Grant and donor funding is the lifeblood of many nonprofit organizations. Yet too many nonprofits are lacking the strong financial management foundation that gives donors confidence that funds will be used effectively and in keeping with all program requirements.
Professional financial management isn't just about keeping books. It can be a strategic asset that directly enables fundraising success.
Professional financial management establishes the foundation of accounting expertise, proven systems, and credibility needed for nonprofits to secure and maintain funding relationships. With the right approach, this “cost center” can play a central role in supporting future fundraising.
The Complexity of Donor Requirements
With more competition than ever for limited donor funding, nonprofits must be able to demonstrate their ability to manage complex financial requirements even with limited resources. Donors want to see a history and pattern of solid financial management that gives them confidence in a nonprofit's ability to meet strict reporting requirements.
And those requirements can get incredibly strict as donors work to ensure their money will go towards the critical deliverables of the projects they support. Some donors may want reporting that provides the total number of hours worked on a project while others may request to see timesheets for funded projects. Many donors have stringent restrictions on the amount of overhead that can be charged to contracts. It’s no longer uncommon to see a donor limit overhead on a contract to no more than 20%.
Tracking and reporting these various expenses demands keen attention to detail and the resources to manage a number of moving pieces. But managing these pieces well can deliver a powerful return. For one organization, providing detailed, reliable monthly reports for an exacting donor – a donor that set limits on benefits and overhead rates, as well as strict budget parameters – gave the donor confidence that the organization could manage a second award. Following an initial award of $500,000, the organization was gifted an additional $2 million.
Implement Controls, Policies, and Procedures
Strengthening your organization’s financial management may seem daunting, but it can ultimately serve as an effective way to reduce costs and gain new revenue streams for your nonprofit. That’s because solid financial management strategies can reduce organizational risk and increase efficiency.
The first step of good financial management is to implement strong internal controls. Even with limited resources, organizations can put in place internal controls that ensure proper use of funds, prevent fraud, and reduce the risk of unintentional errors. An internal controls questionnaire can help nonprofits better evaluate opportunities to strengthen their controls.
The next step is to create policies and procedures – and a system for ensuring that they are followed. Many awards come with layers of parameters that organizations may have to follow. It’s important to have a plan in place for how your organization will ensure compliance. But it’s also important to ensure that everyone responsible for the use, management, and tracking of funds understands these policies. It’s this last step that too often gets overlooked.
For one organization, lack of processes meant that key compliance information was never delivered to the grant manager. As a result, the grant manager was not providing the required information to the funder. The cost of that oversight amounted to $6 million.
Invest in Solutions for Reliable Tracking
No one knows better than a nonprofit leader that time is money. Automating processes can help you recoup both. When evaluating your existing financial management processes, consider opportunities to shift from manual processes to automated systems. A number of solutions may already exist in your accounting software that reduces the need for paper documentation and increases your ability to move data across systems.
When it comes to tracking donor funding, however, it’s important to implement a system that tracks that money separately from your nonprofit’s other revenue streams. This is important for any award, but particularly for awards that bring an organization’s total federal funding for the year to more than $1 million, as this limit triggers the Office of Management and Budget (OMB) threshold for a single audit (formerly known as an A-133 audit). This audit puts an organization’s federal awards under a magnifying glass. If your organization’s accounting software does not allow you to track funds separately from the rest of your spending, consider working with a professional financial management firm.
Play to Your Administrative Strengths
It’s also important to recognize that the donor pool contributing to your organization can impact how you should structure your internal controls, processes, procedures, and reporting structure. For example, organizations with a few large donors may face more stringent reporting requirements, while organizations with many small donors may need to track a greater multitude of varying reporting requirements. Each comes with their own administrative burden that may require different strengths from your team.
When nonprofit organizations outsource financial management to a professional firm like Vault, they gain the strength of a dynamic team. Vault can help organizations with limited resources strengthen their internal controls and financial knowledge and more effectively compete for funding. To learn more about professional financial management and how to create new revenue streams for nonprofits, contact Vault Consulting.