Nonprofit Financial Management Best Practices Uncovered

Proper financial management is a defining characteristic of a successful nonprofit in an increasingly stressful environment. 

Your organization must showcase transparency, accountability, and adherence to its mission in the face of fluctuating funds, changing regulations, and increasing complexity. 

Whether your organization is small or big, you must stay ahead of the complexities of allocating and accounting for funds, attracting new funders, and maintaining existing donor relationships. 

In this guide, we present some handy nonprofit financial management best practices to help you deal with challenges and maintain financial stability. 

We'll also discuss the best software to help you implement these practices in just a few weeks. 

TL;DR - Nonprofit Financial Management Best Practices

Let's start with an overview of the best practices we'll discuss in detail later in the guide. 

1. Effective budgeting and sustainable planning
2. Complying with legal and regulatory requirements
3. Timely reporting
4. Real-time forecasting
5. Board oversight

Since these practices can be overwhelming, you’ll need modern nonprofit financial management tools to streamline various processes. 

For example, Martus is a cloud-based financial management tool that can help with on-point budgeting, reporting, and forecasting to ensure that your finances and programs align with your mission. 

Through the collaborative budgeting function, you can involve both finance and non-financial teams to promote sufficient leadership and staff buy-in. 

Consult with our team to see how Martus can help you implement various strategies and improve financial management.

What Happens When Nonprofit Finances Are Mismanaged?

If the world were perfect, you wouldn't have to deal with financial mismanagement. While it may not have happened at your nonprofit, it's a good idea to be aware of these possible consequences:

1. Grantors Fail to Renew Funding 

Government and corporate grants are a huge funding source for most nonprofits. 

If grantors discover your organization is mismanaging grants, they may choose not to renew their funding, leading to budget deficits, program cuts, staff reduction, or even ceasing operations. 

Some may demand repayment, further worsening your financial situation. 

2. Delays Reporting to the Board

Late financial reports to the board can hinder its ability to monitor and evaluate your organization’s financial health and performance. 

The board may be unable to decide on measures that could restore your financial glory, such as proper resource allocation, fundraising strategies, or program development. 

You may also force your board to resort to reactive rather than proactive functioning if they only discover issues when they escalate. 

Ideally, it would be in everyone's best interests if the board could discover potential issues sooner so they can handle them as early as possible. 

3. You Lose Donor Confidence

Your donors may question your integrity and ability to steward resources responsibly if they discover your organization has been mismanaging funds. 

Losing donor trust and confidence leads to decreased donations, which may stop altogether. Negative publicity also makes it difficult to attract new donors. 

To overcome these problems, you'll need more than just good intentions. You must cultivate a culture of integrity, transparency, and accountability across the organization. 

In addition, you'll need clear systems and processes, such as accounting controls, physical security, efficient documentation, early problem detection, and rigorous approval procedures. 

You must also embrace strong financial management systems that may include data-informed budgeting, reporting, and auditing practices. 

Core Principles of Nonprofit Financial Management

The guiding pillars that regulate nonprofit finance actions and decisions help ensure accountability, efficient use of resources, and sustainable operations.

Let's consider the main ones below. 

1. Mission-Driven Budgeting: Your budgets must reflect your organization’s priorities and match your strategic goals and long-term ambitions. You'll need clearly defined program goals and desired outcomes for successful budgeting. You must also involve your staff in budgeting, monitor performance, and adapt to changing situations. 
2. Diversified Revenue Streams: Your nonprofit will be financially vulnerable if you rely on only one or a few funding sources. Try various options across grants, earned income, and donations to reduce risk and promote long-term stability. You'll also need to build strategic reserves for long-term sustainability.
3. Transparency and Accountability: You must communicate openly and clearly with all stakeholders regarding your finances and operations to build trust and credibility. You should also share financial decisions with your staff, the board, and funders to ensure everyone is aligned and secure buy-in. 
4. Strategic Internal Controls: Risk management for nonprofits requires robust internal controls to protect assets, ensure accurate financial information, and prevent fraud. Some standard practices include segregating duties, regular audits, and reviewing financial transactions regularly. Other risk management aspects, like insurance coverage and contingency plans, are important. 
5. Continued Financial Monitoring and Evaluation: Every nonprofit must regularly monitor how its budgets perform against its goals to identify issues and adjust where needed. Check the effectiveness of your programs to ensure you are using resources efficiently and contributing to the desired outcomes. This process helps you learn, adapt, and improve proactively. 

