Nonprofit financial management best practice and tips 

Financial management is a cornerstone of successful nonprofit organizations, with finance teams operating in a complex and stressful environment. To demonstrate good financial stewardship, there is increasing pressure to provide full transparency for compliance.  

The board, executives, donors, and government funders are demanding better visibility into financial and outcome metrics. That’s why organizations of all sizes—even small nonprofits—must find new ways to keep up with the complexity of accounting for funds, grants, projects, programs, and more while maintaining funding relationships and attracting new donors. 

This comprehensive guide explores best practice and tips for nonprofit financial management, helping your organizations navigate their unique challenges and thrive. 

Here’s what we’ll cover: 

Understanding nonprofit financial management best practice and policies 

Nonprofits operate under unique financial constraints and regulatory requirements. Understanding best practices and policies is essential for staying compliant and maintaining good financial health. In this section we’ll look briefly at some of the key nonprofit financial policies and regulatory issues to consider.  

Gift acceptance 

Nonprofits often rely heavily on donations and grants, making it essential to establish clear policies for gift acceptance. This should include: 

• Gift acceptance policy: this outlines the types of gifts your organization can accept, potentially including things like cash, property, stocks, and in-kind contributions. You should also address any restrictions on how gifts can be used.  

• Transparency: it’s important to communicate openly with donors about how their gifts will be used, making sure donors feel confident their contributions support your mission. Providing information on the impact of their contributions can foster trust and encourage future donations. 

• Documentation: keep meticulous records of all donations, including donor information, the purpose of a gift, and any specific conditions attached to it. Proper documentation helps in reporting and compliance, and it also supports good relationship management with donors. 

Income and expenses 

Effective nonprofit fiscal management involves careful planning and oversight of both income and expenses. 

• Budgeting: create an annual budget that reflects your organization’s mission and goals, and includes anticipated revenues and expenses. Involve key staff and board members in the budgeting process to make sure you take a realistic and inclusive approach. 

• Expense monitoring: regularly monitor expenses against the budget. Invest in financial management and accounting software for nonprofits to track expenditures efficiently. This helps identify any variances and allows for timely adjustments. 

• Financial reporting: prepare monthly financial statements, including income statements, balance sheets, and cash flow statements. Share these reports with the board and key stakeholders to maintain transparency and facilitate informed decision-making. 

Conflicts of interest 

Conflicts of interest can undermine the integrity of nonprofit organizations, so it’s vital to establish policies to manage them. 

• Conflict of interest policy: this should require board members and staff to disclose any personal or financial interests that could influence their decision-making. It should also outline the procedures for handling such conflicts, including recusal from relevant discussions or votes. 

• Training and awareness: regular training on conflict of interest issues can help create a culture of transparency and accountability within your organization. Make sure that all staff and board members understand the policy and its implications. 

• Keep records: carefully document any disclosures and actions taken to address conflicts. This documentation demonstrates the organization’s commitment to ethical practices and helps build trust among stakeholders. 

Staff compensation  

Like in any other organization, attracting and retaining excellent, qualified staff is critical for success, even when budgets are limited. 

• Competitive salaries: carry out research to make sure that your compensation packages are competitive within the nonprofit sector and local market. Nonprofits can use salary surveys and resources from organizations like the Nonprofit Finance Fund to benchmark salaries. 

• Non-monetary benefits: in addition to salaries, consider offering non-monetary benefits, such as flexible work hours, professional development opportunities, and wellness programs. These benefits can enhance job satisfaction and help with retention. 

• Transparency in compensation: clearly communicate the organization’s compensation policies and rationale for salary decisions to build trust and avoid disputes. 

Other nonprofit financial policies to consider 

In addition to what we’ve covered above, consider these additional nonprofit policies: 

• Reserve policy: establish guidelines for maintaining a financial reserve to protect the organization’s long-term stability during economic downturns or unforeseen expenses. This should include regular monitoring of financial ratios for nonprofits to help you better understand your organization’s financial health.  

• Investment policy: if your organization has surplus funds, develop an investment policy to guide how these funds are managed. This policy should align with your mission and risk tolerance. 

• Whistleblower policy: protect individuals who report unethical or illegal activities within the organization. A whistleblower policy encourages accountability, transparency, and a culture of integrity. 

Important financial management documents for nonprofit organizations 

As we’ve already noted, it’s crucial to make sure your nonprofit’s paperwork is in order, with any important information documented and communicated. We’ve outlined some of the core financial management documents below.  

Annual budget	A detailed plan outlining expected revenues and expenditures for the upcoming financial year. It should reflect the organization’s goals and objectives.
Financial statements	Regularly prepared statements, including balance sheets, income statements, and cash flow statements, that offer insights into the organization’s financial health and performance.
Tax returns (Form 990)	All nonprofits have to file Form 990 annually, providing transparency to stakeholders about the organization’s finances and operations.
Audit reports	Conduct annual audits, whether internally or externally, to make sure your financial reporting is compliant and accurate. Audit reports can enhance credibility with donors and regulators.
Policies and procedures manual	Having a comprehensive document that outlines your financial policies, procedures, and responsibilities will help with consistency and accountability across your organization.

Tips on how to master financial management for nonprofits and thrive 

Most nonprofits today are facing growing complexity while operating with limited staff and resources. “There’s a level of complexity here that is equivalent to what a major for-profit organization deals with,” noted Controller Nikki Jones of the Healthcare Businesswomen’s Association.  

