Non-Profit organizations are looked at with a much tougher lens compared to their for-profit counterparts. Besides ensuring that they have enough funds to operate, they are also required to clearly demonstrate impact as well as be very transparent in the way that funds have been utilized.

Most countries have specific legislations governing not for profits and these come with additional reporting requirements. We have worked with various not-for-profits at Thrive and besides ensuring back-office accounting/bookkeeping support, we have also assisted not-for-profits in setting up their systems and processes. Below is us sharing some of our experience in the financial management of not-for-profits.  

Overhead Support 

There is a very common misconception from donors that their funds can only be used “on the ground”. Some donors often do not want their funds to go towards the payment of salaries of staff who are not directly involved on the ground e.g. the CEO, managers, administration etc. However, without professional support, a foundation/not-for-profit will never be sustainable. Attracting good talent for a not-for-profit is as important (if not more) than a for-profit organization.  

We recommend our not-for-profit clients to not shy away from having tough conversations with their potential funders. There is a cost to “keeping the lights on” at any not-for-profit. This needs to be clearly determined, communicated, and considered in every single funding proposal that is done. 

Good Governance 

Good governance at a not-for-profit is determined through the existence of a minimum set of policies and procedures and these being adhered to. Policies such as delegation of authority, procurement policy, compensation & benefits philosophy and policy, board responsibility, restricted gifts policy, and fiscal management policy are the minimum that should exist.

In addition, most institutional funders will require additional policies to be in existence before even considering an entity as a recipient of their funds. Some of these include whistleblower policy, conflict of interest policy, gift acceptance policy, and sexual harassment policy. 

Transparent finances  

Transparent finances in a nutshell mean that you have an internal process that ensures that one can easily determine who has funded a specific transaction or a group of transactions and that the restriction of the funder has been clearly respected. One of the risks that donors see within not for profits is the risk of “double dipping” .i.e. the same transaction is being funded twice. To reduce this risk, each transaction needs to be clearly allocated to a donor. This ensures transparency in the process. 

We have come across some fantastic accounting software that exists, allowing not for profits to do exactly that. There are the ones with bells and whistles which we will not mention here as they are adequate for much larger organizations. There are some inexpensive solutions that we have come across on the market that we recommend. These are QuickBooks Online, Zoho and Xero.

Any accounting software which allows transactions to be tagged can be used as a not-for-profit accounting software. This is of course the most simplistic level. There are software out there that allow additional options such as sub-granting and, if the not-for-profit grows to this level of complexity, one would need to consider those.

We also recommend our clients consider software that can be easily integrated with other modules e.g. payroll module, CRM for donor management, and automatic bank feeds. There are some fantastic off-the-shelf solutions out there with easy integration options.  

Financial Reserves  

 Donor funding is cyclical whereas expenses need to be paid on a monthly basis. To ensure its survival, not for profits need to ensure that there is good cash flow management and that there are adequate financial reserves to float the organization should there be an unexpected drop in donor funding. This is easier said than done, given that a lot of not for profits live hand to mouth. However, even the more established foundations started their financial reserve from zero.

We recommend that not for profits have a financial reserve policy so that this is quite transparent to their donors. Donors appreciate not-for-profits that have sustainability in mind and, adequate financial reserves ensure exactly that. You will typically start at zero and slowly start building the reserves. Keep any draw down from these reserves to a minimum and only if there is an exceptional circumstance. Financial reserves should be touched last and only if it is absolutely necessary.