Financial health is fundamental to an organization’s operation. It shows how well the organization could achieve its mission and serve the public directly and indirectly. Here are some tips that NPOs can use to keep a healthy finances.
Collect and Analyze the Historical Data
Gather all your current financial information, including the financial data from the past 2-3 years. On one hand, you should understand how much money you have in your bank account, including cash available for daily operation, long term savings/reserves and investments/GICs. You should also know how much debt you have including credit cards to be paid, accounts payable and other liabilities.
On the other hand, you should understand your revenue sources and where the money has been spent in the past by analyzing the Statement of Operations report. The expense categories usually can be summarized like the below:
General Office Expenses
Set Up the Plan
After understanding how your money has previously been spent, you may set up the financial plan for the new fiscal year by preparing the budget. You will want to set the goal clearly, whether it’s collecting more membership revenue or holding more events. When preparing the budget, be specific and realistic. The more informed you are about where to spend, the easier it is for you to track each budget line item during the year. The budget also helps you to control the entirety of the year’s finances, as well as allocate the funds to the right place.
This is about how you plan to stick to the budget and track your spending during the year. Before you make purchases, you should ask yourself if this expense was budgeted. If so, where was it budgeted and for how much? If not, why do I need to expense it now, or where else I can get the extra funding for it? Should we take extra funds from other line items? Each expense should be tracked against each line item of the budget. Sometimes, we might find it necessary to adjust the budget/projection based on some strategic initiatives. This is acceptable, but you always want to be conservative.
Follow Up and Review
The organization’s financial performance should be reviewed annually, after each event or monthly according to the volume of transactions of your organization. This could be done by preparing the monthly financial statements and comparing the monthly financial statements against the budget. By comparing the statement with the budget, each budget line item can be followed up on, and each expense can be justified. You want to make sure your finances are always heading in the right direction, and are used to support the organization’s main goals. A good financial situation is crucial to the sustainability of each organization.
Blog post written by Pearl Chen, Accounting Manager & Accounting Operations at Managing Matters Inc.