This chapter examines the financial and accounting principles and procedures related to the management of a nonprofit organization. The chapter addresses basic accounting principles that leaders of a nonprofit organization should be aware of, and the conditions surrounding the financial situation of a nonprofit organization. The chapter includes various frameworks to help understand facets of financial management in nonprofit organizations.
WHAT IS FINANCIAL MANAGEMENT?
Simply put, financial management is the efficient and effective planning of investment, financing, and asset management decisions through goal setting and identification and management of risks in order to ensure a positive cash flow and/or maximize the wealth of the organization. The ability of a nonprofit organization to deliver services to the maximum number of clients possible depends on its financial resources. The more financial resources generated by a nonprofit organization, the greater is the potential to offer more services. In times of financial and economic crisis, a nonprofit organization may find it difficult to sustain existing services and even be forced to terminate some. In fact, one of the ways to understand the level of financial sustainability of a nonprofit organization is the extent to which such an organization was able to keep providing existing services despite financial hardship. A vulnerable organization will reduce its services as soon as an external financial crisis hits. Consequently, people who rely solely on the services provided by an organization may see the overall conditions related to their survival deteriorating
FIGURE 8.1 A nonprofit perspective of financial management.
significantly. One must understand that an organization is as good as its ability to meet the needs of its target population. Efficient and effective financial management is one of the most important tools that help an organization achieve its goals and objectives.
As Figure 8.1 illustrates, a nonprofit perspective on financial management includes financial planning, financial monitoring, financial decisions, and financial accountability in order to ensure that an organization can sustain its financial resources to fulfill its vision and mission through the achievement of organizational goals and objectives.
Financial planning is a systematic process used to determine the strategic financial goals and objectives of an organization, as well as its activities and resources (human, material, and financial), and the timeline needed to achieve them. Financial planning starts with an organizational analysis, the development of a budget that accounts for the costs related to resources that are necessary to implement specific activities, and the identification of anticipated risks and strategies for risk management. Organizations use techniques, such as forecasting and analytics, to perform financial planning. Forecasting is the use of data on past performances to predict future performance for a similar period. For example, if revenues were down during the second quarter of the past 5 years, forecasting will predict that income will decrease by the second quarter of next year. The budgeting process will take such information into account. On the other hand, analytics use statistical analysis of data to predict future trends or behaviors. For example, analytics might predict that people will be more inclined to donate during the Christmas season or during the tax-filing period. Therefore, fund-raising strategy should increase efforts during such periods to increase revenue.