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Funding Your Mission: 4 Nonprofit Financial Management Tips

When you think about your nonprofit’s funding, the first thing that comes to mind is probably fundraising. Your team likely plans and launches multiple fundraisers throughout each year to bring in enough revenue to fund the various initiatives associated with furthering your mission.

However, proper financial management is just as important as fundraising for making a difference in the community. As funding comes in, you have to carefully plan how you’re going to spend it in order to make the most of it. Then, you need to report on your fundraising and spending to demonstrate that you’re using your donors’ money wisely and complying with government regulations for nonprofits.

In this guide, we’ll share four proven tips to help your organization manage its finances more effectively. Let’s get started!

1. Create an Annual Operating Budget

Jitasa’s nonprofit budgeting guide defines a budget as “a planning document used to predict expenses and allocate resources for your organization.” While there are several types of nonprofit budgets you might create (such as budgets for specific programs or long-term fundraising campaigns), your annual operating budget serves as the master financial plan for your entire organization, making it a critical component of your strategy.

Let’s break down the two sides of an operating budget—revenue and expenses—in more detail.

Revenue

The revenue side of your nonprofit’s operating budget details all of the funds your organization expects to bring in throughout the year. To keep your budget organized and make more accurate projections, we recommend categorizing your revenue by source.

Here is a breakdown of the major nonprofit revenue sources and a few subcategories you might include under each one:

  • Individual donations: Small, mid-sized, and major gifts; event revenue; in-kind donations
  • Corporate philanthropy: Matching gifts, volunteer grants, sponsorships
  • Earned income: Membership dues, branded merchandise sales, fees for services
  • Investments: Endowments, brokerage account interest, stock returns
  • Grants: Government grants, public and private foundation grants, Google Ad Grants

Having a combination of these revenue streams in your budget can help your organization achieve financial sustainability, as you’ll still have plenty of funding you can rely on if one source falls through. And if everything goes according to plan, you may have additional funds that you can reserve for the future or use to expand your organization.

Expenses

In general, nonprofits find it most useful to organize the expense side of their budget based on how their spending furthers their mission. These functional expense categories, as they’re known, are also consistent with nonprofit tax returns and other required reports.

The three types of functional expenses are:

  • Program costs, which are directly related to furthering your mission, meaning they’re different for every organization. For example, an animal shelter would include spending on pet food, toys, and medical supplies under their program costs.
  • Administrative costs, which are necessary for your nonprofit to operate and include expenses like staff salaries, utility bills, and purchases of office supplies.
  • Fundraising costs, which are the upfront costs associated with fundraising campaigns and include event planning, marketing, and fundraising software investments.

You may have heard of the 65/35 “rule” of nonprofit budgeting, which states that nonprofits should spend at least 65% of their funds on their programs and no more than 35% on administrative and fundraising costs combined. In reality, this breakdown looks different for every organization. Treat this rule as a guideline to help you allocate more funding toward your mission and cut administrative and fundraising costs where possible.

2. Implement Fiscal Policies

Fiscal policies give your team guidance on how to properly handle your nonprofit’s funds day-to-day as they act on the predictions in your budget. Make sure to implement the following regulations at your nonprofit:

  • Gift acceptance policy. This details the types of donations (both financial and in-kind) that your nonprofit can and can’t accept, as well as the circumstances under which you’ll accept each contribution.
  • Expense reimbursement policy. If your employees or volunteers spend their own money on behalf of your organization, this policy outlines whether they can be reimbursed and the procedure for providing reimbursements.
  • Investment policy. This provides guidelines for investing, withdrawing, and spending your nonprofit’s reserve funds so you can effectively save for the long term.
  • Staff compensation policy. This ensures all of your employees receive fair salaries and benefits while preventing overcompensation for leadership (which has damaged some nonprofits’ reputations).

Compile all of these policies in a shared organizational handbook so that your team members can easily reference them as they go about their daily tasks.

3. Compile Financial Statements

Think of your nonprofit’s financial documentation as guiding your organization’s activities before, during, and after funds change hands. Your budget applies before, your fiscal policy handbook during, and your financial statements after, since their purpose is to summarize financial data for easier analysis.

Here is an overview of the four core nonprofit financial statements and what each one reports:

  • Statement of activities: Revenue raised, expenses incurred, and change in net assets
  • Statement of financial position: Assets, liabilities, and net assets
  • Statement of cash flows: Cash movement in and out of your organization through operating, investing, and financing activities
  • Statement of functional expenses: Detailed breakdown of program, administrative, and fundraising costs incurred

These four documents are extremely useful for reporting your organization’s financial history and health on its annual tax return. Plus, DonorSearch recommends attaching your financial statements as appendices to your nonprofit’s annual report so supporters and stakeholders can learn more about how your organization has used its funds in the past year.

4. Hire a Bookkeeper and Accountant

Since bookkeepers and accountants both work with financial data, it’s common for nonprofits to confuse the two roles and only hire one or the other. However, bookkeepers and accountants have different functions within an organization, so you need both to effectively manage your finances.

Bookkeepers take care of your nonprofit’s day-to-day financial needs. Their duties include basic data entry, writing checks, making bank deposits, and running payroll. While bookkeepers need some basic training to do their jobs well, they don’t need specialized education or certifications.

Accountants, on the other hand, need at least a bachelor’s degree in accounting or a related field and a CPA certification to be qualified for their role. This is because accountants focus on financial data analysis and reporting tasks, such as reviewing your nonprofit’s budget and fiscal policies and filing tax forms. Having a bookkeeper to keep accurate records allows your accountant to focus on the analytical responsibilities they specialize in.

Pro tip: If your organization doesn’t have enough work to warrant hiring a full-time bookkeeper and accountant or the budget to do so, you can invest in outsourced nonprofit bookkeeping and accounting services to gain access to the financial expertise you need at a lower cost!

Every nonprofit has different financial goals, so keep that in mind as you consider how to apply the tips above at your organization. Also, remember to regularly revisit your budget, fiscal policies, and financial statements so that, with your bookkeeper’s and accountant’s help, you can stay on top of your nonprofit’s needs and create the best possible management strategy.