Nonprofit Financial Health: 3 Tips for Effective Management

If your nonprofit has been in existence for some time, there is likely a system in place for managing organizational finances. Your team has likely started recording your nonprofit’s transactions, creating budgets, filing required tax forms, and establishing a few organization-wide policies for using funding. These financial activities are integral for supporting your nonprofit’s fundraising, programming, and other operational activities that further its mission.

However, once you have these basics established, it’s time to double down on your nonprofit’s financial health. To set your organization up for long-term sustainability and potential future growth, you’ll need to think strategically about all of its financial practices and put more time and effort into maintaining them.

In this guide, we’ll cover three steps you can take to improve your nonprofit’s financial management strategy and improve its health. Let’s get started!

1. Upgrade Your Accounting System

When most nonprofit teams start tracking their spending and fundraising, they keep their records in spreadsheets for an easy-to-use, cost-effective solution. However, as your organization grows and its financial situation becomes more complicated, you’ll likely notice that your spreadsheet can no longer handle all of your financial data—and therefore, it’s time to invest in dedicated accounting software.

Some accounting platforms are built specifically for nonprofits, while others are primarily designed for businesses but can be customized for nonprofit use. Whichever route you choose, Jitasa recommends making sure your organization’s software can: 

• Record all types of transactions, including importing data from other nonprofit software to streamline your bookkeeping processes.
• Store data on restricted and unrestricted funds separately to help you honor donors’ designations for their contributions.
• Compare budgeted vs. actual numbers so you can stay on track with your operating budget and make adjustments as needed.
• Manage grants either within the platform or through integrations with other grant management tools.
• Create financial statements, including income statements, balance sheets, cash flow statements, and functional expense reports, for improved data analysis and reporting.
• Complete tax forms—not only your annual IRS return but also all of the W-2s and 1099s you have to distribute to employees and contractors respectively.
  

Ask your nonprofit’s accountant for help choosing a platform and configuring it for your needs. Then, if you haven’t already, hire or designate a bookkeeper to be in charge of data entry and other everyday financial tasks (writing checks, managing invoices, etc.).

2. Think Critically About Your Nonprofit’s Spending

The expense side of your nonprofit’s operating budget is likely split between program costs (expenditures directly related to your nonprofit’s mission) and overhead (administrative and fundraising expenses). Overhead has gotten a bad reputation over the years because some supporters see it as taking away from nonprofits’ ability to make a difference in the community. However, some overhead is necessary for your organization to thrive—after all, you can only impact the community if you can keep your lights on and engage donors in your work!

The one nugget of truth in the overhead myth is that if your nonprofit needs to cut costs to balance its budget, you should always try to reduce spending on administrative and fundraising needs before taking any funding away from your programs. Let’s look at a few practical ways to do this in both categories.

Administrative Costs

The one aspect of administrative spending that you should try not to touch when cutting costs is staff compensation. You promised each of your employees a specific salary and benefits package when you hired them, and their compensation should increase—not decrease—as they do their best work for your nonprofit if you want to reduce turnover and boost satisfaction.

However, you can reasonably reduce administrative expenses in several other areas, such as:

• Insurance: Review your nonprofit’s options for liability, property, employer, and other types of insurance to ensure you’re getting the best coverage for the most affordable price.
• Utilities: Ensure employees turn off all lights and adjust the thermostat at your facility when they leave to save on your electric and gas bills, and consider installing low-flow bathroom fixtures to reduce water usage.
• Office equipment: Instead of buying new computers, desks, or other supplies outright, create an online wishlist and send it to your supporters so they can purchase those items and donate them to you in-kind.

Fundraising Costs

Since fundraising consulting also supplies a staffing need, it’s typically the hardest fundraising cost to cut. While you should look for cost-effective services that provide the right type of assistance to your organization, investing in consulting can often make or break your fundraising success, especially for large-scale campaigns.

That being said, the types of fundraising expenses you can likely reduce include:

• Software: Audit your tech stack to ensure you aren’t subscribing to duplicate tools (e.g., investing in a separate donation processor when your CRM has one built in), overlooking hidden fees, or paying for a more extensive plan than you truly need.
• Marketing: Research low-cost or free nonprofit marketing tools that provide the functionality you’re looking for without requiring extensive graphic design expertise.
• Event planning: Secure sponsorships from businesses and other nonprofits to offset various upfront event costs, from catering to auction items and even venues (for example, a local high school might let you host your walkathon on their outdoor track for free, or a hotel may provide a nonprofit discount on renting their ballroom for your gala).

3. Promote Financial Transparency

The origin of the overhead myth is essentially donors wanting to know that the nonprofits they support will use their contributions to further their missions. Even though views on overhead are changing, it’s still important to be open and honest about your organization’s financial situation to build trust with supporters and prove that you’re managing their gifts responsibly.

Here are a few tools you can use to promote financial transparency at your nonprofit:

• Recent tax returns. The IRS requires all Form 990s to be publicly available for at least three years after filing and will publish yours on its website shortly after it’s approved. Once this happens, consider linking to your last few returns on your organization’s website so interested audiences can find them more easily.
• Annual reports. Loop’s nonprofit annual report guide recommends including an overview of your organization’s financial data in the body of your report, using charts and graphs to make the information easier to digest at a glance. Then, attach your financial statements as appendices in case some readers want to dig deeper.
• Thank-you messages. After a fundraising event or campaign, share data like the total amount raised and how much you brought in through various fundraising methods (e.g., auction data could be organized according to ticket sales, item purchases, and additional donations) in your follow-ups. This will show supporters how they made your success possible in concrete ways and make them feel even more appreciated. 

If these tips seem overwhelming at first, know that your nonprofit doesn’t have to go about improving its financial health alone. There are plenty of nonprofit-sector financial professionals like accountants, controllers, and fractional CFOs who understand your situation deeply and can draw on their experience to create tailored solutions for your organization. Start strategizing how you’ll implement these improvements, and don’t hesitate to reach out for help when you need it.