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Financial Management

For small community- and faith-based non-profit organizations

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Financial Management for Non-Profits

Dedicated non-profit organizations are not, by definition, money-making ventures. However, even though money isn’t the object, it is still important for every non-profit to follow certain guidelines concerning the financial management of the organization. The basic accounting system should include the following components: chart of accounts, general ledger, budget, reporting and documentation system, and appropriate internal controls. It is also important to have the ability to properly manage grants, and to be cognizant of funders’ individual financial requirements, particularly when receiving government grants.

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The Accounting System

Before considering the elements of an accounting system, an organization must first decide whether to use a cash-based or accrual-based system. In a cash-based system, revenues are recorded only when they are received and expenses recorded only when they are paid. Conversely, in an accrual-based system, revenues and expenses are recorded when they are first earned or incurred, regardless of when money is actually exchanged.

It is recommended that an accounting system be accrual-based, particularly if an organization is planning on applying for foundation or government funds, as this is the generally accepted system among accounting professionals.

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The Accounting System – Chart of Accounts

The chart of accounts is a detailed listing of all of the accounts, or records of each business transaction, of an organization. It is used to keep track of the income and expenses of the organization.

Each account is assigned a number and divided into one of five categories: Net Assets, Assets, Revenues, Liabilities, and Expenses. The standard order for accounting categories on the chart of accounts is:

Assets Liabilities Net Assets (the balance remaining after financial obligations are

subtracted from Assets)Continued…

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The Accounting System –Chart of Accounts

Continued

The chart of accounts should correlate to the categories in the budget so that they can be easily compared. Separate charts may be kept for separate programs or sites, or they may be combined on the same chart.

It is best to keep the chart of accounts as simple as possible and to revise it over time as needed. Accounting software, such as QuickBooks, can be especially helpful and time-saving, particularly with detailed accounts. (Note: QuickBooks is not designed to handle grant accounting. It is best to consult with a public accounting firm for such guidance.)

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The Accounting System – Other Elements

General Ledger: An accounting book into which all of the organization’s accounts are entered and organized numerically. The ledger lists all transactions within that account for the time period the ledger covers. It doesn’t cover the detailed descriptions that are listed in the chart of accounts. In fact, the chart of accounts serves as a sort of table of contents for the general ledger.

Journals: The journal is a chronological record of all transactions. Each entry should include its correlating account number and a brief description of the transaction.

Continued…

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Checkbook: Most of an organization’s transactions are made through the checkbook, with which receipts are deposited and cash disbursements are made. For a very small organization, the checkbook can serve as a combined general ledger and journal, and reports may be prepared directly from it.

Accounting Procedures Manual: The accounting procedures manual is very important for the organization. It is a record of all of an organization’s financial policies and procedures and should be kept up-to-date and on hand all throughout the life of the organization.

The Accounting System – Other Elements

Continued

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Accounting Cycle and Maintenance

Trial BalanceThe trial balance is a procedure that seeks to ensure that

the general ledger is properly balanced (i.e. debits equal credits). If accounting is done manually, a trial balance should be completed on a monthly basis. A computerized accounting system will update the trial balance every time a transaction is entered.

Bank ReconciliationOnce a month, a bank reconciliation should be performed.

This procedure ensures that the organization’s calculated balance equals the balance according to the bank’s calculations.

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Reporting and Documentation

As stated on the previous slide, it is very important to keep proper documentation of all financial activities in the chart of accounts, general ledger, and journals, as well as records or personnel wages and a document detailing the organization’s financial practices. It is also important that all bills, invoices, packing slips, time sheets, etc. be kept in official files.

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Reporting and Documentation – Required Documents

Balance Sheet/Statement of Financial Position: This document is filled out at the end of each period and lists the organization’s assets (current, fixed, and net) and liabilities (current and long-term).

Income Statement/Statement of Activities: This is a report of the organization’s revenues, expenses, and change in net assets over a fiscal year. The income statement will denote whether the organization realized a profit or incurred a loss for the period.

Continued…

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Statement of Cash Flows: This report is usually prepared by an auditor at the request of the organization. It provides information on the flow of cash in and out of the organization.

Annual Form 990: This is the federal tax return for tax-exempt organizations, available online at http://www.irs.gov/pub/irs-pdf/f990.pdf. The 990 is due each year on May 15 and includes information on the previous year’s finances.

Other documents as required by state. (Consult a Certified Public Accountant or tax advisor.)

Reporting and Documentation – Required Documents

Continued

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Reporting and DocumentationTax ReportingAn employer must remit personnel income tax to the IRS on a monthly

basis. State and local remittance requirements and schedules may vary. Check with the state’s department of revenue and local officials to determine state and local requirements.

