Posts tagged with "cash flow"

12 Golden Rules of Nonprofit Finance

12 Golden Rules of Nonprofit Finance by Propel Nonprofits

Healthy nonprofit organizations employ financial management practices that build stability and flexibility, both today and in the future.  In this resource we set out the 12 golden rules for nonprofit finance, including budgeting, diverse funding sources, and interdependence.

Nonprofit organizations impact communities and individuals by delivering services, providing advocacy, and building community. Behind the scenes, powerful missions, innovative programs, and passionate staff and volunteers are supported by financial activities and decisions. Healthy nonprofit organizations employ financial management practices that build stability and flexibility both today and in the future.

1. Budgeting

Budgets matter because they provide the financial information to support all planning. Effective budgets are realistic, using sound assumptions and clear accountability to achieve those assumptions.

2. Program Costs

Financial decisions rely on good information. It is essential that organizations understand the real costs of their programs in order to make decisions about fundraising needs, contract terms, and program expansion or modification.

3. Diverse Funding Sources

While it sounds good, diversifying funding sources isn’t easy, and isn’t necessarily a smart move. Different types of income require different systems, structures, relationships, and communications.

4. Functional/Infrastructure Expenses (aka, Core Mission Support)

Nonprofits are required to account for functional expenses – program services and general/administration & fundraising (often referred to as “overhead”). While lower overhead expenses may sound better to donors, this emphasis is destabilizing and unsustainable. Make the case by reframing from “overhead” to “infrastructure” or “Core Mission Support.”

5. Cash Flow

Day to day, cash in the bank to pay the bills often matters more than any financial statement or long-term plan. Cash flow can be monitored and managed with a few basic management tools.

6. Financial Information

To be an effective leader, encourage everyone to develop financial literacy. This includes learning the terminology, understanding and using financial reports, and asking lots of questions. Good information is provided by trained and respected staff and professionals.

7. Financial Responsibility

Responsibility for making financial decisions and carrying out financial activities is shared throughout an organization. Responsibility needs to be supported with good information, frequent communication, and appropriate authority.

8. Operating Reserves

Every nonprofit needs to have some cash in reserve in order to respond to an unexpected downturn or opportunity. Is there a golden number that every organization should maintain, and how can a nonprofit build reserves?

9. Accountability and Transparency

Between the IRS, Attorney General, foundations, and donors, everyone is demanding information and answers about how nonprofits receive and use financial resources. This trend is accelerating and many nonprofits choose to make accountability an important organizational value.

10. Financial Integrity

As public charities, nonprofits can expect to be held to a high standard of integrity and honesty in all financial activities. While policies, job descriptions, and internal controls help to maintain this integrity, they are built on the foundation of mission, values, and leadership.

11. Responding to Financial Problems

Sometimes things go wrong – contracts are lost, fundraising plans flounder, and expenses skyrocket. Responding to financial problems requires strong leadership, good communication, creative planning, and decisive action.

12. Interdependence

Financial management connects to every aspect of a nonprofit – governance, planning, programs, evaluation, on and on. Keeping everything connected is what financial leadership is all about.

Please contact us to help your organization implement these 12 Golden Rules of Nonprofit Finance.

Building a Superior Budget

By Jim Simpson, CPA and director, Financial Technologies & Management

A strong budget is an essential element for any nonprofit organization to achieve financial leadership. Superior budgets, though, have written plans about the core activities to include strategic, organizational, and program goals and how they will be financed.

Most financial leaders focus too much time on budget variance analysis and not enough time to anticipating or planning for the future. By anticipating or planning, organizations can focus on what’s upcoming regardless of its budget cycle or fiscal year end. A budget can be complemented with rolling forecasts to better anticipate upcoming financial results.

Budgets also need to include cash flow projections, which maybe outside of the finance departments capacity or capabilities. Financial leaders must have a direct role in developing useful cash flow projections and assumptions with frequent, detailed analysis.

Any cash flow shortage needs to be further evaluated to determine if it is just a timing difference or an actual cash deficit. Shortfalls created by deficits need to be solved by budget adjustments or strategic choices to absorb a shortfall. An organization can determine timing or actual deficits by reviewing the budget to see if it had planned for or not.

Financial sustainability can only be achieved with a well-prepared and continuously monitored budget. Conversely, a poorly developed budget can diminish mission focused activities opportunities and threaten long-term success.

Typically, the budgeting process should begin three months before the end of the fiscal year to ensure the budget is approved before the start of the fiscal year. It is important that each of the following budget process best practices is used to develop the budget.

 Under current financial status, including review income and expenses, compared to existing budget, forecast remainder of year, then analyze to understand variances.

 Establish a timeline that allows each step to have time for review, discussion and revisions.

 Set up goals to determine organizational and program goals and desired financial outcomes.

 Agree on budget approach to include budget team’s roles and responsibilities along with authority.

 Draft expense budget to attain strategic, organizational and program goals. It is important to break expenses into variable expenses, fixed expenses, incremental expenses, indirect and in-kind expenses.

 Develop draft income budget to identify expected income from funding sources, including any new activities or discontinued activities.

 Review draft budget to ensure it meets organizational and program goals. Distribute draft budget to the budget team to develop consensus and collect recommendations. Modify budget with budget team input to ensure everyone understands and approves the revised draft budget.

 Finance Committee does the deep dive and reviews draft budgets.  The Full Board adopts the budget recommended by the Finance Committee.

 After presentation of the budget to the board, committee and internal stakeholders, approve proposed budget. The proposed budget may need to be revised, so include this possibility in your timeline.

 Implement budget to communicate budget, assign management responsibilities, implement in accounting system, monitor and respond to changes to the budget. It is important that you document budget decisions including writing down all budget assumptions.

 A budget many need to be broken out for donors without restrictions and with restrictions to insure there are sufficient resources to actually fulfill the donor restrictions

 A budget should add a contingency or cushion to take into consideration the unknown.  The less predictable the budget, the more contingency you may have.  5% of non-personnel costs is typical and may increase if funding or costs are not predictable.

 Document budget decisions including writing down all budget assumptions

 Evaluate the financial viability of new, expanded, or discontinued programs.

 A budget should be implemented with monthly distributions to anticipate the changes to monthly income and expenses.

 Take a strategic approach to your budget, which might include a multi-year financial plan.

 A budget is a living document and narrative that tells the nonprofit’s story using numbers.

 Sometimes a zero-based budget approach can help you to understand a budget from the ground up and provide a fresh perspective and generate new possibilities.

There are various budgeting approaches you should take to include incremental, revenue driven, zero based, activity based, and performanced based.

Most organizations take either a top down or bottom up approach for budgeting.   We have found that a bottom up approach creates a better budget.

It is important that we deal with why budgeting fails which includes an improperly prepared budget which leads to no accountability or ownership which leads to an ineffective budget.

It is important to identify budget deficits as either timing or permanent deficits and respond to take action to minimize the financial impact.

You will go a long way towards building a superior budget by implementing these budget process best practices.

Jim Simpson, CPA and director of Financial Technologies & Management, is a nonprofit financial leader and trainer, CFO, controller, forensic consultant and software advisor, including Abila MIP Fund Accounting since 1999. He has served CFO, controller and software advisor for over 25 years to over 350 nonprofit organizations.

Contact Financial Technologies & Management to see how we can help your nonprofit with accounting solutions. You can schedule an appointment directly from the website at WWW.FTMLLC.COM, email or phone at 317-819-0780.