The Basics of Nonprofit Financial Management: Start Here
Financial strain is a common challenge for nonprofits, especially amid today’s fluctuating economy and ever-changing legislative landscape. If you’re struggling to manage your organization’s finances, you’re not alone. According to the Nonprofit Finance Fund, 36% of nonprofits ended 2024 with an operating deficit, and 86% are feeling the impacts of inflation.
This makes it more important than ever to understand the basics of nonprofit financial management and how to improve your approach. We’ll help you jumpstart your journey by covering:
- Nonprofit Financial Management FAQs
- Core Tenets of Financial Management for Nonprofit Organizations
- Nonprofit Financial Management Best Practices
- Additional Resources: Your Nonprofit Financial Management Toolkit
Nonprofit finances are nuanced and incredibly important, but they don’t have to be intimidating. Use this guide and the support of fiduciary advisors to help your organization manage its finances proactively and responsibly.
Nonprofit Financial Management FAQs
First, let’s address any baseline questions you might have about financial management and its implications for nonprofits.
What is Nonprofit Financial Management?
Nonprofit financial management is the process of planning, tracking, stewarding, and reporting on an organization’s financial resources and activities. All of your nonprofit’s cash and non-cash assets should be managed ethically to support the primary goal of furthering its mission, while remaining financially healthy.
Why is Financial Management Important?
501(c)(3) organizations are required to use all income for charitable purposes, so it’s essential that you track and manage your nonprofit’s funds appropriately. Your staff and board members have a legal, fiduciary responsibility to work in the organization’s best interests. Without proper financial management, you risk repercussions like losing your tax-exempt status and your supporters’ confidence.
Beyond fulfilling your legal and ethical obligations, effective nonprofit financial management comes with plenty of benefits. It allows your organization to more easily:
- Work toward its mission. Better-managed funds mean more resources to allocate to your programs and services.
- Maintain donor trust. Donors expect the organizations they support to use funds responsibly. Protect your assets and publish your financial activity to earn their trust and establish your reputation as an ethical organization.
- Weather times of uncertainty. Managing your finances well makes your organization more sustainable, helping you face unexpected financial challenges with confidence.
When finances are managed well, everyone at your organization (staff, donors, board members, etc.) feels more at ease. Your team can spend less time worrying about money and more time doing what matters: fulfilling your mission.
Who is Responsible for Managing Nonprofit Finances?
Financial management is a team effort, so everyone at your organization should be aware of the best practices we discuss below.
However, there are a few individuals with more direct responsibility than others. The division of responsibility ultimately depends on the structure and size of your nonprofit, but these are the typical key players:
- Board of directors: Your board is responsible for general financial oversight. They should review financial statements and reports regularly and maintain internal controls.
- CFO: A Chief Financial Officer (CFO) takes the lead on financial strategy, budget creation, and cash flow forecasting.
- Accountant: Whether you have an in-house accountant or hire an external bookkeeper, this individual should handle bookkeeping, monthly financial reporting, financial statement creation, and tax form filing.
- Nonprofit investment advisor: A professional investment advisor is an invaluable resource. They’ll manage any investment portfolios, create your investment policy, and provide long-term financial strategy and support.
To learn more about your financial responsibilities and the best framework to follow, check out our free webinar with Hiline. We joined forces with fund accounting experts to answer your questions and break down how nonprofits can boost financial confidence, even in uncertain times. Take a look:
How Do You Know If Your Nonprofit Is Financially Healthy?
Financial health for nonprofits can be complex. You might have a balanced budget and plenty of funding for this year’s programs lined up, but what happens if you lose a grant or a major gift falls through? Do you have a backup plan? Are your reserves healthy, or have they been losing value in a standard savings account for years?
You can get a detailed understanding of your financial health by conducting an audit (plus, you may be required to, depending on state laws and federal funding requirements).
However, there are plenty of signals you can look for in the meantime to get a general idea. For example, financially healthy nonprofits have:
- Enough money to consistently run programs, fundraisers, and cover overhead.
- At least six to 12 months’ worth of operating costs in reserve.
- Standardized processes for tracking and reporting financial activity.
- Regularly reviewed and updated financial policies.
- Strategic cash management plans to steward their reserve funds.
