Nonprofits need financial management so that they can keep the money coming in and get around barriers to funding their work. Investing early means nonprofits don’t run out of money while they’re still doing their mission.
Like the paint-by-numbers tool that’s used to make copies of a famous painting, a well-crafted budget can provide clarity and financial comfort – but its creation is not painless.
Funding Sources
Nonprofits need to have funding from grant, donations, fundraisers and crowdfunding. Each approach requires its own management toolboxes, plans, connections and channels to run at their most effective.
Budgets: Nonprofit organizations establish budgets of various types for activities and initiatives. A running budget contains forecasted revenue and expenses for an annual period, and capital budgets are for long-term expansions such as building campaigns. Last but not least, program or project budgets outline revenue and costs for individual department types such as fundraising or marketing.
When nonprofits want to have the most control over budgeting and budgeting, create a tool to track every incoming and outgoing amount, fixed and variable like office rent. In addition, nonprofits should add in-kind donations and volunteer time to the budget at fair market value; and they should compare the budget often with actual revenue and expenditures.
Unpredictable Income
Nonprofits have many sources of income and the economic situation can be unpredictable. Nonprofit directors may make lofty revenue projections or underestimate in-kind donation numbers.
Non-convenient revenue can also be a liability for nonprofits that need to pay operating costs. It turns out that the income households without predictable income save less and accumulate less, compared with the predictably income households.
Nonprofits can’t afford to be spending too much, so they have to keep up with incoming and outgoing cash flows 24/7, monitor their budget daily to make sure it’s working for them, and respond to problems or obstacles as they come up. A thoughtfully prepared budget helps nonprofits prepare for funding challenges and builds donor trust as well as meet regulatory reporting standards – and there’s nothing easier than involving board members, staff and volunteers in this exercise for transparency and support.
Lack of Expertise
Nonprofit financial planning can be a complex process involving a lot of expert knowledge. It includes estimating sales and losses, and how much money is required to pay for activities. Limited funding should also be controlled, as must a return to donors.
Nonprofit budgets are a lot different than individual budgets, because you have to factor in anticipated revenue from a variety of sources — which isn’t always an easy thing for small nonprofits that rely on foundation funding or a small group of donors.
A nonprofit budget will have to handle items like equipment purchases or software licenses, indirect or overhead costs, as well as in-kind gifts like goods or services donated and volunteer time that might be received. Making a detailed budget takes time and planning – especially if you’re a new nonprofit and just don’t know how to do it all yet.
Limited Staff
There are too few staff in nonprofit organizations for staffers to practice good budgeting and forecasting practices. This can be a huge challenge for organizations who are looking to take the financial management in front of them so that they aren’t overburdened with resources.
Nonprofits need to have an entire accounting system. Making a cash flow projection or “statement of activities”, the nonprofit equivalent of an income statement, and using common ratios that detect issues are important. Establishing a surplus unrestricted each year to service debt, finance depreciation, and increase operating reserves also should be covered by a sound accounting policy.
Check your budget every month to see what actually is and what is budgeted for the month and year so you have a current, accurate look at your money and areas you can make improvements to. This is something that you should in principle do with your entire team/board so everyone knows what it means and why it’s so important to monitor and evaluate.