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Resource Center Financial Management
Resource Center | Non-Profit and Management Resources General Description
General DescriptionFinancial management involves effective use of revenues to accomplish the mission of the organization. The successful organization works to enable all board members to understand financial information that is presented for review. Oversight of the budget and understanding of the organization is the responsibility of every board member, because financial problems can defeat even the most beneficial and extraordinary program. The successful organization works to enable all board members to understand financial information that is presented for review. Indeed, managing the finances of your organization is the most important activity that board members and staff can devote time and energy to. A budget that includes a projection of estimated revenues and expenses for all of the organization's activities for the year is an essential tool in financial management. Frequently the financial information presented in the treasurer's report at regular board meetings contains only half the needed information. A report that has only the current month's checking activity (a check register report) does not have financial management information. In order to form an accurate picture of financial health, the actual deposits and expenses must be compared to what you forecast in your budget. A clear financial strategy is a must for survival. An annual budget that includes projected expenses and revenues is an essential step. Using your annual workplan, expenses are fairly straightforward to plan for (i.e.: office expenses/operating costs, salaries, artistic fees, marketing costs, printing, postage, production costs, etc.). Look at some areas of expense as potential in-kind contributions-talk to local corporations and businesses to inquire what might be feasible. As you plan for your income, keep in mind that it is important to diversify income sources-do not depend too heavily on one source of income. return to the top BookkeepingA good bookkeeping system will accurately record and track income and expenses and provide you with information to help evaluate programs and fundraising. Setting up bookkeeping is not difficult. The basic elements of a bookkeeping system are described below. For small organizations, record keeping can be very simple. Larger organizations tend to have a more complex system. For either one, the basic needs are the same. Chart of AccountsIn a bookkeeping system, all expenses are taken from and income put into categories established in your budget. The list of these categories is called the chart of accounts. The list alone will work for organizations with only a few programs. For more activities, numbers or codes are assigned to each category to make recording easier. Cash Receipts JournalA cash receipts journal is the record of all income. When cash or checks are received, the source, check number, date and amount are recorded along with the category taken from the chart of accounts. The total entries in the cash receipts journal for a month should match the month' s deposits in your checkbook. Cash Disbursements JournalA cash disbursements journal is the records of all expenditures. The check number, date, and who the check is written to are recorded along with the category from the chart of accounts. For smaller organizations, check stubs containing this information serve as the journal. Accounts PayableAccounts payable are very simply the outstanding bills that you have. When a bill is paid, the check number and date should be marked on the copy of the bill. Paid bills should be filed in alphabetical order. Accounts ReceivableAccounts receivable are funds owed to you. For example, invoices on grants are a common receivable, along with the expenses and income, give a picture of your current financial status. The Audit TrailKeeping an audit trail means that your financial information is organized so anyone, including you, can figure out what happened a year later and not get too frustrated in the process. The audit trail is established by keeping cash receipt and disbursement journals current, marking and filing paid bill, and keeping track of the money owed you. Financial ReportsKeeping good records and books can do more for your organization than ensure legal operations. Information learned from financial reports can influence programs and fundraising. Comparing actual expenses and income to budget shows if you are on target or need to make changes. Reports give information that can help make the board make responsible financial decisions. Income and Expense StatementThis statement shows income and expenses for a particular time period (monthly, quarterly, annual). Small organizations frequently use a monthly income and expense statement as the treasurer's report. This statement alone gives little information to a board of directors. To be valuable, income and expenses should be kept year to date, and compared with budget figures. Balance SheetA balance sheet show what the organization owns (assets), what you owe (liabilities), and shows if you have money left or not (fund balance or deficit). The balance sheet provides information not available on income and expense statements. The balance sheet shows cash on hand, accounts receivable, accounts payable, and long term debt showing the total financial picture. Cash FlowCash flow refers to when funds come in, and when they are spent. Projecting cash flow will tell you if there will be funds when the bills are due. To project cash flow, use financial information from past years, make adjustments for program changes, and plot expenses and income by month. Estimating cash flow helps identify times of little cash before they happen, when adjustments can be made to spending or fundraising. Budget Year-to-Date ReportA Budget Year-to-Date report compares actual expenses with what was forecast in the budget. An annual budget is an organization's best guess about income and expenses. The Budget Year-to-Date report tells the organization if it guessed right. To generate the report, the income and expenses statement and budget figures are placed side-by-side for easy comparison. This information becomes part of the financial report to the board. return to the top Nonprofit ManagementPermanent Corporate Files:It is a good idea to be aware of all of the required filings and
paperwork required for your organization. It is also important to
have the original documents for corporate files stored cleanly and
clearly in a secure space.
