As a nonprofit professional, you probably dedicate most of your time to running your programs and fundraising. After all, furthering your organization’s mission is why you work hard every day!
When using this operating model, however, nonprofit financial management activities often take a backseat. It’s essential to understand and proactively manage your finances so your organization has the resources to provide services and complete projects. Financial management works side by side with fundraising to allow your organization to fulfill its mission.
To help you start managing your organization’s fundraising revenue, this guide will review the basics of four key areas of nonprofit finance. Here’s what we’ll cover:
Nonprofit Finance Essentials
Once your organization develops a strong foundation for financial management, you’ll be able to adjust your fundraising strategy and more effectively achieve your goals. Let’s get started!
1. Revenue Generation
The question of how nonprofits make money is complicated for two reasons. First, while for-profit organizations focus on making a profit through their revenue-generating activities, all of a nonprofit’s funding has to be invested back into the organization. This doesn’t mean you shouldn’t work to maximize your fundraising revenue or establish a reserve fund, though—in fact, both are part of effective nonprofit financial management!
Second, for-profit organizations make most of their money by selling goods or services. Nonprofit funding models are often more complicated and include several of the following revenue sources:
- Individual donations. This category includes monetary gifts from small, mid-level, and major donors, as well as event revenue, planned gifts, and in-kind donations from individual supporters.
- Corporate philanthropy. Many businesses of all sizes support nonprofits through corporate social responsibility initiatives such as matching gift programs, volunteer grants, and event sponsorships.
- Earned income. If your nonprofit rents out space to another organization, sells branded merchandise, or collects membership fees, those activities fall under the category of earned income.
- Grants. Grant funding requires an application to secure and is usually awarded to help nonprofits accomplish specific goals. Many types of organizations provide grants, including government entities, public and private foundations, and corporations.
- Investments. Infinite Giving’s guide to nonprofit investing explains that nonprofits can (and should!) open investment accounts to build assets and grow their reserve funds. Nonprofits can also choose to invest in stocks, treasury bonds, and other types of accounts.
Diversifying your revenue through these different sources provides your nonprofit with more sustainable funding over time. Let’s say economic turbulence causes your individual donors to contribute less, but your organization is already leveraging matching gifts and volunteer grants. In that case, you could promote those corporate philanthropy opportunities to your supporters to multiply the impact of the money and time they can give and continue bringing in funding to further your mission.
2. Budgeting
To properly allocate the funding your organization brings in, you’ll need to create an operating budget for your nonprofit. This document outlines all of your predicted expenses for the upcoming fiscal year, as well as how much revenue you expect to bring in.
In your operating budget, you’ll organize your revenue based on the sources listed in the previous section. Your expenses can be broken down into these three categories:
- Fundraising costs. These expenses are defined as anything your organization spends on different aspects of fundraising campaigns, such as event planning, marketing, and nonprofit software costs.
- Administrative costs. This category includes utility bills, rent, employee compensation, and other expenses necessary to operate your organization. Administrative and fundraising costs together make up your nonprofit’s overhead.
- Program costs. Any expenses necessary to conduct your nonprofit’s community-facing work are considered program costs. For example, an animal shelter would categorize the money they spend on pet food and medical supplies under program costs, while an educational organization that provides free after-school tutoring would likely include the cost of books and school supplies.
An operating budget is just one of several types of budgets your nonprofit might create to help manage your finances effectively. Grant applications often ask for a budget showing how your organization plans to use the grant funding if you secure it. If you start a new program or launch a capital campaign, you might also create separate budgets to keep your finances on track throughout those major initiatives.
3. Financial Statements
In addition to creating an annual operating budget, compiling financial statements is another activity that your organization should complete each year. Each statement summarizes how your nonprofit has used its revenue in a different way and provides unique insights into the organization’s financial health.
To comply with the Generally Accepted Accounting Principles (GAAP), nonprofits are required to compile three financial statements:
- Statement of activities. Similar to the for-profit income statement, this document breaks down your nonprofit’s revenue, expenses, and net assets. You can compare this statement to your predictions in the previous year’s budget to see if you’ve stayed on track and then use that information to improve your budget for next year.
- Statement of financial position. Also known as a balance sheet, this statement compares your organization’s assets and liabilities to provide a snapshot of your nonprofit’s financial health. From there, you can determine if you have the bandwidth to take the risks necessary for organizational growth in the coming year.
- Statement of cash flows. This statement shows how cash moves in and out of your organization, broken down by operating, investing, and financing activities. Analyzing your cash flows provides insight into your fundraising efficiency and helps keep your spending in check.
Some organizations also include a fourth statement in their financial management activities known as the statement of functional expenses. While this statement is optional, it can be helpful come tax season as it categorizes your nonprofit’s revenue and expenses in the same format as the IRS Form 990.
4. Tax Returns
When you registered your 501(c)(3) nonprofit, one of the main benefits your organization received was being exempt from paying federal taxes. However, nonprofits still have to file a tax return using the IRS Form 990 to maintain this tax-exempt status. Since Form 990s become publicly available upon filing, they serve a secondary purpose: ensuring transparency with stakeholders about how your nonprofit is managing its finances.
According to Jitasa’s guide to the nonprofit Form 990, there are four versions of this form that your organization might file depending on your annual gross receipts and total assets, including:
- Form 990-N. Also known as the Form 990 e-postcard, your organization will file this eight-question digital form if your gross receipts total less than $50,000.
- Form 990-EZ. You can file this four-page abbreviated version of the Form 990 if your nonprofit’s gross receipts total between $50,000 and $200,000 and your total assets equal less than $500,000.
- Full Form 990. If your organization’s gross receipts total more than $200,000 or your total assets are valued at $500,000 or more, you’ll need to file the complete 12-page nonprofit tax return.
- Form 990-PF. All private foundations are required to file this type of Form 990, regardless of gross receipts or total assets.
No matter which version your organization qualifies for, the Form 990 filing deadline is the 15th day of the fifth month after your fiscal year ends. For most nonprofits, whose fiscal year follows the calendar year, your Form 990 is due May 15. Failing to file by the deadline (or request an extension in advance) can incur fines, so plan ahead to get your tax returns in on time.
Understanding how your nonprofit generates revenue, creating an operating budget, compiling financial statements, and filing tax returns are the first steps to developing a strong financial management strategy for your organization. Compare this strategy with your fundraising plans and overarching goals to ensure all of your activities align as you work to further your mission.
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