As summer fades and the air buzzes with the excitement of a fresh school year, there's a certain thrill in the act of preparation. Whether it's assembling a new wardrobe, setting up a study schedule, or even just organizing that backpack, getting ready for the academic year ahead is more than a chore - it's a ritual.
The start of a new school year isn't just for students. It also resonates in boardrooms and nonprofit offices, signaling that it's time to revisit the basics and refresh foundational knowledge. So, just as students recalibrate for the academic voyage ahead, why shouldn't we?
With our digital school bells ringing, it's time to attend a masterclass in nonprofit finance.
Before we delve deeper, let's get familiar with some key terms. Think of this as your vocabulary list for the year.
Balance Sheet: Provides a quick overview of the nonprofit's financial position at a specific point in time, detailing its assets (what it owns), liabilities (what it owes), and equity (the net assets or funds available to the organization).
Expenses: These represent the costs incurred by the nonprofit in carrying out its activities.
Fiscal Year: The financial year used for accounting purposes. It could align with the calendar year or follow a different period.
Forecast: Refers to the projections or estimations of income and expenses for a future period.
Grants: Funds that nonprofits receive from public or private organizations.
Organizational Budget: A detailed outline of how a nonprofit plans to earn and spend money over a certain period.
Overhead: Refers to the operating costs or ongoing expenses of running a nonprofit.
Restricted Funds: Donations or grants to be used for specific purposes as the donor or grantor dictates.
Unrestricted Funds: Funds that can be used at the nonprofit's discretion for any purpose.
Revenue: The total income generated by the nonprofit from various sources, such as donations, grants, and fundraising events.
Understanding the Balance Sheet
The balance sheet, in its simplest form, provides a snapshot of a nonprofit's financial health at a specific moment. It answers three fundamental questions:
What Does the Nonprofit Own? (Assets)
These are items of value owned by the nonprofit.
Physical Assets: Buildings, equipment, vehicles.
Financial Assets: Cash in the bank, investments.
Intangible Assets: Intellectual property like training materials or educational programs.
What Does the Nonprofit Owe? (Liabilities)
These are amounts the nonprofit must pay, either now or in the future.
Loans that the organization took out.
Bills or invoices that haven't been paid yet.
Contractual obligations to pay for services or goods in the future.
What's Left for the Nonprofit? (Equity)
Once you subtract what you owe (liabilities) from what you own (assets), you're left with equity. It represents the nonprofit's financial net worth or reserves.
If the nonprofit had to settle all its debts today, equity is what would remain.
Why is the Balance Sheet Important?
The balance sheet is a vital tool for a nonprofit because:
Transparency: It shows donors, stakeholders, and members how resources are being managed.
Decision-making: Helps the leadership decide if they can take on new projects, need to fundraise more, or should conserve resources.
Financial Health: Indicates if the nonprofit is in a stable, vulnerable, or growing financial position.
Having a clear understanding of the balance sheet gives nonprofits a grounded sense of their current position. But while the balance sheet captures a single point in time, there's another tool that looks ahead, planning for the nonprofit's financial future: the organizational budget.
Unpacking the Nonprofit Budget
A nonprofit budget outlines your organization's financial goals and how you plan to achieve them. It's a roadmap that guides your financial decisions, ensures transparency, and helps you stay focused on your goals.
Creating a budget involves:
Making realistic projections about revenue and expenses.
Laying out these estimates in a clear and understandable format.
Being flexible enough to adjust the budget as circumstances change.
It is essential to regularly monitor your budget to ensure that your nonprofit stays on track financially and can meet its objectives.
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Crafting the Nonprofit Budget in 10 Easy Steps
Think of setting up a nonprofit budget like piecing together a jigsaw puzzle. At first, it may seem overwhelming with all the scattered pieces. But when you start sorting them out and following a plan, the picture becomes clear. Here's a simple step-by-step guide to help you fit all the pieces together:
Start early and follow a set process: Begin the budgeting process at least three months before the start of the fiscal year. This allows you sufficient time to gather all necessary information, consult with stakeholders, and present the proposed budget to the board for approval.
Involve your team: Budgeting should be a collaborative effort involving the board, staff, and volunteers. This ensures a comprehensive and accurate budget that has buy-in from all stakeholders.
Rely on real numbers: Use past financial data to make accurate projections for the upcoming year. Avoid making assumptions or guesses. If you must make assumptions, document them for future reference.
Be realistic: Make sure your budget is grounded in reality. Don't overestimate your revenue or underestimate your expenses. It's better to err on the side of caution.
Keep it detailed: Your budget should provide a detailed breakdown of all expected revenue and expenses. This helps you track your financial progress and make informed decisions.
Don't forget about non-monetary contributions: Include in-kind donations and volunteer hours in your budget. These contribute value to your nonprofit and should be accounted for.
Plan for cash flow: Make sure you have enough cash on hand to cover your expenses throughout the year. Consider the timing of your revenue and expenses and plan accordingly.
Separate operational from capital budget: Keep your operating and capital budgets separate. Your operating budget covers your day-to-day expenses, while your capital budget covers long-term investments and large one-time costs.
Don't operate on a shoestring budget: Operating with a minimal budget is risky. Aim to budget for a surplus to buffer unexpected costs or shortfalls in revenue.
Monitor your budget regularly: Review it periodically and compare it to your income and expenses. This helps you monitor your financial progress and make adjustments as needed.
Remember, your budget is a living document that evolves with your nonprofit. Regular monitoring and adjustments ensure that your budget remains effective and relevant to your nonprofit's needs and goals.
Final Thoughts: Leveraging Financial Basics for Nonprofit Success
The back-to-school season always brings a sense of renewal —and the spirit of learning and revisiting the basics is universal.
Just as students brush up on fundamental subjects before delving into intricate chapters, it's an opportune time for us to solidify our grasp of core financial concepts.
With the essentials of budgeting and balance sheets under your belt, navigating the intricate waters of nonprofit finance becomes a more manageable task. Here's to mastering and leveraging those fundamentals for a successful financial journey ahead.
Kristin Chute is a freelance writer with a passion for helping nonprofits increase their reach and impact. She has written for companies offering SaaS solutions, nonprofits directly, and donor loyalty programs.
Kristin believes in the power of nonprofit organizations to change the world. With expertise stemming from her career and personal connection to volunteering at her childhood summer camp, she shares insights to help nonprofits increase their reach, engage supporters, and amplify fundraising efforts