Section 2. Managing Your Money

• Why does your organization need a financial management plan?

• What does everyday financial management include?

• How do you create a financial management plan?

• What issues are involved in being tax-exempt?

• How do you handle cash flow?

• What are some day-to-day financial management issues?

• What are some investment issues?

Organizations need reliable financial systems in order to carry out their missions, pay staff and vendors, comply with funding requirements, manage risk, and make informed decisions about the future.

Effective financial management generally requires:

• A realistic and current budget
• Appropriate banking, payment, and purchasing systems
• Reliable accounting and recordkeeping
• Clear authorization and internal-control procedures
• Systems for paying bills, receiving revenue, and managing payroll
• Cash-flow forecasting and sufficient liquidity to meet obligations
• Procedures for managing grants, contracts, restricted funds, and reporting requirements
• Appropriate cybersecurity, privacy, document-retention, and backup practices
• Clear financial oversight by organizational leadership and the governing board

Why does your organization need a financial management plan?

Even very small organizations need some way to track money coming in and going out, maintain appropriate records, protect organizational resources, and meet financial obligations. The complexity of the system should reflect the size, activities, legal structure, funding, and risks of the organization.

A financial management plan can:

• Help the organization fulfill its mission. Reliable finances make it possible to sustain programs, staff, partnerships, and other work.
• Support effective use of resources. Good financial information helps leaders determine whether money is being used efficiently and in ways consistent with organizational priorities.
• Strengthen control over finances and cash flow. Leaders can identify problems earlier and respond before they become crises.
• Support reliable relationships with employees, vendors, partners, lenders, and funders. Meeting financial obligations and communicating early when problems arise builds trust.
• Strengthen credibility and accountability. Boards, funders, donors, partners, and community members should be able to trust that organizational resources are managed responsibly.
• Save time. Clear procedures and reliable records reduce the time spent locating missing information, correcting errors, or reconstructing transactions.
• Support better decisions. Accurate financial information helps leaders understand what the organization can afford, what risks it faces, and where additional resources may be needed.

What does everyday financial management include?

Financial management is not primarily about advanced mathematics. It is about creating reliable systems, using accurate information, establishing appropriate controls, and making sound decisions.

Financial responsibilities may be carried out by an executive director, finance staff, bookkeeper, accountant, chief financial officer, board treasurer, finance committee, fiscal sponsor, or some combination of these roles. Even when financial work is delegated, organizational leaders and board members should understand the organization's financial position and know what questions to ask.

Useful systems may include:

• An accounting and bookkeeping system that records transactions accurately and produces useful financial reports
• A banking and treasury system that addresses liquidity, fees, security, authorized users, deposit insurance, and access to funds
• A payment and purchasing system defining who can authorize, approve, initiate, and review expenditures
• A controlled process for low-dollar purchases, whether through petty cash, purchasing cards, reimbursement, or another method
• A payroll system that provides accurate and timely compensation and handles applicable taxes, deductions, employee benefits, and reporting
• Accounts-payable and accounts-receivable systems
• A grants and contracts management system for tracking restrictions, budgets, deliverables, reimbursement, reporting, and compliance
• A cash-flow management system
• Financial security and internal controls, including appropriate separation of duties, approvals, account access, reconciliations, and fraud-prevention measures

Cash flow refers to when money actually becomes available and when payments must actually be made. An organization may have substantial grants, contracts, pledges, or receivables on paper and still face a cash shortage if those funds have not yet been received.

Organizations also need to make decisions such as:

• What accounting or financial-management system will we use?
• Which bank accounts and financial institutions meet our needs?
• Who can authorize purchases, electronic payments, transfers, contracts, reimbursements, and other transactions?
• What approval thresholds and separation-of-duties controls should apply?
• How will compensation, employee benefits, leave, and employment classifications be handled consistently with applicable law and organizational policy?
• What purchasing and vendor-selection processes will we use?
• How will grants, contracts, restricted funds, and cost allocations be tracked?
• How will the organization respond to a cash-flow shortage?
• How will financial information be reviewed by leadership and the governing board?

The goal is to create controls strong enough to protect the organization without making routine work unnecessarily difficult. Financial caution and organizational innovation do not have to be opposites. A strong system helps leaders understand which risks are reasonable and which may threaten the organization.

How do you create a financial management plan?

Every organization needs financial-management practices appropriate to its size and circumstances. A small volunteer-led initiative may need a relatively simple system, while an organization managing payroll, grants, contracts, restricted funds, and multiple programs will need substantially more structure.

Accounting

Accounting systems should provide accurate and timely information about revenue, expenses, assets, liabilities, cash, restrictions, grants, and the organization's overall financial position.

Work with an accountant, bookkeeper, or other qualified financial professional when necessary. Community Tool Box guidance can help organizations understand the questions involved, but it is not a substitute for professional accounting, legal, or tax advice.

Organizations may use cash-basis, modified cash-basis, or accrual accounting depending on their circumstances and reporting requirements.

Cash-basis accounting generally records revenue when cash is received and expenses when they are paid.

Accrual-basis accounting generally recognizes revenue when it is earned and expenses when obligations are incurred, providing a broader view of amounts receivable and payable.

The appropriate accounting method depends on organizational needs, legal and tax requirements, funder requirements, and applicable accounting standards. Seek professional guidance when selecting or changing accounting methods.

Communication between financial staff and program or organizational staff is essential. Program staff need financial information they can understand, while accounting staff need timely and accurate information about purchases, contracts, payroll, grants, program activity, and other transactions.

Banking

Choose financial institutions based on the organization's actual needs. Relevant considerations may include:

• Fees and interest rates
• Deposit insurance and management of balances that exceed insured limits
• Online banking and electronic payment capabilities
• Fraud-prevention and account-security tools
• ACH, wire, check, debit-card, and purchasing-card controls
• Positive-pay or similar fraud-prevention services
• Payroll and direct-deposit capabilities
• Lines of credit or other appropriate financing
• Customer service and accessibility
• The institution's community relationships and lending practices, when these are relevant to the organization's mission and values

Do not assume that opening several accounts at the same financial institution automatically increases deposit-insurance protection. Review current deposit-insurance rules and structure organizational accounts appropriately.

Authorization and internal controls

Clearly establish who has authority to approve budgets, authorize spending, sign contracts, initiate payments, approve payroll, transfer funds, and access banking systems.

Governing boards generally provide financial oversight and approve major policies and budgets, while staff leaders usually manage approved day-to-day operations within delegated authority. The exact arrangement should be documented and appropriate to the organization's size and governance structure.

Whenever feasible, separate important financial responsibilities. For example, the same person should not independently authorize a purchase, initiate payment, reconcile the bank account, and review the transaction without another level of oversight.

Organizations may establish transaction thresholds requiring additional approval for significant expenditures. Approval rules should apply to electronic transactions as well as checks.

Organizational debit cards, purchasing cards, banking credentials, and payment accounts should be limited to authorized users. Use individual credentials rather than shared passwords whenever possible, enable multi-factor authentication, document cardholders and limits, and review activity regularly.

Petty cash and low-dollar purchasing

Some organizations still use petty cash, while others rely on purchasing cards, reimbursements, digital payments, or other methods for small expenses.

Whatever system is used, establish limits, authorized users, documentation requirements, approval procedures, and reconciliation. Small transactions still need appropriate records.

Payroll

Payroll is often one of an organization's largest expenses and carries significant legal, tax, and administrative responsibilities.

Organizations should establish clear procedures for:

• Pay periods and payroll schedules
• Employee classifications and timekeeping
• Salaried and hourly compensation
• Overtime and other wage requirements where applicable
• Employee benefits and leave
• Payroll taxes and withholding
• Direct deposit and other payment methods
• Required payroll and year-end reporting
• Secure retention of payroll and personnel records

Definitions of full-time and part-time work and eligibility for particular benefits depend on applicable law, benefit plans, and organizational policy. Avoid relying on a single informal number of weekly hours for all purposes.

Organizations may manage payroll internally or use a payroll provider, accountant, professional employer organization, or other service. Even when payroll is outsourced, the organization remains responsible for providing accurate information, reviewing payroll, protecting employee data, and ensuring obligations are met.

Payables and receivables

Accounts payable are amounts the organization owes for goods or services already received or other obligations already incurred.

Accounts receivable are amounts owed to the organization, such as unpaid invoices, reimbursement claims, contract payments, or other earned revenue.

Establish procedures addressing:

• Who reviews and approves invoices
• Who initiates and authorizes payment
• How purchases are approved before commitments are made
• How invoices, receipts, purchase records, and contracts are retained
• When customers, partners, or funders are invoiced
• How grant or contract reimbursement requests are submitted
• How overdue receivables are monitored and followed up

Purchase orders or electronic purchasing workflows can provide useful documentation and approval controls, particularly for organizations with significant purchasing activity.

Grants and contracts management

Grants and contracts may include requirements concerning allowable costs, budgets, reporting, performance, procurement, documentation, cost sharing, indirect costs, payment schedules, and other conditions.

Do not assume that every grant provides money in advance or that every contract reimburses costs after they have been incurred. Payment structures vary substantially. Review the specific award or contract terms.

Track revenue and expenses for each significant grant or contract within the accounting system so the organization can demonstrate how resources were used and whether spending remains consistent with the approved budget and terms.

A separate bank account for every grant is usually unnecessary unless the award, law, banking arrangement, or other requirement specifically calls for one. Modern accounting systems can typically track grants, programs, departments, restrictions, and funding sources through separate classes, projects, funds, or account codes while using shared organizational bank accounts.

When changes to an approved grant or contract are needed, determine whether prior approval is required and obtain authorization in the form required by the funder before making changes that require approval.

What issues are involved in being tax-exempt?

Nonprofit status and tax-exempt status are related but are not the same thing. Nonprofit organizational status is generally created under state law. Federal tax exemption is governed by federal law, and most organizations seeking recognition of exemption must separately apply to the Internal Revenue Service unless an exception applies.

State and local tax treatment also varies. Federal recognition does not automatically mean an organization is exempt from every state or local income, sales, property, or other tax. Determine which exemptions, registrations, renewals, filings, and documentation requirements apply where your organization operates.

Organizations should pay attention to requirements such as:

• Applying for federal recognition of tax-exempt status when required
• Maintaining appropriate state nonprofit registrations and charitable-solicitation registrations
• Applying separately for available state or local tax exemptions where necessary
• Using appropriate exemption documentation for qualifying purchases
• Filing the appropriate Form 990-series annual return or notice when required
• Filing applicable state and local reports
• Maintaining payroll-tax compliance
• Reviewing whether unrelated business or other activities create additional tax obligations

Annual federal filing requirements vary by type and size of organization. Some organizations file Form 990, Form 990-EZ, or Form 990-PF, while certain smaller organizations may be eligible to file Form 990-N. Some organizations are excepted from particular filing requirements. Use current IRS guidance to determine which filing applies.

Do not assume that all nonprofits must undergo an annual independent financial-statement audit. Audit, review, compilation, and other financial-reporting requirements may arise from state law, federal awards, funder or lender requirements, contracts, governing documents, or board policy. Determine which requirements apply to your organization and obtain professional guidance when necessary.

How do you handle cash flow?

Cash flow is the timing of money entering and leaving the organization. An organization can have a balanced budget or substantial receivables and still be unable to meet payroll or other obligations if cash has not arrived when needed.

Causes of cash-flow problems

Common causes include:

• Delayed grant, contract, reimbursement, or government payments
• Slow invoicing or reimbursement requests
• Large expenses occurring before related revenue is received
• Seasonal fundraising patterns
• Uncollected accounts receivable
• Unexpected expenses
• Rapid organizational or program growth
• Restricted funding that cannot be used for current obligations
• A structural operating deficit rather than a temporary timing problem

Distinguishing a temporary cash-flow problem from an underlying financial deficit is important. Borrowing may help address a timing mismatch, but it does not solve a long-term shortage of revenue.

Ways to address cash-flow problems

• Prepare a rolling cash-flow forecast. Estimate expected cash receipts and payments by month or, when necessary, by week.
• Maintain an appropriate operating reserve. Reserves can help organizations manage revenue delays and unexpected expenses.
• Invoice and request reimbursement promptly. Know the documentation and approval requirements before payments are needed.
• Discuss payment timing with funders or contracting organizations. When permitted, explore advances, revised payment schedules, more frequent reimbursement, or other arrangements.
• Maintain communication with vendors and other creditors. If payment may be late, discuss the situation before the due date and obtain agreement about revised terms whenever possible.
• Establish access to responsible short-term financing before a crisis. A line of credit or other financing may be useful when repayment capacity is clear and borrowing is consistent with organizational policy.
• Monitor restricted and unrestricted cash separately. Cash may be in the bank but unavailable for a particular obligation because of donor or grant restrictions.

When cash is insufficient to pay every obligation on time, do not rely on an informal rule that one creditor can simply be delayed because it is more likely to tolerate late payment. Consider legal obligations, payroll and payroll taxes, contractual requirements, critical services, consequences for employees and vendors, and any negotiated payment arrangements. Seek professional guidance when the organization's ability to meet its obligations becomes uncertain.

Credit cards may provide payment flexibility, but they can also carry significant interest, fees, and risk. Review card terms, establish organizational controls, and avoid using revolving credit as a substitute for a sustainable cash-flow strategy.

What are some day-to-day financial management issues?

Once systems are established, financial management depends on consistent use. Reliable software does not help if transactions are not entered, accounts are not reconciled, approvals are bypassed, or reports are not reviewed.

Trusted professional relationships with vendors, funders, financial institutions, partners, and others can make communication and problem-solving easier. At the same time, purchasing and financial decisions should follow transparent organizational policies rather than depend solely on personal relationships.

Purchasing goods and services

Consider overall value rather than simply selecting the lowest price.

Relevant considerations include:

• Price and total cost of ownership
• Product or service quality
• Accessibility
• Reliability and customer support
• Data privacy and cybersecurity
• Maintenance and replacement costs
• Shipping and delivery
• Contract terms and cancellation provisions
• Vendor reputation and financial stability
• Applicable procurement requirements
• Mission-related considerations when they are appropriate and consistent with organizational policy

Organizations may also reduce costs through cooperative purchasing, shared services, group contracts, joint technology platforms, shared facilities, or other collaborations.

Online purchasing can simplify comparison shopping, but organizations should also consider vendor security, counterfeit or unsupported products, licensing, warranty terms, subscription renewal practices, and whether organizational purchasing policies are being followed.

Working with funders

Grant and contract terms should be followed carefully. When circumstances change, however, some funders permit budget revisions, extensions, revised payment schedules, scope adjustments, or other amendments.

Do not assume that a change will be approved. Review the award terms and communicate with the appropriate funder representative before making changes that require prior approval. Document significant approvals and amendments in writing.

Maintaining financial systems

Areas requiring ongoing attention include:

• Transaction entry and reconciliation. Enter financial activity promptly and reconcile bank, credit-card, investment, payroll, and other accounts on a regular schedule.
• Access controls and cybersecurity. Limit financial-system access to authorized users, use strong authentication, review permissions regularly, and protect sensitive financial and employee information.
• Backups and recovery. Maintain secure backups and test procedures for recovering critical accounting and financial records.
• Payables and receivables. Pay approved obligations, issue invoices, pursue reimbursements, and follow up on overdue receivables consistently.
• Payroll and payroll taxes. Maintain accurate payroll data and comply with applicable withholding, reporting, wage, benefit, unemployment, workers' compensation, and other requirements.
• Grant and contract compliance. Track expenditures, deliverables, reporting deadlines, modifications, and restrictions.
• Tax and financial-reporting requirements. Complete applicable federal, state, local, audit, review, and other reporting requirements according to their current deadlines.
• Document retention. Maintain invoices, receipts, approvals, contracts, payroll records, grant documentation, board records, and other financial documents according to organizational policy and applicable requirements.

Financial systems should be reviewed periodically to determine whether controls remain appropriate as the organization changes. Growth, new funding sources, staffing changes, new technology, remote work, and new payment methods can all create new risks or require different procedures.

What are some investment issues?

An organization with funds beyond its immediate operating and liquidity needs may consider holding some of those resources in interest-bearing deposit accounts or other investments.

Investment decisions should begin with the purpose of the funds. Operating cash, emergency reserves, board-designated reserves, restricted funds, endowments, and long-term capital funds may have very different time horizons and risk tolerances.

Consider factors such as:

• How soon the funds may be needed
• Liquidity
• Preservation of principal
• Investment risk and volatility
• Expected return
• Fees
• Donor or grant restrictions
• Deposit-insurance limits
• Applicable laws and fiduciary responsibilities
• The organization's board-approved reserve and investment policies

Checking accounts, savings accounts, money market deposit accounts, certificates of deposit, Treasury securities, and other relatively liquid instruments may be appropriate for funds that must remain accessible, depending on the organization's needs and policies.

Organizations with long-term reserves or endowments may use diversified investment portfolios when appropriate. Decisions about stocks, bonds, pooled investment funds, and other assets should reflect the organization's time horizon, risk tolerance, liquidity needs, restrictions, governance responsibilities, and professional investment advice rather than a general rule that one type of investment is appropriate or inappropriate for all nonprofits.

If organizational deposits approach or exceed applicable deposit-insurance limits at one institution, review how the accounts are structured and consider appropriate treasury-management strategies.

Capital investments

A capital investment involves committing significant organizational resources to an asset expected to provide value over an extended period. Examples might include a building, land, vehicles, major technology systems, or specialized equipment.

Before purchasing real estate or another major asset, consider:

• Purchase and financing costs
• Maintenance and repairs
• Insurance
• Accessibility and renovation needs
• Utilities and operating costs
• Property-tax treatment under applicable state and local law
• Liquidity and debt-service effects
• Whether ownership or leasing better fits the organization's mission and long-term plans
• Risks associated with future organizational growth, contraction, or relocation

Real estate may become an organizational asset and may sometimes produce rental income, but ownership also creates long-term costs and responsibilities. Analyze the full financial implications rather than assuming that purchasing property will automatically reduce costs.

In Summary

Effective financial management combines reliable systems, appropriate internal controls, timely information, and thoughtful decision-making. Organizations need ways to manage accounting, banking, purchasing, payroll, payables and receivables, grants and contracts, cash flow, financial reporting, and organizational resources.

These systems should be proportionate to the organization's size and complexity and should evolve as programs, staffing, technology, funding, and financial risks change. Organizational leaders and boards should understand the financial position of the organization even when accounting or financial tasks are delegated to specialists.

Strong financial management is not an end in itself. Its purpose is to protect organizational resources, strengthen accountability and sustainability, support staff and partners, and make it possible for the organization to carry out its commitments to the people and communities connected to its mission.