For nonprofits to make a meaningful impact and ensure sustainability, it is essential to maintain financial stability. This can only be achieved by establishing strong financial oversight. When you implement these steps with dedication and enthusiasm, your nonprofit can create a financial environment where its mission-driven goals can thrive, resulting in flourishing communities. In today’s podcast, Linden Mattie from Pilot Ship Consulting and Stephen Halasnik from Financing Solutions discuss how nonprofits should establish strong financial oversight.
Summary
Establishing Strong Financial Oversight
For nonprofits, financial stability is not just a formality but rather a vital component for achieving long-lasting transformational impact. Your nonprofits need to establish a strong and comprehensive financial oversight system. This will build trust, accountability, and effectiveness in your mission-driven work. To achieve this, you should carefully examine the financial operations, budgeting, and accounting practices of your organization. Again, you must ensure that your financial policies and procedures align with your mission and goals. In all, fortifying your financial foundation will enable your nonprofit to confidently sail through the challenges of funding and achieve its objectives with greater efficiency and success.
In this article, we’ll take you down the path of establishing strong financial oversight in your nonprofit.
Craft a Comprehensive Financial Policy
Drafting a detailed and comprehensive financial policy or culture is one of the first steps in establishing a sound financial plan for any organization. This policy document plays a big role in guiding the organization toward achieving its financial objectives. So, this document should clearly outline the financial goals, procedures, and responsibilities of the various stakeholders within the organization.
A well-crafted financial policy is essential to effectively manage financial resources. Also, it minimizes financial risks and promotes financial accountability and transparency. The policy document should cover a wide range of financial aspects, such as budgeting, cash management, accounting, financial reporting, and internal controls.
Moreover, you have to review and update your financial policy periodically to reflect the changing financial needs and priorities of your nonprofit organization. You can establish strong financial oversight by having a clear and comprehensive financial policy.
Lay the Groundwork with Effective Budgeting
Imagine your organization’s annual budget as a blank canvas, waiting to be painted with the colors of your aspirations. As you put together your budget, it’s important to not only consider your long-term strategic vision but also to anticipate the challenges and surprises that may arise in the financial landscape.
To create a budget that truly reflects your organization’s goals and values, start by identifying your top priorities. What are the key initiatives that your team hopes to achieve in the coming year? What resources will be necessary to make them happen? Be sure to consider both revenue and expenses and don’t forget to account for any potential risks or uncertainties.
Once your budget is in place, it’s important to revisit and recalibrate it regularly. This will help you stay agile and responsive to changes in the market, shifts in your industry, or unexpected events that may impact your finances.
Institute an Internal Control System
Think of internal controls as the guardians of your organization’s financial integrity. They serve as the first line of defense against financial risks and fraud. Therefore, implementing a set of well-designed and robust internal control measures, such as segregation of duties, regular reconciliations, and periodic audits, ensures the safety and integrity of your financial data. These measures are necessary ways to prevent fraudulent activities, such as embezzlement, corruption, or misappropriation of assets. For instance, segregation of duties involves assigning different tasks to different employees to ensure that no single person has complete control over a financial transaction from start to finish. On the other hand, regular reconciliations, enable organizations to detect discrepancies and errors in financial records and take corrective actions before they escalate into major problems. Implementing such measures, can establish strong financial oversight, safeguard your reputation, and ensure regulatory compliance.
Regular Financial Reviews
View your organization like a ship sailing through stormy seas. So, to steer it toward success, you need to conduct regular financial check-ins. By reviewing financial statements, budgets, and internal controls, you can detect potential issues and risks early on. This helps you make informed decisions and move forward with confidence. In other words, financial check-ins provide you with a clear understanding of your organization’s financial health. You can identify areas of strength and weakness, make informed decisions, and achieve your financial goals. Regular financial check-ins also contribute to transparency and accountability within your organization. This builds trust with stakeholders and donors and ensures long-term success.
Enlist the Expertise of Financial Professionals
When it comes to managing finances, it’s crucial to have someone with the necessary knowledge and experience to assist you in navigating the complexities of the financial terrain. Seeking the assistance of a qualified financial professional can be the key to achieving the financial objectives of your nonprofit. A knowledgeable financial advisor can offer valuable insights and recommendations on how to handle your finances, make informed investment choices, and reduce risks. With their guidance, you can create a solid financial plan and make sound decisions that will enable you to safeguard the financial future of your nonprofit.
Champion Transparency and Accountability
Maintaining transparency in all aspects of an organization is vital to building a strong foundation of trust. A key way to achieve this is by providing regular and detailed financial reports and updates to all stakeholders and even donors. These reports should clearly outline the organization’s financial performance, including revenue, expenses, and overall profitability. By doing so, stakeholders can gain a better understanding of the organization’s financial health and can make informed decisions about their involvement with it.
Furthermore, transparency should extend beyond just financial reporting. It is important to create an environment of openness and accountability throughout your organization. You can achieve this by encouraging open communication between volunteers, management, and board members. When everyone is on the same page and has access to the same information, it cultivates a culture of trust and support, which can ultimately lead to greater success and strong financial oversight.