- The infrastructure to accept and manage high-value gifts like stocks and crypto.
Achieving long-term financial health is an ongoing process. If you want to improve your financial situation and start stewarding your finances for long-term stability now, talk with our team of registered nonprofit investment advisors.
Core Tenets of Financial Management for Nonprofit Organizations
Financial management encompasses many moving parts. Let’s explore six of the most important aspects.
Budgeting
Budgets are vital for allocating your resources effectively and staying on track with your financial goals. These documents detail your organization’s projected income and expenses, often for specific time periods, programs, or activities. For instance, you might create several fundraising event budgets throughout the year in addition to your main operating budget.
You should regularly create and review detailed budgets to ensure your spending aligns with your current resources and goals. Break down financials by source and type of funding or expense to get the full picture. Then, update your budgets with actual revenue and expenses throughout the year and adjust accordingly.
Diversified Revenue
Putting all your eggs in one basket is risky, especially when it comes to nonprofit financial management. If you only have one source of revenue and it falls through, you’ll have a hard time getting back on your feet.
Don’t rely on a single source of income. Instead, diversify your revenue streams so you consistently receive income from multiple different sources. This might include:
- Individual donations of various sizes
- Corporate sponsorships
- Federal and foundation grants
- Planned gifts like bequests
- Investment income
- Revenue from merchandise sales
- Annual distributions from an endowment
Additionally, make sure you have a good mix of restricted and unrestricted revenue. If most of your funding is locked by funder restrictions (such as a major gift you can only use to pay for scholarships), you’ll have a hard time covering operating costs and unexpected expenses. Encourage donors to make unrestricted gifts so you can pay for all aspects of your organization’s work.
Responsible Financial Policies
You need clear, up-to-date policies and guidelines to keep everyone at your organization on the same page about finances. These policies should outline responsible procedures, internal controls, and risk management plans to safeguard your organization’s funds.
If you haven’t established them already, we recommend creating, at a minimum, the following core nonprofit policies:
- Gift acceptance policy: This document defines what types of donations you can and cannot accept. Consider setting requirements for in-kind gifts of goods or services, and include any non-cash assets your organization is able to accept.
- Investment policy statement (IPS): An investment policy is crucial if your nonprofit plans to manage any endowments or invest its reserve funds (which we recommend!). Your IPS will outline investment goals, strategies, spending policies, and more.
- Conflict of interest policy: To ensure you’re always working in your nonprofit’s best interest, you need guidelines for what is considered a conflict of interest and what to do if one arises.
- Staff compensation policy: This policy breaks down your organization’s compensation structure and details how you should make compensation decisions for individual staff members.
Even if you already have all of these policies in place, review them now with your board of directors to see if they still meet your organization’s needs. Some of these policies are more technical (such as the IPS), so you might need professional help to ensure they cover all your bases.
Accurate Reporting
Reporting on your financial activity regularly is essential for retaining public trust and your tax-exempt status. Many organizations use accounting software, bookkeeping services, and outsourced professional help to ensure their documents are accurate and easy to find. No matter how you approach financial reporting at your nonprofit, you must keep detailed records and file the necessary tax forms.
Some of these core financial statements and tax forms include:
- Chart of accounts: A reference table that tracks your organization’s assets, liabilities, net assets, revenue, and expenses
- Statement of activities: A report on your actual annual revenue, expenses, and net assets that you can use to create better budgets
- Statement of cash flows: Monthly statements that describe how money moved into and out of your organization throughout the month
- IRS Form 990: Your nonprofit’s annual tax return that details all of your financial activity and helps you maintain your 501(c)(3) status
- W-2s and 1099s: Employer tax forms you must complete for each of your organization’s employees so they can file their own taxes
Your organization’s accountant should handle most of these statements, but check out our toolkit later in this guide if you want more information. Remember that your board of directors is responsible for reviewing these reports and ensuring accuracy, so they should have a baseline understanding of each one.
Transparency with Stakeholders
Many reports, like the Form 990, are already publicly available. However, it’s in your nonprofit’s best interest to publish financial information yourself to be as transparent as possible with your stakeholders.
