4 Nonprofit Financial Management Challenges (& Solutions)

When you start a nonprofit, one of the most important things to figure out is how to manage your organization’s finances. Understanding the fundamentals of accounting—keeping records of revenue generation and expenditures—is critical for your nonprofit to launch successful mission-driven programs, plan engaging fundraising campaigns, and even just keep its lights on.

However, nonprofit accounting is often more complicated than it sounds. As your organization expands and evolves, many complexities can arise, making financial management more difficult for your team.

In this guide, we’ll dive deeper into four common nonprofit financial management challenges and offer solutions to help you navigate each one. Let’s get started!

Nonprofit professionals are always trying to do more with less, whether you’re talking about program management, fundraising planning, or organizational administration. There are two surface-level fixes for the problem of limited resources: raise more or spend less.

However, it’s easy to get caught up in maximizing your nonprofit’s revenue without also considering how to manage its expenses (which is often the more sustainable approach), or to cut costs without thinking about what spending is really necessary for your organization.

Solution: Strategically Manage Expenses

If you need to reduce your nonprofit’s spending, start by examining its overhead—i.e., its combined expenditures on administrative and fundraising needs. In contrast, program costs are directly related to mission-critical services and offerings. You don’t want to take funding away from your programs unless it’s absolutely necessary, but some spending on overhead is essential for your nonprofit to operate.

On the administrative side of overhead, the most important expense to maintain is staff compensation. Your employees deserve to be paid for their hard work and expect to receive the salaries and benefits outlined in their job offers. However, you can strategically cut other administrative costs by:

• Evaluating your organization’s insurance plan to ensure you’re getting the right amount of coverage for the best price.
• Seeking out nonprofit discounts or asking for in-kind donations of new office equipment.
• Reducing utility costs by installing low-flow bathroom fixtures at your facility or turning down the heat and air conditioning when no one is in the building.

To reduce fundraising expenses, consider looking into free or low-cost marketing tools to get the word out about your campaigns for less. Also, DNL OmniMedia’s nonprofit digital strategy guide recommends regularly auditing your organization’s fundraising tech stack to ensure you aren’t paying subscription costs for software you don’t use or that has overlapping functionalities with your other tools (e.g., if you pay for a separate donation processor when your CRM has one built in).

When nonprofit teams start keeping financial records, they often use spreadsheets to simplify the process. While this solution works temporarily, spreadsheets aren’t equipped to handle complex recordkeeping needs that will likely become more prevalent as your organization grows, such as payables, receivables, and grant management.

Solution: Invest in Dedicated Accounting Software

As soon as it’s feasible given your nonprofit’s budget, add an accounting platform to your tech stack. According to Jitasa, this software should be able to:

• Organize various types of transaction records in a concise chart of accounts.
• Differentiate between unrestricted and restricted funds (more on this later!).
• Visualize your actual financial data and compare it to your budget.
• Track grant progress, either within the software or through an integration with a dedicated grant management system.
• Store your organization’s past financial statements, budgets, Form 990s, and employer tax forms (W-2s, 1099s, etc.).

Some accounting platforms are designed specifically for nonprofits, while others were originally made for businesses but can be customized for nonprofit use. Research the various options and pricing plans available to make an informed decision that will benefit your organization for years to come.

Supporters who give a lot of money to nonprofits typically want some control over how the organization uses that money to further their mission and therefore designate their contributions for specific purposes. But if you don’t clearly delineate these restricted funds in your records, you may accidentally use them differently from how they were intended and break your promises to your most valuable donors.

Solution: Categorize Restricted Funds

In your nonprofit’s accounting software, organize your revenue records into three categories:

• Unrestricted funds aren’t designated for any specific purpose, so your organization can use them to cover any expenses. Most small to mid-sized contributions from individuals and corporations, as well as earned income like membership dues and event ticket sales, are unrestricted.
• Permanently restricted funds usually take the form of endowments, which are large donations that your nonprofit isn’t allowed to spend directly. Instead, you’ll invest the funds and put the interest they generate toward a designated program or project.
• Temporarily restricted funds include most planned and major gifts, grants, and corporate sponsorships. These contributions are designated for a specific initiative or time period, but once the initiative is finished or the time expires, any leftover funds are released from restriction.

By tracking restricted funds in this way, it’s also easier to share the impact of supporters’ contributions with them, making them more likely to continue giving.

Due to their tax-exempt status, nonprofits are subject to many federal, state, and local regulations that for-profit organizations aren’t. Plus, like all organizations, nonprofits need to adhere to the rules set forth by the Financial Accounting Standards Board (FASB), the independent governing body of financial reporting in the United States. With all of these policies to consider, maintaining financial compliance can quickly become complicated.

Conduct an Independent Financial Audit

During an independent financial audit, a third-party auditor reviews your nonprofit’s financial records, reports, and procedures to not only ensure they meet all of the above standards, but also to see if they’re moving your organization toward financial health and stability. In addition to ensuring compliance, conducting a financial audit annually (or even every few years) can provide the following benefits:

• Regular accountability as your nonprofit grows and changes.
• Clear opportunities for improvement so your processes are more efficient and effective.
• Increased transparency—if you let stakeholders know that your nonprofit has undergone an audit, they’ll know you take financial management seriously.
• A potential reputation boost because charity watchdog organizations like GuideStar and Charity Navigator may rank your nonprofit higher if you conduct an audit.

Some nonprofits are required to undergo financial audits for various reasons—for example, if audits are written into your organization’s bylaws or if you’re applying for a grant that asks you to submit an audit report along with the proposal. However, the benefits above make it worthwhile to conduct an audit even if it isn’t mandatory for your nonprofit.

The tips above should provide a solid starting point for addressing your nonprofit’s most prevalent financial challenges. If you still need help or have any questions, don’t hesitate to reach out to an accountant, fractional chief financial officer (CFO), or other financial professional who specializes in nonprofit work. They’ll use their experience in the sector to help you develop and implement solutions to any unique problems your organization may face.