Maintaining a sound financial performance is a crucial aspect of any organization. However, it’s not something that can be done once a year and forgotten. It’s an ongoing process that requires regular monitoring and evaluation. By regularly assessing your financial health against benchmarks and goals, you can determine the areas that need improvement and identify growth opportunities. Keeping a close eye on your finances can also help you make informed decisions about investments, budgeting, and cash flow management. By doing so, you can establish strong financial oversight, which can ultimately help you achieve your long-term goals and objectives.
Empower Board Oversight and Engagement
Your board of directors plays a crucial role in the success of your organization. They are not just a group of figureheads, but rather your partners in navigating the financial waters. It is important to engage your board in oversight and decision-making, leveraging their diverse expertise and insights to steer your organization toward success. By actively involving your board in the strategic planning process, you can benefit from their collective knowledge and ensure that your decisions are well-informed and aligned with your overall goals. Additionally, regular communication with your board can help build trust and ensure that everyone is on the same page when it comes to the financial health of your organization. Ultimately, by working closely with your board of directors, you can maximize your chances of achieving your objectives and establish strong financial oversight.
Make use of Technology
Managing finances is a crucial aspect of running any organization, and nonprofits are no exception. Thankfully, there are a variety of financial software available that can help with bookkeeping and tracking. In fact, several software options are specifically designed for nonprofits’ financial management needs. Some of the most popular ones include Monkeypod, QuickBooks, and FreshBooks. These platforms offer a range of features, such as tracking donations, managing grants, and generating financial reports. With the help of these software solutions, nonprofit organizations can establish strong financial oversight.
Financial Documents that All Nonprofits Should Review
Nonprofits, like any organization, should regularly review several key financial documents to ensure transparency, compliance, and effective financial management. Here are some essential documents:
Budget
An annual budget is a comprehensive financial plan that lists all the expected income and expenses of an organization for one year. It is an essential tool that helps businesses and non-profit organizations forecast their cash flow and plan their financial activities accordingly. The budget typically includes details of all the sources of revenue, such as sales, grants, donations, and investments, as well as the expected costs, such as salaries, rent, utilities, marketing, and supplies.
Financial Statements
Nonprofits should regularly review three primary financial statements
- Income Statement (or Statement of Activities): Shows revenue, expenses, and net income or loss over a specific period.
- Balance Sheet (or Statement of Financial Position): Provides a snapshot of the organization’s assets, liabilities, and net assets at a specific point in time.
- Statement of Cash Flows: Details the cash inflows and outflows during a specific period, categorizing them into operating, investing, and financing activities.
Audit Reports
If applicable, audited financial statements provide an independent examination of an organization’s financial statements to ensure they are accurate and comply with accounting standards.
Internal Financial Reports
Regular internal reports (e.g., monthly or quarterly) help the organization monitor its financial health and make informed decisions.
Form 990
In the United States, most tax-exempt organizations must file Form 990 annually with the IRS. This form provides financial information about the organization and is publicly available, promoting transparency.
Donor Reports
As a best practice, nonprofit organizations should maintain detailed records of all received donations and how they are utilized. These records should be used to create regular donor reports, which provide transparency and accountability to those who have generously contributed to the organization’s cause. Donor reports should include information on the exact amount of the donation, how it was used, and the impact it had on the organization’s mission. By consistently providing these reports, nonprofits can build trust with their donors and establish strong financial oversight.
Financial Policies and Procedures
Having well-documented financial policies and procedures is crucial for any organization to maintain consistency and compliance with financial best practices. Such policies and procedures outline the guidelines, rules, and procedures that govern an organization’s financial activities. They ensure that financial transactions are conducted transparently and ethically and that they comply with regulatory requirements and accounting standards. Additionally, they help to minimize the risk of fraud, errors, and financial misstatements, which can be detrimental to an organization’s reputation and financial health. Therefore, it is essential to establish and maintain robust financial policies and procedures that are regularly reviewed and updated to reflect changes in the organization’s operations and the regulatory environment.
Grants and Contracts
For nonprofits receiving grants or entering into contracts, it’s important to review the terms and conditions to ensure compliance with funding requirements.
Regular review of these documents helps nonprofits maintain financial health, comply with legal requirements, and establish strong financial oversight.
About Our Guest, Linden Mattie From Pilot Ship Consulting
Linden is a Canadian CPA and founder of Pilot Ship Consulting. He works with nonprofit leaders and boards to ensure there is strong, reliable and trustworthy financial oversight in place. His specialty is working with leaders who don’t have a background in finance or accounting. He teaches and implements systems to oversee the finances of your nonprofit that you don’t need to have an accounting degree or CPA to keep up with, and provides ongoing advisory services to boards and executives that want access to a higher level of expertise they don’t have in-house or need on a full-time basis.
Learn About Stephen Halasnik
Stephen Halasnik co-founded Financing Solutions, the leading provider of lines of credit for nonprofits and church financing. The credit line program for nonprofits & churches is fast, easy, inexpensive, and costs nothing to set up, making it a great backup plan when cash flow is temporarily down. Mr. Halasnik is also the host of the popular, Nonprofit MBA Podcast. The podcast brings experts to discuss fundraising, nonprofit grants, executive director leadership, nonprofit boards, and other important topics. You can learn more about the nonprofit line of credit program here or call 862-207-4118.