5 Nonprofit Financial Management Best Practices

We'll discuss the best practices for nonprofit financial management in detail in this section. 

1. Effective Budgeting and Sustainable Planning 

Budgeting provides a roadmap for allocating resources and achieving your goals. It helps secure donor trust, continued support, leadership buy-in, and long-term resilience. 

Your budget must reflect your strategic plan and mission, draw from diverse income streams, and ensure expenses do not exceed revenues. 

You should also plan and budget for sustainability by ensuring you always have more revenue than expenses, enough insurance coverage, sufficient net assets, and accessible reserve funds. 

2. Complying with Legal and Regulatory Requirements

Your nonprofit must comply with government regulations, donor and grantor requirements, and public expectations. Compliance is important to avoid losing tax-exempt status, incurring financial penalties, or losing public and donor trust. 

Nonprofit accounting best practices, such as proper record-keeping, internal controls, and adherence to IRS regulations on fundraising, reporting, and fund usage, can ensure compliance.

Compliance not only protects your 501(c)(3) status but also maintains stakeholder trust and secures funding to further your mission. 

3. Timely Reporting

Timely and transparent financial reporting helps your board play its oversight role effectively. 

The executive and board members can make timely and informed decisions to ensure the organization is financially stable and adheres to its mission. 

You'll want to serve your board with timely, accurate, comprehensive financial reports such as the Statement of Functional Expenses and Statement of Activities to showcase accountability and transparency. 

Real-time and up-to-date dashboards in financial management tools help produce customized reports with flexible views that align with your nonprofit's operations. 

4. Real-Time Forecasting

Most nonprofits overlook forecasting, but it's important because it provides the clarity and insights you need to make informed decisions for the future. 

For example, monthly reforecasting helps eliminate the problem of outdated budgets. You can update and adjust all your budgets in real time throughout the fiscal year rather than at the start of the year only. 

You can also create and compare yearly forecast scenarios to anticipate various financial results and make strategic decisions that align with your mission despite evolving changes. 

5. Board Oversight

The input of the board is important to your organization’s success because it keeps you focused on the mission in your operations and financial management. 

Oversight often includes having a finance committee that oversees financial matters, reviews financial reports, and makes recommendations to the rest of the board. 

You'll want to conduct regular financial reviews and analyses to discover potential issues and ensure you comply with the board's regulations and requirements. 

Internal controls, such as user-based permissions, can help prevent financial mismanagement and fraud to secure the trust and confidence of the board. 

Sometimes, you might have to train your board members to help them understand financial statements and their oversight role. 

How to Implement Financial Best Practices Across Your Nonprofit

These best practices for nonprofits can be challenging to implement. 

Here are some measures to help you make implementation easier. 

1. Assess Your Current Practices

Conduct a detailed financial self-assessment using checklists or tools to evaluate your budgeting, reporting, forecasting, internal controls, and cash flow. 

Identify what works, what doesn't, and where to prioritize improvements. 

2. Secure Leadership and Staff Buy-In

Present a convincing case for change to your board and the rest of the staff to get their buy-in and ownership of the practices. 

Getting buy-in might be the most challenging part of the implementation. The tips below will come in handy. 

• Demonstrate the Value of the Practices: Show leaders and team members how implementing these practices will boost your nonprofit's financial health, improve its ability to deliver on programs, and increase its overall impact. For example, you can compare past budgets to the corresponding outcomes to show them how financial discipline directly increased program reach and donor confidence.

• Address their Concerns: Listen to the concerns the leaders and other staff raise about the implementation and address them accordingly. 

• Share Case Studies: Show the leaders and staff case studies of other nonprofits that have implemented similar practices successfully and the positive outcomes they have achieved.

3. Build a Cross-Functional Task Force

Form a working group with leaders and staff from finance, programs, development, and operations to make decisions that reflect the ground reality.

Through improved communication between departments and collective decision-making, you can translate financial changes into service-level impacts. 

4. Prioritize and Roll Out the Practices in Stages

When rolling out the practices, start with high-impact areas, such as tracking budget vs. actuals every month, allocating program costs, monthly reforecasting, and grant reporting. 

5. Train Staff and Board Members 

Train and support the board members and staff to ensure they are comfortable with using new systems and processes. Training will also help build financial literacy, secure buy-in, and create a culture of shared responsibility. 

For instance, you can offer short training customized to different roles, such as Finance Basics for Program Managers.

