Financial Management

For small community- and faith-

based non-profit organizations

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 Financial Management for Non-Profits
Dedicated non-profit organizations are not, by definition,
money-making ventures. However, even though money
isn’t the object, it is still important for every non-profit to
follow certain guidelines concerning the financial
management of the organization. The basic accounting
system should include the following components: chart
of accounts, general ledger, budget, reporting and
documentation system, and appropriate internal
controls. It is also important to have the ability to
properly manage grants, and to be cognizant of funders’
individual financial requirements, particularly when
receiving government grants.

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 The Accounting System
Before considering the elements of an accounting system,
an organization must first decide whether to use a cash-
based or accrual-based system. In a cash-based system,
revenues are recorded only when they are received and
expenses recorded only when they are paid. Conversely,
in an accrual-based system, revenues and expenses are
recorded when they are first earned or incurred,
regardless of when money is actually exchanged.

It is recommended that an accounting system be accrual-

based, particularly if an organization is planning on
applying for foundation or government funds, as this is
the generally accepted system among accounting
professionals.

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 The Accounting System –
Chart of Accounts
The chart of accounts is a detailed listing of all of the
accounts, or records of each business transaction, of an
organization. It is used to keep track of the income and
expenses of the organization.

Each account is assigned a number and divided into one of

five categories: Net Assets, Assets, Revenues, Liabilities,
and Expenses. The standard order for accounting
categories on the chart of accounts is:
 Assets
 Liabilities
 Net Assets (the balance remaining after financial obligations are subtracted
from Assets)
Continued…
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 The Accounting System –
Chart of Accounts
Continued

The chart of accounts should correlate to the categories in

the budget so that they can be easily compared.
Separate charts may be kept for separate programs or
sites, or they may be combined on the same chart.

It is best to keep the chart of accounts as simple as

possible and to revise it over time as needed.
Accounting software, such as QuickBooks, can be
especially helpful and time-saving, particularly with
detailed accounts. (Note: QuickBooks is not designed to
handle grant accounting. It is best to consult with a
public accounting firm for such guidance.)

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 The Accounting System –
Other Elements
 General Ledger: An accounting book into which all of
the organization’s accounts are entered and organized
numerically. The ledger lists all transactions within that
account for the time period the ledger covers. It doesn’t
cover the detailed descriptions that are listed in the
chart of accounts. In fact, the chart of accounts serves
as a sort of table of contents for the general ledger.

 Journals: The journal is a chronological record of all

transactions. Each entry should include its correlating
account number and a brief description of the
transaction.
Continued…

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 The Accounting System –
Other Elements
Continued
 Checkbook: Most of an organization’s transactions are
made through the checkbook, with which receipts are
deposited and cash disbursements are made. For a
very small organization, the checkbook can serve as a
combined general ledger and journal, and reports may
be prepared directly from it.

 Accounting Procedures Manual: The accounting

procedures manual is very important for the
organization. It is a record of all of an organization’s
financial policies and procedures and should be kept
up-to-date and on hand all throughout the life of the
organization.
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Accounting Cycle and Maintenance
Trial Balance
The trial balance is a procedure that seeks to ensure that
the general ledger is properly balanced (i.e. debits
equal credits). If accounting is done manually, a trial
balance should be completed on a monthly basis. A
computerized accounting system will update the trial
balance every time a transaction is entered.

Bank Reconciliation
Once a month, a bank reconciliation should be performed.
This procedure ensures that the organization’s
calculated balance equals the balance according to the
bank’s calculations.

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 Reporting and Documentation
As stated on the previous slide, it is very
important to keep proper documentation
of all financial activities in the chart of
accounts, general ledger, and journals, as
well as records or personnel wages and a
document detailing the organization’s
financial practices. It is also important that
all bills, invoices, packing slips, time
sheets, etc. be kept in official files.
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 Reporting and Documentation –
Required Documents
 Balance Sheet/Statement of Financial Position: This
document is filled out at the end of each period and lists
the organization’s assets (current, fixed, and net) and
liabilities (current and long-term).

 Income Statement/Statement of Activities: This is a

report of the organization’s revenues, expenses, and
change in net assets over a fiscal year. The income
statement will denote whether the organization realized
a profit or incurred a loss for the period.
Continued…

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Reporting and Documentation –
Required Documents
Continued
 Statement of Cash Flows: This report is usually
prepared by an auditor at the request of the
organization. It provides information on the flow of cash
in and out of the organization.

 Annual Form 990: This is the federal tax return for tax-
exempt organizations, available online at
http://www.irs.gov/pub/irs-pdf/f990.pdf. The 990 is due
each year on May 15 and includes information on the
previous year’s finances.

 Other documents as required by state. (Consult a

Certified Public Accountant or tax advisor.)

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 Reporting and Documentation
Tax Reporting
An employer must remit personnel income tax to the IRS on a monthly
basis. State and local remittance requirements and schedules may
vary. Check with the state’s department of revenue and local
officials to determine state and local requirements.

