Nonprofit financial management: 5 best practices to follow

Whether you manage a small grassroots operation or a powerhouse 501(c)(4) organization, nonprofits need to conduct a wellness check to ensure stable financials and streamline operations. Because of the rise of various fraud schemes targeting nonprofits over the last several years, organizations are placing a stronger emphasis this year on implementing developed financial management controls to streamline operations and improve organizational security.  

This article offers five tips for nonprofit financial management so you feel prepared and empowered when conducting a financial wellness check.

Due to both its high reliance on volunteer employees and different internal controls than regulated organizations, the nonprofit sector is estimated to lose approximately $4.5 trillion each year to various fraud schemes. The most common types impacting nonprofits include:

• Business email compromise (BEC) scams: Cybercriminals gain access to company records via fraudulent emails posing as a trusted partner.

• ACH Payment fraud: Cybercriminals use stolen account information to complete an unauthorized ACH transaction into their private account.

• Endorsement fraud: A signature is forged on a stolen/counterfeit check.

• Credit card fraud: Cybercriminals make small donations with stolen cards to test their validity for other purchases, causing chargeback fees to the organization.

It should be noted that banking solutions cannot prevent fraud from happening; having the right support, however, can help mitigate the potential circumstances that arise from fraud when detected. Nonetheless, nonprofits seeking to reduce the impact of fraud in the coming year can reference this guide to educate employees on how to spot these scams, as well as several others and how to help protect the organization when they do. 

Rather than donations themselves, membership often forms the financial foundation for most nonprofits, the top performers prioritize a positive donation experience for their members. This approach not only increases the likelihood of potential members making a contribution but can also lead to a larger donation amount than initially intended.

With that in mind, nonprofits should make the following adjustments to their payment process: 

• Simplify your organization's payments: Look for opportunities to remove paper from your processes and use streamlined electronic transactions wherever possible. This will help your organization stay organized, save time and money and avoid possible postal system delays. 

• Optimize for devices: Ensure your site is navigable on web and mobile devices to meet the needs of various member types.

• Consult with banking associates: Collaborate with your bank to ensure that they are offering all of the needed payment options to members/members. 

Technology can help empower nonprofits to optimize operations, enhance financial systems and unlock efficiencies. By updating financial systems and integrating enterprise resource planning (ERP) solutions, nonprofits can:

• Automate tasks: ERP systems are designed to automate menial everyday tasks such as inventory management, procurement, finance, accounting and marketing. This helps reduce the liability for human error or manipulation in these systems and keeps data updated more consistently than it would be through human means. 

• Improve accuracy: Because ERPs collect financial data in one place, they help reduce the need for excessive compiling or transferring of data across systems. This is especially helpful for non-profits often working with systems that do not easily communicate with each other.

• Maximize resource utilization: ERPs automatically budget and report on systems they control, allowing non-profits to quickly assess what resources are and aren’t being used. This helps them make crucial decisions about member benefits, payroll and event planning without having to switch between various systems.

Modern systems offer real-time insights for better decision-making, budget tracking and transparent expense management. Integration of ERPs centralizes functions, streamlines workflows, eliminates data silos and enables efficient collaboration. 

Leveraging technology can engage members, volunteers and stakeholders through online platforms, social media and mobile apps. It enhances reach, member relationships, impact measurement, transparency and accountability.

Because budgets at nonprofits are typically limited, it’s critical for your organization’s health to ensure that you are prepared for unexpected events that may cause unforeseen strain. It’s critical that organizations make backup plans so that your organization is prepared for setbacks in the future. Consider the following:

• Examine your payroll structure: Ensuring that your vendors, employees and paid volunteers receive payment on time is a critical element of staying afloat through tenuous economic conditions. Companies should ensure that their payroll and other internal systems are capable of being run both in-office and remotely to ensure that payments can be made regardless of the external conditions.

• Evaluate your organization's cash flow: Liquidity plays a crucial role during economic downturns. Having sufficient liquidity enables organizations to respond swiftly to changing market conditions, reallocate assets and adjust funding as needed. This adaptability can help them navigate economic challenges more effectively. 

• Focus on adaptability: Hold a regular meeting to evaluate your company’s preparedness for changing environments (e.g., natural disasters, public relations crises) to assess potential weak points. Consider aspects like company culture, historical financial strength and the level of debt the organization carries.

For nonprofits seeking advice on how to start this process, this resource has specific tips for building resilience into existing processes.

It’s a less glamorous aspect of performing a wellness check, but I’s must be dotted and T’s crossed. Nonprofits run through a great deal of paperwork pertaining to members, vendors and employees which need to be properly organized and secured. We recommend the following checklist items:

• Examine your contacts: Review your list of vendors and members to eliminate redundancies or outdated records. 

• Eliminate previously authorized backdoors into your nonprofit: Delete company profiles, access accounts and security clearance for employees who are no longer with your organization.

• Change your passwords: Update your organization’s passwords and set procedures to have them regularly changed moving forward. 

Executing nonprofit financial management practices in the real world is a difficult practice and it’s made all the more difficult when done alone. Between navigating the administrative difficulties of coordinating events and recruiting volunteers, nonprofits manage this noble work on what are often shoestring budgets that make success difficult and the risk of failure even greater. In the middle of that fight, it’s good to have someone in your corner.

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