The do's and don'ts of nonprofit finance

Here’s an all too common scenario: A passionate changemaker—dedicated to giving back—knows exactly how to help their community. But when it comes to the finances of a nonprofit (expenses, income, forecasting), they feel completely lost.

Many of us in the nonprofit world know the struggle: Donors have expectations, and regulations are a stressful puzzle, making financial management feel like a tightrope balancing act. And keeping the mission burning bright at the same time can feel almost impossible.  

The good news is, we’ve got your back. In this article, you’ll learn all the ins and outs of nonprofit finance, including some key do’s and don’ts, plus a step-by-step guide for getting started.

What is nonprofit finance?

At its core, financial management for nonprofit organizations is the set of practices and processes that nonprofits implement to plan, monitor, and control their monetary resources.

But, unlike their for-profit counterparts, nonprofits aren't driven by a bottom line of earnings. Instead, they focus on a mission, developing an ethical and efficient financial strategy that will help them make the most impact possible.

How do nonprofit finances work, exactly?

Typically, nonprofit financial management involves:

• Creating budgets aligned with the organization's mission 
• Ensuring compliance with legal and regulatory requirements 
• Understanding and defining specific revenue streams 
• Maintaining transparent reporting 

Following these financial practices consistently helps advance the organization's mission while remaining sustainable and efficient. 

Why is financial planning for nonprofits so important?

Here’s the thing: effective fiscal management for nonprofits is not just about how much money you have and how it’s being used. While those are important pieces of the puzzle, they don’t encapsulate all the benefits: 

• Mission alignment 💪 Successful nonprofit financial management can provide a sense of accountability to the mission—clear budgets and financial goals provide a framework for tracking progress and motivating staff and supporters.‍
• Resource optimization 💡 The Better Business Bureau recommends that organizations spend no more than 35% of their funding on overhead expenses and 65% on programs. A financial plan helps nonprofits allocate limited resources efficiently, maximizing the impact of their programs and initiatives.‍
• Legal compliance 💼 Financial planning ensures compliance with nonprofit accounting standards, tax regulations, and reporting obligations, preventing legal issues and maintaining the organization's tax-exempt status (hence, the IRS Form 990).‍
• Transparency 📈 According to research, 51% of leaders report outcome metrics to help connect with donors. Transparent and responsible financial management builds trust with supporters, showcasing a commitment to accountability.‍
• Long-term sustainability 🚀 Viable financial planning involves creating reserves, managing cash flow, and preparing for unforeseen circumstances—critical for weathering economic fluctuations or unexpected challenges.‍
• Strategic decision-making 🤔 Proper fiscal management can help organizations make smart choices based on their budget and goals. For example, creating a financial plan can help nonprofits pivot to focusing more on donor retention than acquisition, which can save hundreds of thousands of dollars.   

The do’s and don’ts of nonprofit financial management 

Financial management looks different for every organization depending on its mission, goals, and overall fundraising and revenue strategies.

However, regardless of a charity’s specific characteristics, there are a few universal nonprofit financial management best practices—plus some major don’ts—to consider.

The do’s

✅ Do commit to transparent reporting: Provide clear, understandable financial reports to stakeholders in order to build trust.

✅ Do budget with a purpose: Develop a detailed annual budget that aligns with the organization's mission and goals, and review it regularly. 

✅ Do diversify revenue sources: Avoid over-reliance on a single nonprofit funding source to ensure a steady and reliable inflow of funds. Consider incorporating grants, donations, events, and corporate partnerships into your revenue.

✅ Do establish financial policies and procedures: Create and adhere to clear financial guidelines so everyone on your team is on the same page.

✅ Do encourage financial literacy: Invite everyone on your staff to get involved in financial planning—a group understanding of your budget and goals increases employee buy-in and motivation.

✅ Do create strategic reserves: After the pandemic, 60% of nonprofits established emergency reserves. Build and maintain adequate reserves to cover unexpected expenses, changes in funding, or global obstacles like a recession. 

The don’ts

❌ Don’t forget technology: Leverage specific tools like nonprofit accounting software for efficient financial record keeping and reporting.  

