Unlocking Financial Success: Essential Skills Every Nonprofit Leader Must Master

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As a nonprofit leader, you’re passionate about your mission. But to truly make an impact, you need to master the financial skills that will keep your organization thriving. At The Charity CFO, we’ve seen firsthand how understanding these key areas can transform your nonprofit’s financial health. Let’s dive into the essential skills you need to secure your organization’s future.

In this blog, we’re diving into a subject near and dear to our hearts at The Charity CFO – sustainability. 

If you prefer, video, check out this presentation right here:

What do we mean by that? 

At its core, a nonprofit exists for a mission. You want to serve others, bringing good into the world and meeting specific needs. 

But if your nonprofit is not sustainable, whether by struggling financially or burning out your team – the mission will not reach its full potential. 

In this blog, we’re breaking down some of the points made in the recent webinar with our CEO Tosha Anderson, and Instrumentl. 

What we’ll explore in this blog are three important takeaways:

Key Takeaways

  • Financial Red Flags: Nonprofits should be vigilant about red flags such as insufficient unrestricted funding and low cash reserves.
  • Importance of Cash Flow: Understanding cash flow is crucial for maintaining operational stability and planning for future growth.
  • Strategic Planning for Expansion: Nonprofits must carefully assess their financial health before pursuing programmatic expansion to avoid creating unsustainable funding gaps.

Recognizing Financial Red Flags

Are you keeping a close eye on your nonprofit’s financial vitals? You should be. Two critical red flags to watch for are:

  1. Insufficient unrestricted funding: Aim for over 50% of your funding to be unrestricted. This gives you the flexibility to allocate resources where they’re needed most.
  2. Low cash reserves: If you have less than 30 days of cash on hand, you’re living on the edge. Strive for at least 90 days of reserves to buffer against unexpected challenges.

By staying vigilant about these indicators, you can address potential issues before they become crises.

Mastering Cash Flow Management

Your cash flow is the lifeblood of your organization. While budgets and financial statements are important, cash flow should be your primary metric for evaluating financial health. Here’s what you need to do:

  1. Calculate your daily cash needs by dividing your annual budgeted expenses by 365.
  2. Monitor your cash flow closely to anticipate challenges and make informed decisions.
  3. Recognize the seasonal nature of your cash flow, especially if you rely on events or campaigns.

Understanding these patterns will help you plan effectively and avoid cash shortages during lean periods.

Planning Strategically for Growth

When exciting funding opportunities arise, it’s tempting to jump in headfirst. But before you commit to expansion, ask yourself:

  • Do we have sufficient cash reserves and operational capacity?
  • Can we maintain at least 25% in operating reserves and 90 days of cash on hand?

Taking a measured approach to growth will help you avoid overextending your organization. Develop multi-year financial plans that outline your projections for growth and resource allocation. This strategic approach will ensure your expansion is sustainable in the long run.

Dive deeper: Check out our recent episode of The Modern Nonprofit Podcast where we explored strategic planning in-depth: https://thecharitycfo.com/modern-nonprofit-podcast-vision-directed-strategic-planning/ 

Building Your Financial Confidence

If finance isn’t your background, don’t worry. Start by focusing on a few key performance indicators (KPIs) that matter most to your organization. Whether it’s cash on hand or program performance, understanding these metrics will give you a clearer picture of your financial health without overwhelming you.

Analyze the factors that influence these KPIs and how they relate to your mission. For instance, if a successful fundraising event boosts your cash flow, identify what made it successful so you can replicate that success in the future.

Your Path to Financial Success

By mastering these skills – recognizing red flags, managing cash flow, planning strategically, and building your financial confidence – you’re setting your nonprofit up for long-term success. At The Charity CFO, we’re committed to helping you navigate these financial waters with confidence.

Remember, financial management doesn’t have to be daunting. By breaking it down into manageable components and focusing on what matters most to your organization, you can make data-driven decisions that align with your mission and drive your impact.

Ready to take your nonprofit’s financial management to the next level? Let’s work together to ensure your organization’s financial future is as bright as its mission.

Get in touch with us here and we’ll chart a parth to long term sustainability for your organization.

