The Biggest Financial Mistakes Nonprofits Make

The Biggest Financial Mistakes Nonprofits Make

Many nonprofit organizations are charitable groups which provide help and services to people and communities in need, so it can sometimes be a challenge to balance those ideals with good financial health. Charities combat these issues by following common financial norms, but some of these may do more harm than good. A study reported by The Conversation found that some charities spent more than 53% more money to advance their missions, depending on what overhead costs they invested in. Approaches like maintaining revenue from different sources and scrimping on expenses like information technology and office space were found to not be necessarily conducive to growth. Although managing finances isn’t as straightforward, it’s still essential to know the basics of financial management to avoid costly mistakes.

By learning what other nonprofits have done, you can learn what your organization needs to do to ensure that your finances are maximized. This article can help you recognize the top financial mistakes nonprofits make and how you can avoid them:

Not Setting Concrete Financial Goals

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As with any organization, success always hinges on proper goal setting. Understanding your needs is the backbone of every project, as it helps set goals and assignments. In Managing the Non-Profit Organization: Principles and Practices, management leader Peter Drucker writes that the mission is essential to leadership. As the ones running the organization, you have to define concrete financial goals to ensure each resource is maximized, and eventually delivers good results. When analyzing revenue and expenses, it’s good to start with a specific date and determine what you currently own (assets) and what is owned (liabilities). From there, you can follow an income statement that can analyze the general flow of your finances, letting you set more realistic goals to either settle liabilities or even invest in events like fundraising to generate more assets.

Struggling with Internal Checks and Balances

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Due to the nature of nonprofit organizations, it can be challenging to have a proper segregation of staff duties. This intermixing of roles makes it difficult to implement internal checks and balances, which increases the likelihood of fraud or other problems, such as those related to cybersecurity. As reported by IBM, data breaches have cost businesses $4.35 million globally, with 60% of studied organizations raising their product or service prices due to data breaches. With almost 83% of organizations experiencing more than one data breach in their lifetime, it’s essential for nonprofits to set internal controls. Being irresponsible with the financial side of the organization will ruin the trust of the donors, resulting in the loss of donations, and possibly leading to your nonprofit being shutdown. Referring to resources like Michael Worth’s Nonprofit Management can help nonprofits determine what policies they need to establish, and how these processes can be monitored. It’s also important to have specific staff accountable for these tasks, such as financial managers, who can also improve existing policies.

Recording Financial Data Incorrectly

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All organizations have to go through various types of financial transactions. As shared in our post on “How to Host a Successful Hybrid Fundraiser for your Nonprofit”, these may include expenses, in-kind contributions, donations, and the like. Projects like fundraisers are great opportunities to gain more assets and learn what changes the organization should make. However, with the influx of documentation needed, an inexperienced staff member may mismanage financial statements, which can result in errors and misleading data. A great way to organize is to hire an experienced accountant or outsource your accounting needs. With nonprofits already going through a tight budget, it’s important to have someone who is capable of reviewing financial statements to properly document data and address any outliers or errors.

Although nonprofits have limited resources, proper financial management can maximize an organization’s output. Setting financial goals, having proper internal controls, and recording their financial data correctly will ensure their assets remain secure and available. This way, nonprofits can complete their missions and goals without any financial hitches.

Article written by Reena Judith

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Reena Judith

Written by Reena Judith

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