Reports to IRSReview Circular E: Employer's Tax Guide, Department of the Treasury,
Internal Revenue Service, available at your local IRS office. The
IRS also offers Publication #557, which gives more detailed information
about the tax obligations of nonprofit employers. To order a copy,
call 1-800/829-1040. Both publications are clearly written and easy
to understand. They give instructions on:
return to the top Glossary of Financial Management Termsaccount: a business relation involving credit; a record of transactions expressed in debits and credits, evaluated in money, and showing the current balance accounting: the organized method of recording all the transactions affecting the financial condition of a business accounts payable: an amount owed to a creditor for merchandise bought on open account accounts receivable: money owed a business for merchandise bought on open account appreciation: an increase in the value of an asset asset: anything owned by an individual or business that
has commercial or balance sheet: an itemized statement listing total assets and liabilities to portray the net worth of a business at a given moment in time bookkeeping: the systematic recording of transactions affecting a business bottom line: net worth; owner's equity break-even point: the point of activity at which the company earns zero profit; it is reached when total revenue equals total expense budget: an itemized listing of estimated revenue, costs, and expenses for a stated time period business: the buying and selling of goods and services capital: the amount invested in a business venture cash: any business transaction that involves the handling
of currency and coins; collateral: security (one's home, auto, jewelry) left with
a creditor to assure the performance of the obligator; when the
obligator has performed (the loan collection: payment consideration: something of value consignment: goods delivered to a vendor for sale; the vendor pays if and when the goods are sold contract: a legal agreement entailing specified rights and duties copyright: the exclusive right to produce and sell an item cost: the value given up to receive goods or services; not all costs are expenses credit: sales or purchases that are accompanied by a promise to pay debit: any amount that, when posted, will increase the balance of an asset or expense account and decrease the balance of a liability account depreciation: a decline in the value of an asset dividend: a portion of the net profits declared by the board of directors for distribution to stockholders entry: a recording of data in an account book equity: net worth expenditure: a payment or obligation of payment for some item or service expense: the cost of resources used to create revenue; all expenses are costs financial statement: any statement recording the financial status of business fiscal: financial fixed assets: permanent assets (e.g., furniture, land, building) required for the conduct of a business, not converted into cash fund balance: current assets less current liabilities; equals net worth, or equity gross: the total amount before deductions in the black: a business that is functioning with a profit in the red: a business that is functioning with a loss income: money earned from the sale of goods or services income (operating) the profit and loss statement of a business for a period of time statement: interest: the price paid for the borrowed use of money invoice: a written form prepared by a seller of goods or services and rendered to the buyer, listing all items and prices journal: a record of original entry ledger: a record of final entry liabilities: claims against a business loan: a rental of funds loss: excess cost of an asset over its price of the sale management: planning, coordinating, and directing the activities of an organization net: that which remains after deductions from the gross amount net cash flow: the net cash consumed or produced in a period by an activity or product during a unit of time obligation: the legal responsibility and duty of the debtor to pay a debt when due operating (income) statement: a statement providing net sales, costs, expenses, and the net operating profit or loss for a fixed period overhead: costs of materials and services not directly adding to the product or service post: to record onto subsidiary records amounts that were