6. Monitor Progress and Refine the Process 

Track Key Performance Indicators (KPIs), such as budget accuracy, reporting timeliness, and staff confidence in financial tools. Conduct monthly or quarterly check-ins and adjust as needed. 

7. Institutionalize Best Practices

Make the best practices part of your organization’s long-term culture, such as involving program managers in the budgeting process every fiscal year. 

You can update your financial policies, onboarding materials, staff goals, and even job descriptions to reflect the new standards. 

To make implementation easy, you can turn to a specialized financial management tool like Martus. 

Martus streamlines the implementation of financial best practices by offering:

• Collaborative budgeting tools that engage both finance and non-finance staff, enabling teams to create and update budgets in one shared platform without the back-and-forth common with spreadsheets and emails. 
• Role-based access so that each team sees the data that matters the most to them without being overwhelmed by the information from other teams.
• Automated dashboards for real-time insights into financial trends and monitoring program budgets in real time.
• User-friendly and board-ready reports that reduce manual work, promote transparency, and allow you to drill down on performance by grant or program.

Keep Your Team on Track with the Right Financial Management Tools

Modern financial management tools can help you keep your team on track when it comes to proper financial management across the organization. They can help in the following ways:

• Eliminate Over-Reliance on Spreadsheets: You can use modern tools instead of spreadsheets to minimize errors and avoid poor scalability, time wastage, manual data entry, and lack of collaboration. 

• Provide Access Controls with Audit Trail: Modern tools have better access controls and audit trails to ensure financial information is safe and accurate. You can see all changes in real time, including who made them and when. 

• Facilitate Multi-Program Budgeting: Unlike traditional tools, modern tools let you create, track, and manage multiple program budgets within the same platform with the collective input of the relevant staff. 

As a modern cloud-based tool for financial management in nonprofit organizations, Martus can help keep your team on top of the game. 

You can ditch spreadsheets for Martus to connect team members, multiple and unlimited budgets, and other financial tools, such as accounting software. 

This connectivity ensures real-time collaboration among staff and leaders, time savings, and faster, smarter decisions. 

You also get lock controls that prevent further edits to worksheets that have already been completed and approved. 

Martus’s integrations with your existing accounting software ensure you enjoy efficient accounting and still get advanced budgeting, reporting, and forecasting capabilities. 

Streamline financial management and make smarter decisions with Martus.

Frequently Asked Questions (FAQs)

Let's wrap up with answers to additional questions you may have concerning best practices in financial management for nonprofit organizations. 

What Are the Most Common Financial Mistakes Nonprofits Should Avoid?

You'll want to avoid common nonprofit financial mistakes such as:

• Continuing to use spreadsheets even when you've outgrown them
• Accumulating too much debt and other liabilities 
• Not building a sufficient reserve fund 
• Inadequate fundraising 
• Neglecting budgeting
• Managing cash flow poorly 
• Recording financial data incorrectly 
• Poor oversight due to a lack of internal controls, reporting procedures, or clear financial policies
• Ignoring accounting best practices, such as applying the FASB’s Generally Accepted Accounting Principles, working with professional accountants, and leveraging modern software like Martus

What’s the Best Way to Involve Staff in Financial Management?

The best way to involve staff in financial management is to let them take charge of the parts that are dear to them. 

For example, when you let them create and track their own budgets, they can understand how finances support their work and the organization's overall mission. This understanding can build ownership and reduce surprises. 

Participation in team-specific areas can build financial literacy over time, making it easier to involve the staff in financial management in the future. 

How Do We Assess Whether Our Current Financial Practices Are Effective?

Internal and independent external audits are great ways to assess whether your current financial practices produce your target results. 

The financial health check can focus on budgeting accuracy, cash flow stability, effectiveness of internal controls, reserve levels, program delivery, and timeliness in reporting. 

Conclusion

Proactive financial management for nonprofit organizations can empower your team by improving financial clarity, reducing stress, and building stronger funder confidence. 

Being on top of the game requires implementing robust best practices, such as effective budgeting and timely board oversight. 

The problem is that even with sufficient buy-in, these practices can be hard to implement without the right financial management tools. 

You'll want to use a dedicated nonprofit financial management tool like Martus to streamline the implementation as well as your overall financial processes.

With Martus, you can save time, make faster and smarter decisions, enhance transparency and accountability, and ensure compliance across the board. 

Book a demo to see Martus in action and discover how it can help you manage your finances better.