3 Best Financial Practices for Nonprofits

Nonprofits play a major role in providing essential services to communities in need. They often face unique financial challenges due to limited resources, increased accountability, and the need to build sustainability and good stewardship. To ensure that financial decisions are made in the best interests of the organization over an extended period of time it is important for nonprofits to adhere to certain best practices for financial management. This post will discuss the importance of developing a strong financial plan, ensuring effective internal controls, and maintaining accurate financial records.

Develop a Financial Plan

The first step to successful financial management for a nonprofit is to develop a comprehensive financial plan. This plan should include a budget, cash flow projections, and strategies for generating income, as well as other key financial components. The budget should focus on expenses that are necessary for carrying out the nonprofit’s mission, while also considering any potential income sources.

Cash flow projections are important for predicting when funds will be available and whether they will be sufficient to cover operating costs. Strategies for generating income should include fundraising, grants, donations, and other potential sources of revenue. A financial plan should also include strategies for managing debt and investments, as well as guidelines for making financial decisions.

Create Internal Controls

The second important best practice for nonprofits is to ensure effective internal controls. Internal controls are the policies, procedures, and systems that are in place to ensure that financial resources are used properly and in accordance with the organization’s mission. Nonprofits typically do this through an Investment Policy Statement. This serves as the guidelines and guardrails for both the Board and your third party partners in how you should handle your finances and ensure strong stewardship. Where should your reserves live? What investment strategies are you comfortable with? What are your time horizons?

Other examples of internal controls could include requiring two signatures for checks over a certain amount, setting spending limits, and implementing policies for safeguarding financial information. By having strong internal controls in place, nonprofit organizations can help ensure that funds are used appropriately, any irregularities are quickly identified and addressed, and you are building a foundation for sustainability.

Maintain Accurate Financial Records

Too often nonprofits aren't entirely sure where all of their funds are, why those choices were made, and the cost and performance of each one. Thus, the third best practice for nonprofits is to maintain accurate financial records. This includes keeping track of income, expenses, assets, liabilities, and other financial information. Accurate records are essential for preparing financial statements and budgets, as well as for providing information to donors, grantors, and other stakeholders.

Accurate financial records also help to ensure compliance with applicable laws and regulations, and provide evidence for financial decisions. Perhaps most importantly, it brings transparency and knowledge to the forefront. And knowledge give you the power to create strategic initiatives around doing the most with what you have and targeting long term sustainability.

In conclusion

In conclusion, nonprofit organizations should adhere to certain best practices for financial management to ensure that their resources are used responsibly and in the best interests of their mission. These include developing a comprehensive financial plan, implementing effective internal controls, and maintaining accurate financial records.

By following these best practices, nonprofit organizations can ensure that their finances are managed effectively and that their resources are used responsibly. Not sure you have the time or expertise? Find a trusted provider like a Nonprofit Investment Advisor, who can help create, guide, and stratgize with you on these policies. Clients of Infinite Giving receive all of this as a complimentary service.