Free Management Library's
Online Nonprofit Organization Development Program Module #8:

Managing Your Nonprofit's Finances and Taxes

(This module is in the nonprofit organization development program. However, this module can also be used by anyone as a self-study exercise to learn more about managing nonprofit finances and taxes.)

INTRODUCTION

Financial management is a major responsibility of the nonprofit chief executive -- unless the board decides otherwise, which is risky and rare. It's not uncommon for nonprofit founders and chief executives at first to have very limited skills in financial management. However, they should quickly develop at least basic skills in financial management, including in the critical areas of managing operating and program budgets, bookkeeping, financial controls, cash management, financial statement generation and analysis, and taxation. This module will help you understand the critical areas of financial management, and build the basic systems and practices needed in a healthy nonprofit organization.

The board has final responsibility for the financial health of the nonprofit organization. Therefore, it's critical that new nonprofits quickly build up the roles of the treasurer and finance committee. The treasurer and finance committee can be wonderful assets to the chief executive when managing the finances of the organization -- however, the chief executive should never completely ignore the finances by leaving them for the treasurer and other board members to manage. The board's role in ongoing governance of the nonprofit finances can include ongoing review of financial reports during board meetings, approving yearly budgets and financial statements, approving a set of fiscal policies (guidelines for managing the nonprofit's finances), reviewing results of a yearly audit conducted by an outside auditor, co-signing checks that are over certain limits, approving contracts, etc.

NOTE ABOUT LEARNING FINANCIAL MANAGEMENT: At first, when learning financial management, many people might react that the learning experience seems mostly like filling one's head with strange concepts and processes. Typically, the learning process starts with this experience -- it probably isn't until the learner actually enters an accounting transaction and analyzes a financial statement that learning about financial management seems more "real". But the learning process almost always starts by reviewing concepts and processes. Financial management always tells the truth about the situation of a nonprofit -- so the learning process is well worth the effort.

NOTE ABOUT BOARD COMMITTEES: Consider establishing a Board Finance Committee to review and help guide implementation the information in this learning module. Major activities and goals from this learning module could be incorporated in that Committee's Committee Work Plan.

MATERIALS FOR REVIEW

The following materials will help you address each of the topics and learning activities in this module.
Note that additional materials for review are associated next to certain topics and activities listed in this module.

Preparation for Financial Management

1. What is fiscal sponsorship? When is it appropriate to consider, that is, when might it be helpful to someone who is founding a nonprofit? (See Fiscal Sponsorship.)

2. What is the role of the board treasurer? (See Role of Your Board Treasurer.)

3. What is the role of the finance committee? (See Description of Typical Committees.)

4. What needs to be considered when selecting an accountant? (See Getting and Using Accounting Services.)

5. What needs to be considered when buying accounting software? (See Buy Accounting Software to Help You? -- click out to "nonprofits, general advice")

6. What needs to be considered when selecting a banker? What services might a nonprofit need from a bank? (See Getting and Using Banking Services.)

7. What is the board's role in financial management? (See Very Basic Overview of Process and Its Key Terms, What Financial Reports do Management and the Board Need? (go to Financial Management) and What is the Board's Responsibility in Investment?(go to Financial Management))

Basics of Accounting

1. What is the accounting cycle? (See What Are the Elements of an Accounting System?(go to Financial Management) and Very Basic Overview of Process and Its Key Terms.)

2. What are the elements of an accounting system? (See What Are the Elements of an Accounting System?(go to Financial Management) and Very Basic Overview of Process and Its Key Terms.)

3. What is a fiscal policies and procedures manual? (See Very Basic Overview of Process and Its Key Terms.)

Bookkeeping and Financial Controls

1. What general activities are included in bookkeeping? (See and Very Basic Overview of Process and Its Key Terms.)

2. What is cash-basis vs. accrual-basis accounting? (See What is the Difference Between Cash Basis and Accrual Basis Accounting?(go to Financial Management))

3. What bookkeeping journals might you start out with? (See Very Basic Overview of Process and Its Key Terms.)

4. What is a Chart of Accounts? (See What Should Our Chart of Accounts Include?(go to Financial Management))

5. What is depreciation? How do you account for it? (See What is Depreciation?(go to Financial Management))

6. How do you account for contributions? (See How Do We Account for Pledges?(go to Financial Management), How to Account for Donated Goods and Accounting for Contributions Received and Contributions Made.)

7. What is the purpose of financial internal controls? What are some practices in internal controls (HINT: think about signing checks, opening mail, how to verify that account totals are accurate, etc.)? (See Very Basic Overview of Process and Its Key Terms, What is an Internal Accounting Control System and How Can We Make Ours Effective?(go to Financial Management), What Internal Controls are Needed for Cash Disbursement?(go to Financial Management) and What Internal Controls are Needed for Payroll?(go to Financial Management).)

