For many not-for-profit boards, financial management and planning is the thing that takes up the most time during meetings. Let’s face it, your financial position can mean the difference between the board being able to focus on strategy and organisational purpose, or constantly struggling to find ways to fund its operations.
When we talk about finance in relation to NFPs, there are a number of things that good boards need to keep front of mind. In challenging sectors, it can be difficult to see the wood for the trees, so the only way out is to make time to look at your financial position as a strategic imperative.
One of the key fundamentals for me is around diversified income. It’s ideal if you can get at least two or more sources of income. While I know it can be hard for some NFPs who work in a specific area or narrow field, and depending on where your income is coming from (given constant changes in government funding), you need to be looking at how you can diversify and see if you can grow your funding stream so you're not reliant on one particular source.
Getting this right can mean riding out the peaks and troughs in cash flow is a little easier.
You should also be trying to balance income, making sure that you're not overly reliant on one large income stream, even if you are diversified. As best practice, you should aim for no more than 50% from one source. This should be an agenda item on your finance, funding and fundraising meetings.
Professional help and proper process
I always advise NFPs to work with a certified accountant making sure that they’re reviewing the books appropriately and that they’re working within proper accounting standards. With governance responsibilities becoming greater, we're beyond having mums and dads being the treasurer and doing the books alone.
This can be a major area of risk for any NFP, where independent processes are not in place coupled with good oversight. It’s worth making sure that you have engaged someone who is qualified.
Another key area you should be thinking about is making sure that the organisation is acquitting money and programs accurately and in a timely manner. This includes reporting back to government if your NFP is under contract for funding. You also might be in partnership with other organisations which receive the funds as lead agency and you're doing a piece of their work. This means the same rules would apply for you too, and the need to make sure that you're accurate and timely with those acquittals.
As an NFP, you should also have a budget in place. It’s important to make sure that it is reflective of fluctuations throughout the course of the year. Move away from just smoothing income evenly across the year, and make sure the projections take into consideration any peaks and troughs. If you're making sure your budget reflects your in comings and out goings throughout the year, you can see where you are placed more accurately and avoid unnecessary conversations around why income or expenditure is up or down allowing the board to focus on the more pertinent points.
Of course you need to make sure that you are solvent at all times and that you can meet your short term debts. One of the other things that you should be looking at is what happens if there's a major issue with one of your programs and you have to shut it down quickly. Do you have all your provisions in the budget for leave and for employee entitlements and contract entitlements? Your accountant should be working with you on that.
Contingency planning can help you map out some of these scenarios and estimate financial impacts. Make sure programs are fully costed, and that they're isolated within your budgeting if there's an issue with funding going forward. Many NFPs get into trouble if they don’t know which unsustainable programs are being propped up with surpluses from other areas.
Ensure the management of cash flow, debtors and creditors maximise these cycles where you can. While we’re all working with NFPs, we should be trying to manage a surplus or retain earnings each year. It’s important to be trying to put as much as possible away for contingencies and the little surprises that you're not expecting. If you're operating right to the bone every year, it can be a major issue and unnecessarily stressful.
Policies and Procedures
Policies should be in place in regards to spending and accountability from CEO through to the senior management team, making sure that there is accountability and safeguards. You should also be making sure that your accounts are independently audited. Apart from your accountant or the people doing the accounts, you should be independently audited to make sure that proper accounting rules are being applied and that expenditure and income are going in the right areas. Record keeping and trace-ability are also critical.
Putting these key plans and actions in place around finance can ensure your NFP is able to fund its programs, build for the future and ride out and ups and downs that come their way. Good planning and oversight means the board can spend valuable time on strategy and less on operations.