Donors, grantmakers, volunteers, and the general public want to know that you’re using donations ethically and effectively to further your mission. They may search for financial information themselves or rely on charity watchdogs and agencies that report on nonprofit activities.
To promote transparency, publicly disclose financial information by creating detailed annual reports and publishing financial statements on your website.
Long-Term Financial Planning
As soon as you’ve stabilized your current financial situation, start looking to the future. Take steps to become more financially sustainable and grow your funds over the long term.
Not every nonprofit needs to open a quasi-endowment (an endowment managed by your board), although this may help your organization’s financial growth if you have the capacity to manage one. For other nonprofits that are just starting to improve their financial management, focus on smaller goals, like:
- Building and maintaining sufficient reserve funds.
- Keeping your reserves in an FDIC-insured account.
- Diversifying your donation options and revenue sources.
- Stewarding your funds in low-risk, highly liquid assets.
No matter where you are in your journey towards sustainability, the team of nonprofit finance experts at Infinite Giving is here to help. We can help you open a brokerage account with up to $5 million in FDIC coverage, steward your reserve funds in low-risk strategies like treasury bills, manage conservative, low-risk investment portfolios, and more.
Nonprofit Financial Management Best Practices
Now that you know the basics, let’s explore a few best practices that will help you better manage your nonprofit’s finances.
Understand Different Funding Types
In order to diversify your revenue and accurately track your nonprofit’s assets, you need to have a baseline knowledge of various funding sources. This includes:
- Individual donations: Individual donors may give cash, in-kind donations, planned gifts, donor-advised fund (DAF) grants, or assets like stocks and cryptocurrency. These contributions range from small-dollar donations to major gifts, and they may be classified as restricted or unrestricted revenue.
- Restricted revenue: Any funding that comes with stipulations is restricted revenue. An individual donor might want their gift to fund a specific program, or you may win a grant that comes with detailed guidelines for how you can use the funding.
- Unrestricted revenue: Donations and income without any restrictions are essential for keeping your nonprofit afloat. You can use this revenue for any purpose that’s relevant to your mission, such as covering overhead expenses or paying for fundraising software.
- Grants: Federal, state, foundation, and corporate grants provide restricted funding, typically for a specific program/initiative and time frame. To win grants, you must research grantmaking organizations and write a proposal that explains exactly how you plan to use their funds.
- Reserves: Your reserve, or rainy day, fund is a savings account that holds unrestricted funding you can use to cover operating costs in an emergency. Reserve funds should be set aside and highly liquid so you can easily access them in times of need.
- Investment income: Any returns you receive from investing reserve or endowment funds are considered investment income. By investing in low-risk, highly liquid assets like treasury bills and CDs, you can give your funds the potential for long-term growth.
Knowing the specifics of each type of funding will help you secure each one and get a more accurate picture of your nonprofit’s financial assets. Plus, you’ll be able to better explain the benefits of certain income types to your donors, such as unrestricted gifts.
Build a Healthy Reserve Fund
If you don’t already have a sufficient reserve fund, building one should be your first priority for financial management. Aim to keep 6-12 months’ worth of your operating reserves in reserve in case of emergencies or unexpected funding loss.
It also matters where you store your reserve funds. Keeping them in a traditional savings account can hinder their growth and make managing your finances more difficult.
Instead of balancing multiple accounts that don’t even beat inflation, we recommend choosing a brokerage account with an FDIC sweep program. This way, you can access up to $5 million in FDIC coverage from one account, meaning more of your money is insured by the federal government. You can also invest in low-risk, highly liquid strategies to give your reserves the potential for growth.
Expand Your Donation Options
Accepting a variety of donations makes it much easier to diversify your revenue and improve nonprofit financial management. Donors want flexibility when they give, so providing plenty of donation options shows that you value their preferences and want to make the giving experience as seamless as possible.
Plus, many non-traditional types of donations are typically larger than cash gifts. For instance, the average value of a stock donation last year was over $33,000. You don’t want to leave that kind of money on the table!
Go beyond cash donations and build the infrastructure needed to accept:
- Stock donations
- Cryptocurrency
- DAF grants
- Endowment gifts
- Planned gifts like bequests
- In-kind donations
- Corporate matching gifts
Navigating new types of contributions can be overwhelming, so our team at Infinite Giving is here to help. With our simplified non-cash donation page, your nonprofit can accept cash, stocks, crypto, DAF grants, and endowments in one place. Combine our technology with your nonprofit’s branding for a seamless, professional giving experience.