❌ Don’t think of financial planning as a one-time thing: Implement regular monitoring to track income, expenses, and overall financial health so you can spot issues or areas of improvement as they come up.

❌ Don’t leave out key stakeholders: It’s easy to want to handle a big project yourself. But, bringing in board members, relevant staff, and even professional financial planners can make the process easier and more effective. 

❌ Don’t only plan in the short term: Many nonprofits get caught up in financial planning for their next event—not for the long-term health of the organization. Don’t forget to look at your organization and financial management holistically. 

How to get started with nonprofit fiscal management

Starting nonprofit financial management can seem intimidating, but the process just requires a few steps. Admittedly, some are easier than others. While every nonprofit’s process might look a bit different based on its resources, tools, and staff, most financial planning involves a similar approach.

Step 1: Define your mission and goals 🏆

Nonprofit work is all about the mission—that’s why your financial plan should begin with identifying SMART goals that are aligned with your nonprofit’s overall vision.

Examples of goals might include:

• Increase annual fundraising revenue by 20% to support program initiatives and enhance the organization's impact.
• Diversify funding sources by securing new grants and partnerships, aiming for a 30% increase in non-donation revenue over the next year.
• Establish a reserve fund equivalent to three months of operating expenses to ensure financial stability and the ability to weather unexpected challenges.
• Reduce operational expenses by 10%, allowing for redirected funds to support core programs and services.

Step 2: Establish a budget 💰

Creating a detailed nonprofit budget, first and foremost, involves assessing your organization’s projected income and expenses. This might include:

📈 Revenue:

• Donations and fundraising 
• Grants and sponsorships 
• Program fees 
• Planned giving initiatives 

📉 Expenses: 

• Programmatic costs (educational materials, transportation for programs)
• Administrative costs (office supplies, subscriptions)
• Overhead expenses (rent, utilities)
• Fundraising costs (event planning and coordination, fees for software platforms)
• Personnel/staff costs (salaries, benefits)

More to explore

Discover 5 sections every nonprofit budget should include (free template!) →

Step 3: Set Up financial policies and procedures 📋

Create clear financial policies and procedures that detail how financial transactions will be handled, including approvals, record keeping, and reporting.

• Balance sheet (or statement of financial position) ⚖️ The balance sheet provides a snapshot of the organization's assets, liabilities, and equity at a specific point in time.
  
• Income statement (or statement of activities) 💰 This financial statement provides a summary of the organization's revenues, expenses, and net income over a specific period.
  
• Cash flow statement 💸 This statement tracks the inflow and outflow of cash over a specified period, highlighting changes in budgeting.

Step 4: Monitor and review regularly 🕜

Nonprofit financial planning shouldn’t only be an annual occurrence. Successful organizations invest in their financial health all year round in order to make sure they stay on track. 

• Create a financial calendar 📅  Outline key dates for budgeting, reporting, and financial reviews to ensure timely and organized fiscal activities.
  
• Invest in tech ⚒️ Choose and implement accounting software suitable for your organization's needs. This will streamline financial information and reporting.
  
• Work with a dedicated financial team 🤝 Assemble a core group responsible for fiscal strategy and management, including individuals with financial expertise.
  
• Pull reports 📊 Regularly pull reports from your accounting software and nonprofit CRM to take stock of income, expenses, and other related activities. 

Other resources for nonprofit financials

Need a bit more help with your organization’s finances? Check out the following resources:  

• Nonprofit financial support 🤝 The Nonprofit Finance Fund provides professional consulting and assistance.‍
• Nonprofit financial training 📚 Want to understand nonprofit finances better? Learn from the National Council of Nonprofits’ resource library.‍
• Budget template ✍️ Learn how to create a nonprofit budget template in 5 easy steps.

Take the stress out of nonprofit finance with Givebutter

Nonprofit financial planning is one of the most essential pieces of nonprofit success—mission-aligned goals and budgets, established policies, and consistent monitoring of financial progress all help organizations make an impact.

With Givebutter, nonprofits can take advantage of flexible payment processing, a CRM that tracks all contributions in one place, and easy customer reporting—all for free. 

Create your Givebutter account in minutes and see how you can transform your fundraising—and financial future.