When you combine these mounting pressures with a lean finance team to manage it all, the art of nonprofit financial management often results in a tremendous amount of stress and strain. 

Nonprofit finance professionals face a constant barrage of reporting requests, compliance requirements, complex funding streams, and multifaceted organizational structures. As your organization grows in size and mission, you need flexible cloud-based accounting solutions that you can administer without IT.  

Fortunately, finance teams that leverage a best-in-class, cloud nonprofit financial management solutions can achieve greater visibility and ultimately ensure mission success with these five tips. 

Tip #1: check your foundation 

Nonprofit finance professionals know that it’s essential to track every dollar and view each one by multiple dimensions, including fund, grant, program, project, and location. You then need to deliver the right metrics and reports to meet the varying needs of your board of directors, executives, donors, grantors, and staff. All those dollars and dimensions can equal an ever-multiplying chart of accounts, with thousands of unique account numbers if you’re using the wrong system. 

Your nonprofit chart of accounts is the foundation for your nonprofit’s accounting system, and it’s the place where stewardship begins. Without a solid foundation, your trek will be full of obstacles and pitfalls. That’s why many nonprofit financial teams use a logic-based chart of accounts for their financial structure. 

A modern cloud-based solution allows you to use a table-driven chart of accounts which minimizes complexity, reduces the number of account codes, and puts the financial team on solid footing. 

Tip #2: study your path with enhanced visibility 

For better visibility of what lies ahead, you need better data. The wrong financial reporting system can require too much manual data entry and even force you to use other tools to cobble together insights. When there’s urgency to get started on your journey, the finance team falls into survival mode and produces only the basic reports your organization needs. Plus, many accounting systems only offer backward-looking reports that don’t provide any real-time insights or support predictive analysis. 

Cloud nonprofit financial management solutions empower nonprofit finance teams to increase visibility with real-time information available anytime and anywhere. With an easy-to-use reporting system that filters, slices, and dices data, the finance team can quickly provide specific information to the right people at the right time—and in the right format.  

Flexible financial reporting capabilities provide a guided experience to help you filter, group, and organize data by the dimensions you want and build reports quickly. #

Tip #3: comply with the rules and enhance internal controls 

Nonprofit finance teams not only need to see their path clearly, but they also need to know and follow the basic rules of the road. Poor internal controls or inadequate recordkeeping can throw grants and donations into jeopardy and put you at risk of non-compliance. Your nonprofit accounting system should centralize grant records and reports, tracking funding details and monitoring spending and budget as grants get used. 

Cloud nonprofit financial management solutions help manage conditional grants, automating revenue recognition as milestones are achieved. These solutions also automatically create GAAP financial statements, FASB compliance reports, and Form 990 submissions to ensure compliance. A clear audit trail, roles-based security and automated compliance help enforce good internal controls so you can look ahead with an eye to future success. 

Tip #4: follow your true north with navigation tools 

With the right navigation tools, nonprofit finance teams can unlock a new, strategic layer of functionality with dashboards. Think of dashboards like an empty trip itinerary where you can populate components to create a proposed route and slate of activities for your group. Once the right components are gathered, the information is presented visually in a way that’s tailored to a specific program, role, or functional area of your organization. 

A real-time single source of financial truth provides the data including reports, metrics, nonprofit KPIs, and approval statuses. Role-based dashboards present this information visually in the form of graphs or collaborative communication feeds so users can see key performance and financial information, like real-time budget-to-actuals, at a glance. 

Tip #5: measure outcomes and impact 

Nonprofit financial professionals, donors, and funders are all driven by mission. To successfully achieve your goals, it’s essential to deliver accurate, timely information about program outcomes and demonstrate the impact your organization makes with each dollar of funding.  

Without the ability to monitor outcomes and impact, you can’t tell the human side of the story, attract donors and funders, or effectively deliver your mission. Cloud nonprofit accounting software empowers your team to track and report on both financial and non-financial information so you can easily see and present outcomes—whether that is measured in patients treated or meals served. 

Download our nonprofit finance team survival guide

There’s no question that financial management for nonprofit organizations can be grueling, especially without the right foundation. Cloud-based technology gives nonprofits of all sizes access to the insights needed to stay on course toward mission success.  

A core fund accounting solution with a dimensional general ledger, access to real-time metrics, automated compliance, and internal controls with easy-to-use reporting and dashboards will champion your financial management with data-driven insights and decisions. 

To find out how your organization can navigate the complexity of nonprofit financial management and stay focused on delivering outcomes, download our e-book, The nonprofit finance team survival guide. 

Nonprofit financial management FAQs 

What is financial management for nonprofits? 

Financial management for nonprofit organizations involves the planning, organizing, directing, and controlling of financial resources to achieve your goals. This includes budgeting, accounting, financial reporting, and ensuring compliance with laws and regulations. 

Why is nonprofit financial management important? 

Effective financial management is crucial for  sustainability, transparency, and accountability in nonprofit organizations. It helps secure funding, builds trust with stakeholders, and allows nonprofits to fulfill their mission more effectively. 

Who is responsible for financial management in nonprofit organizations? 

 While the board of directors holds ultimate responsibility for financial oversight, the executive director and financial manager (if applicable) typically handle day-to-day financial operations. All staff should be aware of their roles in supporting sound financial practices.