Driving your nonprofit’s mission forward requires your team to manage many different activities, from fundraising to strategic planning to marketing your cause in your community. But one critical aspect often gets pushed to the back burner: financial management. 

Proper financial management ensures your organization has the resources it needs to deliver services, engage its community, and simply keep its doors open. Plus, donors and funders are more likely to support nonprofits that transparently demonstrate their commitment to using the contributions they receive wisely.

In this guide, we’ll review four essential best practices for nonprofit financial management. Whether your organization is well-established or just starting out, these tips will help you use your resources in the most effective ways to advance your mission. Let’s dive in!

1. Assemble a Financial Management Team

Even if your nonprofit is relatively small, you should have multiple experts working on your finances day-to-day. Having a team like this ensures you can delegate tasks, improve efficiency, and allow everyone to check each other’s work, reducing the risk of human error.

The four key members of your organization’s financial management team are your:

• Treasurer. As the financial expert on your board of directors, your nonprofit treasurer is responsible for providing oversight in resource management through tasks like approving budgets and implementing risk management plans.
• Chief financial officer (CFO). This professional works closely with the rest of your organization's executive leadership team on financial strategy duties such as grant management and cash flow forecasting.
• Bookkeeper. Bookkeepers are responsible for keeping organized financial records and taking care of other everyday financial tasks at your nonprofit like managing invoices and making bank deposits.
• Accountant. Accountants’ main areas of expertise are financial analysis and reporting, which covers various duties that range from balancing transactions in your accounting software to filing tax forms to preparing for financial audits.

Small-to-mid-sized nonprofits often don’t have the budget or the need to hire a full-time CFO, bookkeeper, and accountant. If your organization is in this situation, you can outsource these roles to access the same expertise at a fraction of the cost. Just make sure the professionals you outsource to or hire have experience working with nonprofits so they’ll understand your unique financial situation.

2. Establish Fiscal Policies

Fiscal policies are the foundation of effective financial management, since they govern how your entire team handles your resources day-to-day in their respective roles. Jitasa’s nonprofit financial management guide recommends implementing the following policies at your organization:

• Gift acceptance policy: Outlines the types of contributions (both monetary and in-kind) your nonprofit can and can’t accept, as well as the conditions under which you’ll accept each donation.
• Conflict of interest policy: Establishes the procedure for leaders and board members to disclose conflicts of interest and the next steps to mitigate these conflicts.
• Expense reimbursement policy: Explains when and how employees and volunteers can be reimbursed for spending their own money on behalf of your organization.
• Staff compensation policy: Details how you’ll determine and increase salaries and benefits for your nonprofit’s employees.

Compile all of these policies into a handbook and share it with your entire organization so anyone can reference them as needed.

3. Diversify Your Revenue Streams

You’ve likely heard that you shouldn’t put all of your eggs in one basket when it comes to nonprofit revenue generation. A diversified funding model promotes financial stability, since you’ll have alternatives to fall back on if one revenue source falls short of expectations or expenses are higher than you predicted.

Your funding model should include some combination of the five major nonprofit revenue streams, which are:





• Individual donations. These make up the bulk of most nonprofits’ funding and include small, mid-sized, and major gifts, as well as event revenue and in-kind donations.
• Corporate philanthropy. This category includes all charitable contributions from businesses, such as sponsorships, matching gifts, and volunteer grants.
• Earned income. While this revenue stream isn’t commonly associated with nonprofits, your organization can earn some of its income through membership dues, merchandise sales, and fees for services provided.
• Investments. This also isn’t a common nonprofit revenue stream and isn’t particularly lucrative short-term. However, Infinite Giving recommends opening an investment account to grow your organization’s reserve funds through low-risk vehicles like treasury bills and mutual funds.
• Grants. These awards usually come from foundations or government agencies, and although they’re competitive, they can be critical for financing your nonprofit’s biggest projects and initiatives.

When you create your organization’s annual budget, categorize your revenue by source for more effective goal-setting. Additionally, make sure your total projected income exceeds your total predicted expenses to build in a cushion in case of emergency.

4. Report Your Nonprofit’s Finances Correctly

Many people rely on your nonprofit’s financial reports for various reasons. Federal and state governments set forth regulations for tax-exempt organizations and need to check that your nonprofit complies with them to continue providing it with this status. Grantmakers want to ensure they’re investing in organizations that will make the most of their funding. And donors will only continue to support your nonprofit if they know you’re using their donations to make a difference.

To fulfill all of these groups’ needs, develop the following comprehensive, accurate financial reports each year:

• Financial statements. Each of these four documents organizes and summarizes your organization’s financial data in a different actionable way. They include the statements of activities, financial position, cash flows, and functional expenses.
• Tax forms. To remain tax exempt, your nonprofit has to file an annual tax return via IRS Form 990. Plus, you need to complete W-2s for all of your organization’s employees and 1099s for any contractors you work with to help them do their individual taxes.
• Annual report. When creating this public-facing year-in-review document, include a section with tables and infographics of key financial information to give supporters a general sense of your situation. Then, attach your financial statements as appendices to the report in case any readers want to learn more.

Comprehensive financial reporting is also important for internal decision-making. By referencing past financial statements, tax documents, and annual reports, you can develop more informed strategies to improve your organization’s performance in various areas in the near future.

Nonprofit financial management is complex, but following the best practices above will give your organization a strong foundation to improve your procedures and make the most of your funding. While your financial team should be your go-to resource during this process, making sure everyone at your nonprofit is on the same page about promoting financial transparency and accountability is critical to your success.