Reporting Charitable Contributions

When receiving monetary contributions, an organization should provide
the third party contributor with a written confirmation of the
donation for tax purposes, state the name of the organization and
donor and the value of the gift.

For in-kind donations (goods or services rather than money), the gift
must be valued by the contributor, not the organization, and the
stated value should be confirmed by documentation supporting the
claimed value in order to ensure tax deduction from the IRS.

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 Budget
The budget process should begin two to
three months before the start of the fiscal
year and should include the input of staff
(both financial and program), board
members, and the executive director. The
board finance committee should oversee
the construction and execution of the
budget.

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 The Budget Process
1. Review the previous year’s results. What was the cost per unit of
service?
2. Develop new goals and objectives for the coming year.
3. Estimate the cost of the new objectives based on the previous
year’s results. Don’t forget to include indirect costs (incidental
costs not closely attached to programs and goals—e.g.
administrative costs) along with direct costs (closely associated
with the program – e.g. staff salaries) and to adjust any costs that
will be changing in the coming year.
4. Next, budget projected income. Estimate revenues, including
grants, donations, etc.
5. Compare the projected revenue with the projected expenses. The
organization may decide that it is appropriate to incur a deficit or
realize a surplus for the year instead of breaking completely even.
6. Finally, the board must approve the budget and continue to review
it on a monthly basis.

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 Budget Notes
The categories and labels for the budget should
correlate with those used on the chart of
accounts.

It may be helpful to prepare separate monthly

budgets to break down the year into smaller,
more manageable sections. Finally, remember
that the budget should be realistic, consistent
with the organization’s objectives, cost-
effective, and flexible.

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 Auditing
An organization may or may not decide to
obtain an audited financial statement
depending on the size and revenue of the
organization, as well as the board’s
expertise regarding financial
management. These statements can
range from more or less expensive and/or
comprehensive. If an organization is
applying for government funds, it should
obtain an audited financial statement.
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 Internal Controls
Financial internal controls should be in place
for the operating, accounting, and
compliance departments regarding
payroll, cash collection and disbursement,
safeguarding fixed assets, etc. Making
sure the financial management of the
organization is operating properly is the
responsibility of the entire organization,
not just the accounting department.
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 Internal Controls –
Segregation of Duties
Financial duties should be segregated so that no
one staff member handles any transaction
entirely on their own from start to finish. For
example, different members may sign checks,
authorize payments, record transactions, or
reconcile bank statements. This may be more
difficult for a very small organization. If this is
the case, a staff member may sign the checks
for transactions and a board member (such as
the treasurer) may review the statements and
checks on a monthly basis.
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General Rules for Cash Management
 Purchases should all fall within the established budget
guidelines and restrictions. Large purchases which lie
outside the scope of the budget should be approved by
the board.
 All cash disbursements should include documentation.
 Never withdraw cash from an ATM.
 Restricted funds (such as donations or grant money)
may only be borrowed against if the donor permits the
action and must be replaced within the fiscal/grant year.
 The number of check signers in the organization should
be as minimal as possible while still allowing the
organization to function efficiently.
 Large purchases should have more than one signature
on the check.
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 Grant Management –
Accounting Requirements
Accounting requirements differ according to each
individual funder, but here are some general
guidelines to follow:
1. Account for each award or grant separately
2. Federal and non-federal match funds should be tracked
separately
3. In-kind donations should be tracked as both revenues and
expenses
4. Identify costs by program year and budget category
5. Differentiate between direct and indirect costs

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 Grant Management –
Financial Responsibilities of Grantees
When preparing a grant proposal, an organization
should keep in mind the following
responsibilities:
1. Budget for the entire life of the grant, including all
allowable costs, the agreed upon indirect cost rate, and
increases in the cost of living
2. Address all matching requirements
3. Focus on sustainability
4. If applying for federal funds, an organization must also
seek a solid base of non-federal funds
5. Pay special attention to specific requirements of each
individual grant

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 Government Grants
When managing a government grant, certain
additional guidelines must be followed. These
guidelines, called Circulars, are published by the
Office of Management and Budget. Different
Circulars, apply for educational institutions, non-
profit organizations, and government
organizations.

For a listing of the OMB Circulars, visit

http://www.whitehouse.gov/omb/circulars/index.html.
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 Final Note
This guide is only a brief overview of the financial
management systems that should be in place
for a non-profit organization. The best way to
obtain sound financial advice is to recruit a few
board members with extensive knowledge of
financial systems, or to hire a public accounting
firm for consultation. This can be done relatively
inexpensively for many non-profits and the time
and trouble saved by such a partnership will
likely pay for itself.
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 1. Regulatory 2. Written
Requirements Policies and
Procedures

10. Internal
Controls 3. Documentation
of Expenses

EFFECTIVE
4. Managing
9. Reporting FINANCIAL Cash
MANAGEMENT

8. Matching
5. Efficient
Requirements
Accounting
and In-Kind
Contributions
System
7. Time and 6. Budget
Activity Controls
Documentation

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