Accurately tracking nonprofit financials is a necessary step in supporting the mission your organization is striving to accomplish. However, finances are not always straightforward. With different rules governing nonprofit organizations, it can be confusing and overwhelming — unless you have a dedicated partner.
Below we have outlined the most important terms you need to know from our webinar with Nick Curran, CEO at Numbers 4 Nonprofits. Nick discusses the importance of nonprofit organizations understanding their monthly finances.
Statement of Financial Position (SFP) [4:00]
The first step is to review your SFP, which is ultimately the same as a balance sheet. An SFP represents what is financially happening in your nonprofit organization at a set point in time.
Cash vs Accrual Accounting [4:45]
Determine if you are comfortable with cash basis versus accrual basis financial tracking. Nick recommends an accrual basis, calling it the truest measure of an organization’s financial performance. The main difference between accrual and cash basis accounting lies in the timing of when revenue and expenses are recognized:
- The cash method is a more immediate recognition of revenue and expenses. It involves recording income when the cash is received, and recording expenses when you pay the bill.
- The accrual method focuses on anticipated revenue and expenses, which means you record income when earned and expenses when incurred.
Receivables (Aged or Current) [11:21]
Receivables are what is owed to your organization, whether that be cost reimbursement grants, pledges from donors, or earned income on contracts.
Investments & Distributions [20:11]
Make sure distributions are reflected properly. Distributions are not income, but instead a transfer of cash. For example, suppose an organization is fortunate enough to have an endowment to afford part of its operating budget. In that case, there’s a chance the budget would show a deficit because the funds coming in from investments are not treated as income.
Payroll Liabilities [24:45]
Understanding what is running in and out of payroll is important when it comes to employee deductions. Be sure deductions are zeroing out regularly. Unresolved payroll liability accounts are a common issue with new nonprofit partners.
Revenues [32:25]
Your SFP can provide beneficial information from how much of a grant has been used. An important question to ask is how will we achieve our goals? Try setting monthly fundraising goals and tracking against them.
Expenses [42:22]
From personnel to fundraising, nonprofits need to be mindful of where and how much of their money is spent outside of programming.
Additional Tips
- LUNA - Measure financial health with LUNA (months of Liquid Unrestricted Net Assets). Do this by taking your unrestricted net assets and subtracting your net fixed assets. Then divide by your average monthly expenses. [32:15]
- Debt Payments - The principal portion of debt payments is not reflected in your statement of financial activities. In order to pay debt, your organization has to budget a surplus. [28:35]
- Timeliness - Financials need to be delivered in a timely manner. If an organization is only seeing financials quarterly, chances are you won’t be making decisions as proactively. [6:15]
- Are Your Financials Being Audited? - Most nonprofits undergo an annual audit whether required by law (over $500k of contributed revenues) or per the organization's bylaws. Audits can be expensive, so be sure you need one. [6:50]