Reporting Charitable ContributionsWhen receiving monetary contributions, an organization should provide

the third party contributor with a written confirmation of the donation for tax purposes, state the name of the organization and donor and the value of the gift.

For in-kind donations (goods or services rather than money), the gift must be valued by the contributor, not the organization, and the stated value should be confirmed by documentation supporting the claimed value in order to ensure tax deduction from the IRS.

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Budget

The budget process should begin two to three months before the start of the fiscal year and should include the input of staff (both financial and program), board members, and the executive director. The board finance committee should oversee the construction and execution of the budget.

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The Budget Process1. Review the previous year’s results. What was the cost per unit of

service?2. Develop new goals and objectives for the coming year.3. Estimate the cost of the new objectives based on the previous

year’s results. Don’t forget to include indirect costs (incidental costs not closely attached to programs and goals—e.g. administrative costs) along with direct costs (closely associated with the program – e.g. staff salaries) and to adjust any costs that will be changing in the coming year.

4. Next, budget projected income. Estimate revenues, including grants, donations, etc.

5. Compare the projected revenue with the projected expenses. The organization may decide that it is appropriate to incur a deficit or realize a surplus for the year instead of breaking completely even.

6. Finally, the board must approve the budget and continue to review it on a monthly basis.

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Budget Notes

The categories and labels for the budget should correlate with those used on the chart of accounts.

It may be helpful to prepare separate monthly budgets to break down the year into smaller, more manageable sections. Finally, remember that the budget should be realistic, consistent with the organization’s objectives, cost-effective, and flexible.

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Auditing

An organization may or may not decide to obtain an audited financial statement depending on the size and revenue of the organization, as well as the board’s expertise regarding financial management. These statements can range from more or less expensive and/or comprehensive. If an organization is applying for government funds, it should obtain an audited financial statement.

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Internal Controls

Financial internal controls should be in place for the operating, accounting, and compliance departments regarding payroll, cash collection and disbursement, safeguarding fixed assets, etc. Making sure the financial management of the organization is operating properly is the responsibility of the entire organization, not just the accounting department.

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Internal Controls – Segregation of Duties

Financial duties should be segregated so that no one staff member handles any transaction entirely on their own from start to finish. For example, different members may sign checks, authorize payments, record transactions, or reconcile bank statements. This may be more difficult for a very small organization. If this is the case, a staff member may sign the checks for transactions and a board member (such as the treasurer) may review the statements and checks on a monthly basis.

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General Rules for Cash Management

Purchases should all fall within the established budget guidelines and restrictions. Large purchases which lie outside the scope of the budget should be approved by the board.

All cash disbursements should include documentation. Never withdraw cash from an ATM. Restricted funds (such as donations or grant money)

may only be borrowed against if the donor permits the action and must be replaced within the fiscal/grant year.

The number of check signers in the organization should be as minimal as possible while still allowing the organization to function efficiently.

Large purchases should have more than one signature on the check.

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Grant Management – Accounting Requirements

Accounting requirements differ according to each individual funder, but here are some general guidelines to follow:

1. Account for each award or grant separately

2. Federal and non-federal match funds should be tracked separately

3. In-kind donations should be tracked as both revenues and expenses

4. Identify costs by program year and budget category

5. Differentiate between direct and indirect costs

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Grant Management – Financial Responsibilities of Grantees

When preparing a grant proposal, an organization should keep in mind the following responsibilities:

1. Budget for the entire life of the grant, including all allowable costs, the agreed upon indirect cost rate, and increases in the cost of living

2. Address all matching requirements3. Focus on sustainability4. If applying for federal funds, an organization must also

seek a solid base of non-federal funds5. Pay special attention to specific requirements of each

individual grant

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Government Grants

When managing a government grant, certain additional guidelines must be followed. These guidelines, called Circulars, are published by the Office of Management and Budget. Different Circulars, apply for educational institutions, non-profit organizations, and government organizations.

For a listing of the OMB Circulars, visit http://www.whitehouse.gov/omb/circulars/index.html.

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Final Note

This guide is only a brief overview of the financial management systems that should be in place for a non-profit organization. The best way to obtain sound financial advice is to recruit a few board members with extensive knowledge of financial systems, or to hire a public accounting firm for consultation. This can be done relatively inexpensively for many non-profits and the time and trouble saved by such a partnership will likely pay for itself.

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EFFECTIVE FINANCIAL

MANAGEMENT

10. Internal Controls

1. Regulatory Requirements

9. Reporting

8. Matching Requirements

and In-Kind Contributions

7. Time and Activity

Documentation

6. Budget Controls

5. Efficient Accounting

System

4. Managing Cash

3. Documentation of Expenses

2. Written Policies and Procedures