Work with a Nonprofit Investment Advisor
Finally, you can greatly improve your nonprofit’s financial management success by working with the right professional. Registered Investment Advisors (RIAs) that work exclusively with nonprofits are your best bet. These experts understand the ins and outs of nonprofits’ financial challenges, and they’re dedicated to helping you make the most of your money.
The advisors at Infinite Giving specialize in guiding nonprofits of all sizes toward financial sustainability. We help you grow your financial literacy and reserve funds through strategic cash management and user-friendly giving tools.
Our core financial advisory services include:
- Opening a brokerage account for your nonprofit with up to $5 million in FDIC coverage
- Expert cash management strategies for financial stewardship
- Investment advising and portfolio management
- Consistent fiduciary oversight
- Investment policy creation
- Regular board reports, statements, and tax documents
- Intuitive tools to accept and report on non-cash giving
“Partnering with Infinite Giving has taught me so much about how financing works.” - Christi Gordy, Founder and Executive Director of Canopy Life
With our help, nonprofits like Canopy Life have learned how to steward their funds and manage their finances more proactively, resulting in millions of dollars raised for their missions.
Additional Resources: Your Nonprofit Financial Management Toolkit
Financial literacy is a journey, and there’s always more to learn. That’s why we’ve gathered some of our favorite guides, templates, webinars, and checklists for nonprofits here.
Once you’ve read through our introductory guide, check out any of the following resources to keep exploring:
- Financial management basics:
- Glossary of Nonprofit Finance Terms and Concepts (Nonprofit Finance Fund)
- Nonprofit Financial Management Self-Assessment Tool (The Nonprofit Association of Oregon)
- Board-Ready Finance Kit for Nonprofits (Hiline)
- Budgeting:
- Nonprofit Budgeting: How to Get Started + Template (Jitasa Group)
- Cash Flow Projection Template (Nonprofit Finance Fund)
- Free Budgeting Course for Your Nonprofit Organization (Jitasa Group)
- Accounting:
- Financial policies:
- How to Develop a Nonprofit Investment Policy and Manage Risk (Infinite Giving)
- Sample Financial Policies & Procedures for Nonprofits (BoardEffect)
- Free Investment Policy Statement Template (Infinite Giving)
- Risk management:
- Understanding Nonprofit Risk Management: 3 Things to Know (Cogency Global)
- A Guide to Risk Management and Financial Controls for Nonprofit Leaders (Infinite Giving)
- Financial sustainability:
- Nonprofit Reserve Funds: How to Manage Operating Reserves (Infinite Giving)
- Survive & Thrive: The Complete Financial Framework for Nonprofits (Hiline)
- Financial Sustainability Guide for Nonprofit Organizations (Infinite Giving)
Go through this toolkit at your own pace, and remember that experts are always available to answer your questions or provide individualized support. If you have any immediate questions about managing your funds better or building financial sustainability, don’t hesitate to reach out to our team at Infinite Giving.
Managing Nonprofit Finances Long-Term
Basic knowledge of nonprofit financial management is essential for protecting your organization’s health, but it’s just the beginning. Once you have a handle on your nonprofit’s financial situation, you can start working toward true sustainability that positions your organization for long-term success.
If you’re ready to look to the future and grow your finances with smart cash management strategies, we’re here to help. Contact our team to learn what we can do for your financial management goals.
Karen Houghton, CEO and Founder of Infinite Giving
Karen Houghton is the CEO and co-founder of Infinite Giving, a Registered Investment Advisor that helps nonprofits build financial sustainability. With a background in both nonprofit leadership and venture capital, Karen brings a rare blend of heart and strategy to financial stewardship. She is passionate about democratizing access to wealth-building tools and guiding mission-driven organizations toward long-term financial health.
As a trusted advisor and advocate, Karen is reshaping how nonprofits think about money as a powerful resource for growing impact. Her work empowers tax-exempt entities to grow their assets, weather uncertainty, and fund their futures.
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