Financial management has always been crucial to successful nonprofits. But these days, it’s become a new litmus test for the viability of a nonprofit’s mission. There is increased financial scrutiny being placed on nonprofit organizations by the general public along with greater expectations by donors to deliver on their mission.
Sarbanes Oxley and the scandals of the 90s are more than 10 years behind us, but the results are thoroughly integrated into nonprofit rules and best practices. The increased financial scrutiny is reflected in higher audit standards and increased reporting on the annual Form 990.
Donors too want to see more financial transparency and a clear relationship between finance and mission impact before they commit their support. Today, many donors are sizing up nonprofits more thoroughly than ever before committing funds. They are increasingly concerned that their dollars are being used well and deliver the intended impact.
And as the nation recovers from a recession, nonprofit leaders must guide their organizations with a higher level of financial acumen, preparing for any further turbulence and planning for new opportunities. So as the climate for nonprofit management changes, here are four critical financial imperatives by which all
nonprofits will be increasingly measured and which they must embrace wholeheartedly to thrive today.
01 Establish Professional Financial Management
One of the most significant areas impacted bySarbanes Oxley is Board of Directors fiduciary responsibilities. Organizations have always been required to have good controls over accounting and financial reporting, but now the Board has a heightened responsibility to ensure this. Policies and procedures must be in writing and reviewed by the Board annually, and the Board must review the annual Form 990 before filing. Failing to meet these fiduciary responsibilities makes them more culpable for financial mismanagement.
This increased awareness of fiduciary responsibility by the Board is being felt by Executive Directors as Boards look to management to ensure compliance with generally accepted accounting principles, accuracy of financial information and control over operations. This is in addition to the direct responsibly placed
on the Chief Executive to certify the accuracy of financial information.
In order to satisfy the knowledge demands of increased scrutiny and expectations placed on nonprofit financial management, nonprofits today must have a sophisticated understanding of finance and accounting in house. Gone are the days when your independent auditor can act as your financial consultant and backup accountant. The auditor’s role is to determine if you know what you are doing when it comes to finance and accounting. If you ask them for advice, you are admitting that you don’t. It’s even possible for this lack of understanding to get written up in the auditor’s report to the Board of Directors and potentially seen by funders
02 Create a Solid Financial Foundation
The goal of professional financial management is ensure that an organization will stand on a solid financial foundation. This foundation consists of knowledgeable and experienced personnel in all phases of accounting and finance; a well-organized and managed accounting system defined in writing;
reliable and understandable financial reports on current financial position and results of operations compared to budget; and a comprehensive budget process that includes the entire organization and focuses on operations, cash and capital acquisitions in relationship to specific objectives and goals. A firm financial foundation is basic and essential to satisfying the increasing demands of regulators and donors.
03 Exercise Financial Leadership
In order to capitalize on a strong financial foundation and turn it into a strategic engine that not only satisfies increased scrutiny, but meets and exceeds
expectations, an organization must have strong financial leadership. A professional financial leader is someone who has a detailed understanding of the
organization’s finances and operations and a broad understanding of the organization vision, mission, goals and objectives. It is someone that can be a
right hand to the Chief Executive, who knows how to listen and council, raise tough issues, help implement strategies and be an excellent communicator.
Financial leadership is what makes an organization stand out among its peers.
04 Develop Long-Term Financial Planning
With a solid financial foundation and strong financial leadership in place, an organization must turn its attention to building a sustainable financial future. A recent survey of nonprofit leaders conducted by the Nonprofit Finance Fund discovered that 41% of nonprofits named “achieving long-term financial stability” as the top challenge they face, and 39% of nonprofits have conducted long-term strategic or financial planning in the past 12 months. A long-term financial plan consists of aligning the organization’s spending priorities with its vision and mission, and finding the money to support those spending priorities. Operating reserves and diverse and reliable funding are key to long-range financial security.
Make Finance Your Strategic Advantage
Nonprofit executives are under more pressure today than ever before to have good ideas, attract good people and build strong institutions. They have to
make hundreds of vital decisions, yet today raising their financial game must be an urgent priority. More than ever, nonprofit executives must ensure a strong
financial foundation, help plan for the future and build the trust and confidence with donors that will attract the funding that makes that future possible.