recorded in principal: the original amount of a deposit, loan, or other amount of money, on which interest is earned or paid pro forma invoice: a preliminary invoice indicating the value of the items listed and informing the recipient that all have been sent; not a demand for money profit: monies remaining after expenses, called surplus in not-for-profit organizations profit and loss statement: summary listing of the total revenues and expenses of a business within a specified time period receipt: any written acknowledgment of value received reconciliation: a process for determining the differences between two items of an account so as to bring them into agreement risk: any chance of loss (From the Dictionary of Business and Management by Jerry M. Rosenberg. New York: John Wiley & Sons, Inc., 1983. Reprinted by permission. 4: John Wiley & Sons, Inc. 1983.) return to the top BudgetingBudgeting is knowing how much you need to do what. Most nonprofit organizations don't understand the budgeting process. Many feel that budgeting might hamper their flexibility or style. Some believe that they can't budget because they never know exactly what their income and expenses are going to be. Still others feel that the budgeting process takes too much time (it actually takes very little). If you allow these objections to dictate your group's practices, you will not be able to utitlize your resources most efficiently. Indeed, the more objections you raise, the more your organization probably needs to budget. Here are two important principles to keep in mind when thinking about budgeting:
The budgeting process is a way of translating the goals and plans of an organization into dollars and cents and then looking to see if you have resources available to do the job you want to do. Some budgets deal with short-term projections (from one month to a year); some deal with long-range plans (two to five years). All budgets should show the overall direction of the organization as well as provide a basis for planning significant events such as hiring additional staff, expanding programs, seeking a large foundation grant, or gearing up to raise an organization's side of a matching grant. The monthly detail of budgets enables the organization to relate its operations to cash (how much money will be spent each month and where will it come from_). For this reason, the monthly budget should be as accurate as possible and should not be the result of simply dividing annual amounts by twelve. By comparing actual monthly costs to the projections in the budget, you will then be in a position to take any steps that are necessary to reconcile the two. As we said, budgeting involves a series of educated guesses. The more educated the guess, the more valuable the budget. Your beginning point is an examination of what specific goals your organization hopes to achieve during the budget period (e.g. one year, or five years, or whatever). Next, what are you going to do to bring this about_ When_ By how many people_ In what office_ How many airplane trips will you take_ How many mass mailings to how big a mailing list_ Notice that these questions do not yet involve numbers. You are simply planning. Converting your plans to numbers is the next step and can range from pure guesses to exact amounts. The detailed planning process required enables the organization to relate proposed costs to their proposed benefits. In the process, programs that most efficiently serve your organization's goals are kept; less efficient programs are eliminated. The process of preparing a budget and then comparing it to actual expenses is relatively easy. Taking action accordingly is more difficult, but even that is made easier because you learn about problems as they develop and you have a mechanism which helps solve them. How to Get Help With Your BudgetingProper budgeting requires a detailed knowledge of the goals and functioning of your organization and a day-to-day monitoring of actual operations. For these reasons, the budgeting process is best undertaken by people within your organization or by your Board of Directors. The chief executive of the organization must play a central role in this process. In most cases, the combination of you and your staff's knowledge of what you want to do, perhaps coupled with your treasurer's expertise in the financial management process, will provide you with adequate budgeting know-how. However, if you do have difficulty, you can get advice and instructions on the preparation of budgets and financial plans from various publications, including Gross' Financial and Accounting Guide for Nonprofit Organizations. After you have obtained the background information that you need about budgeting, you and your staff should have a conference to plan a budget for your organization. A program planning conference can logically be expanded into this activity. The next important budgeting phase of comparing actual operations to the budget does not require highly technical skills and can be accomplished very well under the do-it-yourself alternative. Even if you have the money to pay for professional assistance along the way, the do-it-yourself approach is a desirable and effective way of acquiring budgeting capability. return to the top Links
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