Operating Budget, Cash Management, Credit and Collections, and Budget Deviation Analysis

1. What is a yearly (or operating or annual) budget? How is a yearly budget prepared? (See How Do We Prepare a Budget?(go to Financial Management), How Can We Make a Budget for the IRS?, Before We Start Work? (multi-year org'l budget) and Variety of Answers to Questions About Budgeting in the Nonprofit FAQ.)

2. What is petty cash? How should it be handled? (See What is Petty Cash and How Should We Handle It?(go to Financial Management))

3. What is a cash flow and how should cash be managed? (See What is Cash Flow and How Should We Manage It?(go to Financial Management), How Much Cash Should We Hold in Reserve?(go to Financial Management)

4. What is a cash flow statement? (See sample cash flow statement (scroll down to find this).)

5. List at least five methods that organizations can use to ensure they get paid by customers/clients. (See Debt Collection Basics.)

6. What is a budget deviation analysis? What information is considered during this analysis? (See Budget Deviation Analysis.)

Managing Program Finances

1. What is a functional or program budget? (See How Do We Develop Functional Expense Classification?(go to Financial Management))

2. What is the difference between program costs and "overhead" (or indirect or administrative) costs? (See How Can We Allocate Indirect Costs to Programs?(go to Financial Management) and How Can I Determine My Program Costs Easily?.)

3. How can you determine program costs versus overhead costs? (See How Can We Allocate Indirect Costs to Programs? (go to Financial Management) and How Can I Determine My Program Costs Easily?.)

4. How can determine which indirect costs to associate with program costs? (See How Can I Determine My Program Costs Easily?)

5. What are direct and indirect costs? (See How Can We Allocate Indirect Costs to Programs? (go to Financial Management)) (Note that direct costs can be organized into variable costs and fixed costs. Variable costs are those that are directly influenced by the number of clients in your program, for example, costs of various trips to clients' homes, supplies consumed by the clients, etc. Fixed costs are not directly influenced by the number of clients in your program, for example, costs of advertisements about the program, program planning, etc.)

Financial Statements and Analysis

1. What are three major forms of financial statements used by nonprofit organizations? (See What Financial Statements are Nonprofits Required to Issue? (go to Financial Management).)

2. What general information is included a Statement of Financial Position? Statement of Activities? Statement of Cash Flows? (See What Financial Statements are Nonprofits Required to Issue? (go to Financial Management) and Financial Statements of Nonprofit Organizations.)

3. What can be detected from analysis of a Statement of Financial Position? Statement of Activities? Statement of Cash Flows? (See How Do We Interpret Our Financial Statements? (go to Financial Management).)

Financial Reporting

1. What reports do the board and management need to see? (See What Financial Reports do Management and the Board Need? (go to Financial Management))

2. What reports are nonprofits usually required to issue?

3. Who else might expect to receive financial reports from a nonprofit? (See Very Basic Overview of Process and Its Key Terms.)

4. What information should be included in an annual report? (See Tips for Creating a Good Annual Report.)

Nonprofit Taxation

1. What does tax-exempt mean? (See Do I Need Help to Get Started?.)

2. How does a nonprofit obtain tax-exempt status? (See What You Need to Know if Your Organization Plans to Apply for Tax Exemption)

3. What is a Form 990? What nonprofits must file this Form and how often? (See Preparing and Filing Form 990s (including about public disclosure).)

4. What kind of substantiation does the IRS require for contributions? (See IRS Requires Substantiation of Contributions.)

5. What is unrelated business income? How much can you earn without reporting it? How is it calculated? (See Nonprofits Often Don't Worry About UBIT - Part 1, Nonprofits Often Don't Worry About UBIT - Part 2 and How is Unrelated Business Income Tax (UBIT) Calculated?)

6. How much lobbying can a 501(c)(3) do? Electioneering? (See Statement about Importance of Policy Advocacy and Summary of federal rules about lobbying for 501(c)(3) organizations)

7. Name at least five of the major considerations the IRS makes when determining if someone is a contractor or an employee of an organization. (See "IRS Guidelines: Employee Or Independent Contractor?".)

ACTIVITIES TO BUILD SYSTEMS AND PRACTICES

Learners are strongly encouraged to complete the following activities, and share and discuss results with peers, board members, management and staff, as appropriate.
As you proceed through the following activities, be sure to note any incomplete actions in the Action Item Planning List.

