As a nonprofit professional, your top priority is your organization’s mission. It’s the reason your nonprofit exists and likely what motivates you to work hard every day to launch initiatives and run programs that benefit your community.
However, all of this is made possible by properly managing your nonprofit’s funding. While many nonprofits focus on developing a solid fundraising strategy, your financial management practices work side by side with fundraising to provide essential resources for all of your organization’s activities.
To help you get started with nonprofit financial management, this guide will walk through four tested strategies, including how to:
- Create an Annual Operating Budget
- Implement Financial Policies and Procedures
- Focus on Sustainable Funding
- Prioritize Donor Retention
While it’s true that managing your nonprofit’s finances effectively improves your overall performance from day to day, these strategies can be your saving grace in times of economic turbulence or other crisis situations. Consider how you can improve your financial management practices now to plan ahead for anything that may come your organization’s way in the future. Let’s get started!
1. Create an Annual Operating Budget
One of the most important financial documents for any nonprofit is your operating budget. Just as a personal budget helps you keep your spending and saving on track as compared to your annual income, a nonprofit budget allows your organization to see if you’re bringing in enough revenue to cover all of your expenses each year.
When creating an operating budget, most nonprofits break down their projected revenue by source. Your organization likely receives funding from several sources, such as individual donations, corporate contributions, earned income, investments, and grants. Categorizing your revenue this way allows you to make more accurate projections and take any funding restrictions (such as grants that have to be used for specific projects) into account.
For the expense side of an operating budget, nonprofits typically use the following categories:
- Administrative costs, including rent, utility bills, insurance payments, and staff member salaries.
- Fundraising costs, such as event planning, marketing, and supply-related expenses. Administrative and fundraising costs together make up your nonprofit’s overhead.
- Program costs, which are any expenses directly related to furthering your nonprofit’s mission. For instance, an organization that runs after-school music programs might include expenditures on sheet music, instruments, and snacks for the students under program costs.
When you put all of these elements together, your nonprofit’s operating budget will look something like this:
In this example, you may notice that the revenue totals $105,000 while the expenses only add up to $72,000. Although a nonprofit by definition can’t turn a profit (i.e. distribute the profit to others), this doesn’t mean your annual budget has to break even—in fact, it’s much better to budget for a surplus if possible. This way, you’ll have the funds you need if some costs are higher than you anticipated or a revenue source falls through, and you can use any leftover money to build a savings account for your organization.
2. Implement Financial Policies and Procedures
Although policies and procedures are sometimes seen as a necessary evil, they lay the foundation for all of your nonprofit’s operations, especially when it comes to handling funds properly. Jitasa’s financial management guide recommends that nonprofits implement the following key policies:
- Gift acceptance. This policy details what types of donations you can and can’t accept (including both monetary and in-kind gifts), the circumstances under which you’ll accept these donations, and how you’ll track various contributions.
- Conflict of interest. To prevent your nonprofit’s directors and board members from making financial decisions that are influenced by outside interests, this policy defines various conflicts of interest and outlines the steps you’ll take if one is discovered or disclosed.
- Expense reimbursement. This policy explains when and how your nonprofit is allowed to reimburse staff members or volunteers for personal expenditures on behalf of your mission.
Once your organization has outlined these and other financial policies and procedures, compile them into a single reference document. Storing all of your policies in a single, official place helps your organization maintain financial compliance and increase transparency with stakeholders and donors.
3. Focus on Sustainable Funding
Individual donations typically make up the bulk of a nonprofit’s funding. However, these contributions often spike at the end of the calendar year and during fundraising events but die down in between.
Since your organization needs to fund a variety of expenses throughout the entire year, it’s important to ensure your fundraising strategy is sustainable. A great way to do this is to add new year-round revenue streams, such as:
- Recurring giving programs. Supporters are more likely to give regularly if you make contributing to your organization as easy as possible. Adding an option for recurring gifts to your online donation page allows a donor to automatically give a set amount every month, providing more consistent contributions on your end and convenience on theirs.
- Corporate philanthropy initiatives. According to 360MatchPro, many businesses contribute to nonprofits in ways that increase the value of supporter contributions. For example, some companies will match the monetary gifts that their employees make to charitable causes, while others provide volunteer grants that turn employees’ contributions of time into tangible financial support.
- Branded merchandise sales. Consider opening an online storefront for your nonprofit to sell t-shirts, mugs, water bottles, keychains, and other items featuring your organization’s logo. The proceeds from each sale will support your mission, plus your supporters will help spread the word about your nonprofit when they wear or use your products.
- Charity eCards. Your nonprofit can work with dedicated providers to design charity eCards that your supporters can send to friends and family in exchange for a small donation. To turn this into a year-round fundraiser, create eCard options for a variety of holidays as well as birthday cards and thank-you notes.
Ongoing fundraisers like these allow your nonprofit to bring in a steadier stream of contributions between your larger campaigns and events. Plus, they help keep supporters engaged with your mission all year long!
4. Prioritize Donor Retention
There may be times when your nonprofit needs to acquire new supporters in order to grow. However, it’s best to focus on retaining existing donors from a financial management perspective, as retention is more cost effective and sustainable than acquisition.
To retain your supporters, you first need to understand them. Analyze the donor data your nonprofit has collected to gain insight into your supporters’ demographics, giving habits, and other forms of past involvement with your organization. You can then use this information to create targeted communications that will keep your supporters engaged.
Above all, show you donors your organization appreciates them. Personalizing your outreach efforts and periodically asking for feedback makes donors feel valued and in turn, more likely to support you long-term.
Whether you’re looking to improve your organization’s day-to-day operations or you want to be prepared when challenges arise, financial management is essential to your nonprofit’s success. Use the strategies in this guide to get started, and don’t hesitate to reach out to experts in nonprofit finance to answer any questions you may have and take your management capabilities to the next level.
We are super happy that Jon provided this article – because what could be more strategic than understanding and managing your financial situation?