 

Financial Reports to Share with Nonprofit Board

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Transparency and accountability are two of the most important factors in nonprofit accounting. Donors, the board of directors, and the public all want to know what your organization does with the funds it brings in. Being transparent in your nonprofit accounting helps build trust in your organization.

financial reports

But what financial reports are most important to build that trust through transparency with your board of directors? There are five main financial reports you may want to consider when presenting financial data to your board of directors, including:

  • Statement of Financial Position
  • Statement of Activities
  • Statement of Cash Flow
  • Budget vs. Actual Report
  • Fundraising and Development Report

1. Statement of Financial Position

Your statement of financial position is a financial report that provides an overview of the organization’s financials at a specific point in time. For-profit businesses also call the statement of financial position a balance sheet, and many nonprofits do the same.

Your balance sheet is a lot like a health chart for a medical patient–it shows the current overall financial health of your organization. Balance sheets show details on how much money and assets your organization has as well as what it owes to others. Your nonprofit balance sheet will typically have three main components:

  • Assets: What your organization owns
  • Liabilities: The amount your nonprofit owes
  • Net Assets: The value of your organization, or your assets minus your liabilities

Providing your board of directors with a statement of financial position can help them better understand the financial health, stability, and liquidity of your organization.

2. Statement of Activities

More commonly known as an income statement, the statement of activities report summarizes your organization’s revenues and expenses over a specific period. Generally, this report is provided monthly, quarterly, or annually. Organizations that have a high amount of revenue and expenses may want to provide multiple timeframes for their board of directors.

The statement of activities shows your board of directors how much revenue the organization has earned and the amount of expenses incurred over the specified time. The report also details whether your organization has generated a surplus or deficit during the period. Key components of the report include:

  • Revenue: Contributions, grants, program and service fees, and any other income
  • Expenses: Program expenses, payroll and staffing costs, fundraising events
  • Changes in Net Assets: Whether your organization has a surplus or deficit

An income statement report makes it easier for your board of directors to track revenue and expenses over time, which can help make long-term financial decisions.

3. Statement of Cash Flow

An organization’s statement of cash flow report tracks the inflow and outflow of cash over a set timeframe. The report is generally broken into three parts:

  • Operating Activities: Your day-to-day cash transactions including paying employee salaries
  • Investing Activities: Purchases and sales of an organization’s assets, such as buying new equipment
  • Financing Activities: Loans, grants, and donations to the organization

Proving your board with a statement of cash flow helps them better understand the ongoing cash flow management of the organization. You can the board can also use the report to look for opportunities to maximize cash flow and optimize cash flow management to make the organization more resilient to unexpected changes in the nonprofit’s finances.

4. Budget vs. Actual Report

A budget-to-actual report compares an organization’s actual financial performance with its budgeted figures. This report highlights the differences between budgeted and actual revenues and expenses.

Your board of directors can use this report to better assess the organization’s financial discipline and operational efficiency. Organizations with major variances between their budget and actual may need to adjust their cash flow and expense management practices.  Reviewing a budget vs an actual report also helps your organization identify discrepancies such as errors in accounting.

5. Fundraising and Development Report

A fundraising and development report focuses on the organization’s fundraising efforts and donor contributions. This report shows information on funds raised through various campaigns and events. It also generally includes data on donor acquisition and retention rates.

Your board of directors can use a fundraising and development report to evaluate the effectiveness of fundraising strategies. The report can also help show the organization’s financial sustainability through donor retention rates.

Fundraising and development reports are great tools for planning future fundraising ideas for the organization. You can use the report as a starting point to see what fundraising efforts your donors respond to best.

financial reports

Preparing Financial Reports for a Nonprofit Board

These five financial reports can provide your board of directors with an accurate picture of your organization’s financial health. Depending on your organization, some of your reports may be more or less in-depth, and some organizations may not need each report for every board meeting.

Working with an experienced nonprofit accounting firm, like the Charity CFO, is an easy way to ensure you’re providing the right reports for your board. The Charity CFO team specializes in nonprofit accounting and can help you navigate the complexities of financial reporting for your organization. We’ll help you create a nonprofit accounting system that uses technology to automate some aspects of reporting, saving time over manual processes.

Need help setting up a financial reporting process? Contact us today to find out how we can help!

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