Building Role of Treasurer and Board Finance Committee

1. One of the greatest assets to a chief executive can be the board treasurer and finance committee. Do you have a board treasurer and a finance committee? If not, make it a high priority to recruit a treasurer and organize a board finance committee. (See Your Board Treasurer -- A Critical Resource to Help You Get Started, Recruiting and Orienting Members and Building Successful Board Committees.)

Bookkeeping and Financial Controls

1. Select the journals with which you will be working. If you are a small nonprofit that is just starting out, then you'll likely only need a cash journal. (See and Very Basic Overview of Process and Its Key Terms.)

2. Will you be using a cash-basis or accrual-basis accounting? If you're a small nonprofit, then you're likely to use the cash-basis to record transactions and an accrual-basis for generating your financial statement. (See What is the Difference Between Cash Basis and Accrual Basis Accounting? (go to Financial Management and scroll down))

3. Devise a Chart of Account. (See What Should Our Chart of Accounts Include? (go to Financial Management))

4. Adopt a preliminary set of financial internal controls. Consider practices about signing checks, opening mail, verifying that account totals are accurate, etc.) (See Very Basic Overview of Process and Its Key Terms, What is an Internal Accounting Control System and How Can We Make Ours Effective? (go to Financial Management), What Internal Controls are Needed for Cash Disbursement? (go to Financial Management) and What Internal Controls are Needed for Payroll? (go to Financial Management).)

Designing Operating (or Annual or Yearly) Budget

1. Your operating budget depicts the revenue the nonprofit expects to earn or be granted. It also depicts how that revenue will be spent. Budget development starts from strategic planning. If you completed Module 6: Developing Your Strategic Plan. then you already have designed a basic yearly operating budget. If you completed Module 7: Designing and Marketing Your Programs, then you've updated your operating budget to include functional budgets for each of your programs. If you have not completed these two modules, you should review information and materials in those modules to draft a basic operating budget and associated functional budgets for each of your programs.

2. Obtain authorization of the operating budget (including functional budgets for each program) by the board. Board members should receive copies of the operating budget for their review and authorization in a board meeting. The minutes of the board meeting should reflect member's approval of the budget. Approval indicates that the board expects the nonprofit to operate over the coming year according to the expected expenses and revenues depicted in the approved operating budget. Note that if board members have been involved in previous strategic and program planning, then their approval of the budgets should be very straightforward at this point.

Managing Program Finances

1. If you finished the learning modules about strategic planning and about program design and marketing, then you probably already have a good sense for the revenue and expenses of each of your programs. If you have not done so, write a basic functional or program budget. The board should review and authorize this budget. (See How Do We Develop Functional Expense Classification?(go to Financial Management).))

Financial Statements, Analysis and Reporting

1. At this point, you're ready to generate a basic Statement of Financial Position, Statement of Activities and Statement of Cash Flows. The board should review and authorize these statements.

2. Attempt a basic analysis of these statements and write the conclusions and recommendations from this analysis. The board should review the conclusions and recommendations. (See How Do We Interpret Our Financial Statements? (go to Financial Management).)

Nonprofit Taxation

1. Have you obtained "tax-exempt" status from the IRS? If so, be sure to keep the master copy of the letter safely stored away. What taxes are you exempt from? (See What You Need to Know if Your Organization Plans to Apply for Tax Exemption)

2. Attempt to fill in a Form 990? What information do you need to complete and file the form? When do you have to file the form? (See Preparing and Filing Form 990s (including about public disclosure).)

3. Will you have any unrelated business income? What is the source of this income? How will you report it? (See Nonprofits Often Don't Worry About UBIT - Part 1, Nonprofits Often Don't Worry About UBIT - Part 2 and How is Unrelated Business Income Tax (UBIT) Calculated?)

4. Does (or will) your nonprofit engage in lobbying can a 501(c)(3)? How much? Will that be a problem? (See Statement about Importance of Policy Advocacy and Summary of federal rules about lobbying for 501(c)(3) organizations)

Develop Your Fiscal Policies Manual

1. Now that you've considered all of the aspects of financial and tax management for your nonprofit, you're ready to compile a set of policies to ensure that finances and taxes continue to be managed effectively. Work with the Finance Committee to write an outline of the content of a fiscal policies manual. The Committee should adopt an action plan to develop and authorize the necessary policies for the manual. The manual should be reviewed and authorized on a yearly basis. (See Very Basic Overview of Process and Its Key Terms.)

ASSESSMENT(S)

1. Conduct a detailed audit of your financial management practices and internal controls by answering the questions about "Financial Indicators" in the Checklist of Nonprofit Indicators. List an action plan to complete items suggested by the audit, but not done by your organization.

