For any nonprofit employee, from fundraisers to community organizers, a basic knowledge of nonprofit financial management is essential. From a professional development perspective, the higher up you move in your organization, the more you will have to deal with budgeting and other finance issues: just consider this list of ways that Executive Directors should be involved in their nonprofits’ financial leadership. Additionally, when all employees understand how the organization is spending and bringing in money, they can watch out for both opportunities and problem areas.
If you want to become proficient in nonprofit financial management, try signing up for any of the numerous classes and workshops on the subject in the NYC area. Until then, below are three crucial aspects of financial management that you’ll want to understand right away.
All organizations put together at least three financial statements, usually on a quarterly basis, which are reviewed by the Executive Director, Finance Staff, and some (if not all) of the board. The financial statements are important for a handful of reasons, including that they provide the most common way to reference your organization’s financial health and often sophisticated donors or foundations will ask to see them. Check out this helpful summary of nonprofit financial statements to learn more, but here’s a brief description of the three main statements:
- The Balance Sheet: This is a snapshot of the organization’s financial position, showing what you own and what you owe that the moment the document is put together.
- The Activities Statement: This documents lets you know how your organization is doing over a set period of time, such as a fiscal year, showing what money you’ve brought in and how you’ve spent it.
- The Cash Flow Statement: This shows how much cash your organization has, which is crucial for making payments (such as payroll or rent).
Restricted vs. Unrestricted
Not all donations are created equally: money that comes in can be restricted by the donor for certain uses. The Nonprofit Assistance Fund created a document on managing restricted funds, and the key terms you should know are:
- Unrestricted: You can use this money for any activities that will further your mission. Think of most general donations.
- Temporarily Restricted: The requirements on this money can be fulfilled by passing a certain length of time (time restriction) or performing certain activities (purpose restriction). Think of most grants.
- Permanently Restricted: The requirements on this money never expire. Think of an endowment.
Also, you may hear the term “board restricted endowment,” but that is different than permanently restricted funds, because in the future the board has the ability to change their minds and use that money in another way.
Assets, Liabilities, and Net Assets
You’ll find these three terms across financial statements (the balance sheet in particular) and other finance documents. The Montana Nonprofit Association has a useful presentation on nonprofit financial statements, which does a nice job explaining terms like these. But in short: assets are what your organization owns at the moment, from cash to furniture. Liabilities are what your organization still owes to others at the moment, from deferred salaries to taxes. And net assets are assets minus liabilities, which really shows how much your organization is worth.
How about you? What are the most important financial management terms and concepts in your work? How did you get an education in nonprofit financial management?
Micah Goldfus has been working at, volunteering for, and studying NYC-area nonprofits since he moved to the city in 2006. He is a self-proclaimed nonprofit management nerd. Read all of Micah’s posts for YNPN-NYC.