nonprofits in mind that meets as many of your needs as possible while staying within your budget.
In addition to software that stores your financial records, you should also have a designated bookkeeper to create and maintain those records. According to Jitasa’s nonprofit bookkeeping guide, this individual’s duties include:
Entering basic financial data
Writing checks
Making bank deposits
Managing invoices
Processing payroll
Practically allocating costs
If your organization doesn’t have the need or budget for a full-time bookkeeper, you can leverage outsourced bookkeeping services, let the above duties fall to an existing staff member with financial knowledge, or ask a trusted volunteer to fill the role. Just make sure your whole team knows who is primarily responsible for financial recordkeeping.
Tax Filings
At first glance, “nonprofit tax filings” might seem like an oxymoron, since registered nonprofit organizations are definitionally tax exempt. But just because your organization doesn’t pay federal income tax doesn’t mean you can write off tax season!
To maintain its tax-exempt status, your nonprofit is required to complete an annual Form 990 filing. Form 990, the IRS return for tax-exempt organizations, asks for a rundown of your nonprofit’s financial activities to ensure regulatory compliance.
There are different versions of Form 990 for small (Form 990-N), mid-sized (Form 990-EZ), and large charitable organizations (full Form 990), as well as private foundations (Form 990-PF), so check the rules on the IRS website to ensure you’re filing the correct form. The submission deadline for any type of Form 990 is the 15th day of the 5th month after your nonprofit’s fiscal year ends—May 15 if your fiscal year follows the calendar year.
Navigating all of these elements of nonprofit finance might seem complicated, especially if you don’t have prior financial management experience. Fortunately, you don’t have to go it alone—feel free to reach out to a nonprofit accountant or financial advisory professional about any questions, concerns, or needs that arise as you dive in!
This guest post was written by Jon Osterburg.
Since joining Jitasa in 2010, Jon Osterburg has helped hundreds of nonprofits around the world effectively manage their finances through tailored, outsourced bookkeeping and accounting services. He currently serves as Jitasa’s Chief Operating Officer, is a member of two nonprofit boards, and has earned a certificate for Executive Education from the Yale School of Management.