REMINDERS FOR THOSE IN THE ON-LINE DEVELOPMENT PROGRAM

Reminders About You

1. Are you using your skills learned in previous modules? For example, as you using methodical approaches to problem solving and decision making? Are you using strong practices of meeting management? Are you communicating key information to others throughout your organization?

2. Are you discussing topics and materials with peers, board members and others, as appropriate? Discussion and ongoing feedback are some of the best methods to really learn new information and materials.

3. Are you helping others to hold you accountable to your times that you committed to reading and study in this program?

TRACKING OPEN ACTION ITEMS

1. One of the first indicators that an organization is struggling is that open action items are not tracked and reviewed. (Open action items are required actions that have not yet been completed.) Instead, organization members only see and react to the latest "fires in the workplace". Whether open action items are critical to address now or not, they should not entirely be forgotten. Therefore, update and regularly review a list of open action items that includes listing each open action item, who is responsible to complete it, when it should be completed and any associated comments. When updating the list, consider action items as identified during discussions, learning activities and assessments in this module. Share and regularly review this action item list with the appropriate board, management and staff members in your nonprofit. You can use the following Action Item Planning List.

2. What remaining questions or comments do you have that you want to pose? Pose them in ODNet-Nonprofits, a free online discussion group..

(Learners in the nonprofit organization development program can return to the nonprofit organization development program.)

For the Category of Financial Management (Nonprofit):

Recommended Books

Basics and General Information

Budgeting

Bookkeeping and Accounting

Cash Management

Financial Statements and Analysis

Basics and General Information

Bookkeeping Basics -- What Every Nonprofit Bookkeeper Needs to Know: by Debra L. Ruegg and Lisa M. Venkatrathnam, published by Fieldstone Alliance. Explains all aspects of developing and successfully managing systems to track and spend nonprofit finances. This is an easy-to-reference resource that is useful to new or established nonprofits. Today, nonprofits have to be more accountable than ever before about planning, managing and explaining their finances. This accountability now extends beyond just the Board treasurer -- other Board members no longer can expect just one person to handle the finances. This book helps everyone meet their responsibilities about finances!

The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just hover your cursor over the image of the book. A "bubble" of information will be displayed. You can click on the title of the book in that bubble to get more information, too.

Budgeting

Bookkeeping and Accounting

Bookkeeping Basics -- What Every Nonprofit Bookkeeper Needs to Know: by Debra L. Ruegg and Lisa M. Venkatrathnam, published by Fieldstone Alliance. Explains all aspects of developing and successfully managing systems to track and spend nonprofit finances. This is an easy-to-reference resource that is useful to new or established nonprofits. Today, nonprofits have to be more accountable than ever before about planning, managing and explaining their finances. This accountability now extends beyond just the Board treasurer -- other Board members no longer can expect just one person to handle the finances. This book helps everyone meet their responsibilities about finances!

The following book is recommended because of its highly practical nature and often because it includes a wide range of information about this Library topic. To get more information about each book, just hover your cursor over the image of the book. A "bubble" of information will be displayed. You can click on the title of the book in that bubble to get more information, too.

About Library

Add to Library

Contact Us

Free Management Library's Online Nonprofit Organization Development Program Module #8:

Managing Your Nonprofit's Finances and Taxes

INTRODUCTION

MATERIALS FOR REVIEW

Basics and Preparation for Financial Management Activities

Activities in the Yearly Accounting Cycle

Nonprofit Taxation

SUGGESTED TOPICS FOR REFLECTION AND DISCUSSION

Preparation for Financial Management

Basics of Accounting

Bookkeeping and Financial Controls

Operating Budget, Cash Management, Credit and Collections, and Budget Deviation Analysis

Managing Program Finances

Financial Statements and Analysis

Financial Reporting

Nonprofit Taxation

ACTIVITIES TO BUILD SYSTEMS AND PRACTICES

Building Role of Treasurer and Board Finance Committee

Bookkeeping and Financial Controls

Designing Operating (or Annual or Yearly) Budget

Managing Program Finances

Financial Statements, Analysis and Reporting

Nonprofit Taxation

Develop Your Fiscal Policies Manual

ASSESSMENT(S)

REMINDERS FOR THOSE IN THE ON-LINE DEVELOPMENT PROGRAM

Reminders About You

TRACKING OPEN ACTION ITEMS

For the Category of Financial Management (Nonprofit):

Related Library Topics

Recommended Books

Basics and General Information

Budgeting

Bookkeeping and Accounting

Cash Management

Financial Statements and Analysis

Also See

Taxation (Nonprofit) -- Recommended Books

Find a Topic

General Info

Free Management Library's
Online Nonprofit Organization Development Program Module #8: