Here’s a painful truth:
Operating a 501(c)(3) isn’t easy.
- Your organization depends on public donations.
- You can’t sell products or services like a for-profit business.
- Your revenue streams will always be inconsistent.
When you can’t rely on consistent revenue, managing your non-profit’s finances becomes significantly more difficult.
And unfortunately, poorly managed finances within the non-profit sector is a common indicator of the possibility of embezzlement and fraud.
So, whether you’ve just established your non-profit business or have been running it strong for decades, it doesn’t hurt to get a little insight on better financial management.
Here’s a 5-Step Guide to Managing Your 501(c)(3) Finances.
1. Get the Full-Costs for Your Programming
Take a moment and consider your programming calendar for the 2019 year.
What’s on it?
Do you have a weekly series of small events? Is it by the month? Or do you throw your largest efforts into quarterly events?
Got it in your mind? Good.
Now, how much did those events cost last year down to the penny?
If you don’t know, you should, because in the creation of your yearly calendar it’s easy to come up with general budgets and quoted costs, but it’s the on-the-day expenses that pop up like the power cord you picked up at the store last year, or the extra cups you had to go out and buy that ultimately add up.
The second thing to remember is that costs—like inflation—are variable. They will change from year to year based on changes to standard events like venue size, food costs, and event amenities.
As a result, you want to make sure you’re always recording the exact costs of your event purchases in full.
Here’s what to do…
Use a dedicated company credit card for event programming and track your spending line-by-line to get an accurate account for every dollar spent on the previous year’s events.
This will give you a clear start for your budget and help you keep spending—and your organization’s finances—under tight control.
But on the top of greater clarity and control…
2. Stay on top of your funding sources
As we mentioned before, your organization lives on donations—which are inherently difficult to track and rely on. This means you need to stay on top your primary streams of funding.
Here’s an example:
If your organization is a fraternal organization, your largest stream of income will be the dues your membership pays on an annual or semi-annual basis. As a result, you’ll want to ensure that the standard number of members is always in harmony with the rate of dues.
Put simply, if you’ve got 100 active members at any given time charging them $500 dollars twice every year, you’ll have an operating income of $100,000 for the year. If that number dips to 50 members, you’ll need to ensure that the dues collected double to $1000 to keep the same operating income.
However, ideally in this scenario, your efforts should be focused on maintaining the minimum number of active members under the current dues structure.
For other organizational structures, your events may be your largest source of revenue.
Regardless of the reason, you’ll want to make sure that your yearly operating income is either growing or remaining the same. It should never be decreasing.
Here’s what to do…
Keep tabs on the health of your primary revenue streams. Set up a follow-up schedule with your larger donors to make sure they’re donations can be counted on for the following year. Create a contingency plan for alternative fundraising events in case your operating revenue is less than expected.
And if you’re building up your revenue, go ahead and…
3. Set up a reserve fund
Every good budget has a reserve fund.
Because Murphy’s Law tells us that if something can go wrong, it eventually will.
When managing your 501(c)(3)’s finances, keep an allotment of liquid—and accessible—cash for emergency purposes.
The unexpected will occur. And when it does, if you haven’t properly budgeted for it, you will have set yourself up to outspend your budget, eat into your savings, or worse, accumulate debt.
Here’s what to do…
Give your organization a safety net of from a few thousand dollars to several tens of thousands. This will not only give you peace of mind that you’re prepared to be solvent in any event but regardless of the amount in your reserve fund, it’ll soften the impact of a major unexpected expense without breaking the bank.
4. Always be transparent
We brought up the threat of embezzlement within non-profit organizations for a reason.
For starters, it costs the U.S. economy 400 billion every year.
And it happens a lot.
And if you want to prevent the loss of publicly donated funds and establish better financial management practices for your non-profit, it starts by putting in place greater transparency overall.
By setting up internal controls and separating financial duties within your organization, you’ll be using some of the most common (and effective) methods to stop embezzlement.
Embezzlement tends to follow organizations that give one person within them tremendous financial responsibility and forget that individual is human—and as susceptible to temptation as anyone else.
As a result, it’s best to frequently move oversight of funds from one entrusted individual to another, in order to ensure that more than a single individual’s eyes are watching over the organization’s accounting practices.
If things feel fishy, look for…
- Uneven income flows
- Changes in patterns of income or ret profits
- Odd tipping patterns on credit cards
- Accountant or treasurer who is alone in their duties and refuses to take a vacation
- Sudden changes in a member’s lifestyle
And if you see any of them…
Here’s what to do…
- Utilize a purchase card
- Purchase fidelity insurance
- Don’t leave blank checks out, lock them up.
- Create a division of labor with regard to finances
- Have President and Vice President open bank statements together
- Have bank statements sent to a dedicated location (for example, a home)
- Use a shared cash box when collecting donations; no personal envelopes.
One last tip to ensure transparency is keeping strict accountability of your donations. This can be done by following the required charitable solicitation registration requirements for your state, which Harbor Compliance expands on in their fundraising compliance guide. Nearly all 50 states require nonprofits to register to solicit funds from state residents. Plus, concise record-keeping reduces the likelihood of embezzlement.
Taking these actions will establish greater transparency across your organization and dramatically reduce the potential for fraud and financial mismanagement.
5. When in doubt, work with a dedicated partner
Let’s face it: no one knows everything about everything.
If you find yourself in a position where you’re wearing multiple hats within your organization, and the direct management of your finances is a larger task than you originally thought, it may be time to delegate.
Jobs didn’t physically create the iPhone.
Zuckerberg isn’t still coding.
And Bezos isn’t packing prime boxes.
As your organization grows, it’s important to recognize when to take a step back from doing and focus primarily on deciding.
When it comes to the management of non-profit finances, that time may be now, or it may never come, but if you’re hitting a wall in your expertise, bleeding money and aren’t sure where, and haven’t been in the black for more than a decade, consider partnering with a financial expert; it’ll be good for your health.
In managing your 501(c)(3)’s finances, you want consistency above all else. So, make your processes predictable, your income reliable, and plan for the unexpected.
Need an easier financial management solution? We’ve got you covered.
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