How reliable financial information assists with strategic decision making
Having the information you need to make strategic decisions is generally the difference between non-profit organizations that are just existing and those that are thriving. The recent talk of a coming recession has made donors lukewarm on contributions over the past year. This has created challenges for non-profit organizations. In an uncertain environment, having clear and reliable financial information is especially important.
Overview of non-profit financial information best practices
There are several best practices for non-profit organizations regarding having reliable financial information from which decisions can be made. For example, every non-profit organization should have an annual budget, which may include a scenario analysis that takes into consideration what would happen if things don’t go as well as expected but also what happens if things go better than expected. The base budget should be approved by the Board of Directors. However, the scenario analysis allows the organization to be nimble in decision making, regardless of the operating environment. In addition, the non-profit organization should have a cash flow projection that is updated weekly with actual results. A best practice is to have 12 to 15 weeks of cash for operating purposes.
Annual audits
Annual independent audits are another best practice for non-profit organizations. They provide assurance to stakeholders, including Boards of Directors, and they lend credibility to donors on the use of their contributions and the accuracy of your financial records and provide transparency on your finances. Most people don’t love an audit. However, the audit process can be made easier and dare I say, “enjoyable”, if the proper processes are in place on an ongoing basis throughout the year regarding the organization’s financial reporting.
Monthly best practices
So how do you create a month end close process that is efficient and results in accurate reporting? To break this down into the simple goal, the organization should be able to explain exactly what makes up each account on the statement of financial position at the end of each month. This can be accomplished by reconciling each line item on the statement of financial position as part of the month end close. If this is done on a monthly basis, it becomes simple and routine. If you have an account that has not been reconciled in six months, it may take some time and effort to reconcile it. However, if you are reconciling each month, it is simple to update your reconciliation after only four weeks have passed, making monthly account reconciliations another best practice.
In addition to this process making for a much easier audit, it also allows the organization to constantly have updated data and reports that help the organization’s leaders make informed decisions that are based on solid information that can be relied upon. If budgets, cash flow projections and consistent financial close processes are established on a monthly basis and clearly documented in writing, the organization may not require a high-level financial executive in order to keep the processes on track on a continuous basis, which also helps the organization meet its implied fiduciary responsibility to contain costs and put most of its resources towards its mission.
If you have questions regarding specific financial reporting best practices for your nonprofit, please contact your not-for-profit Keiter Opportunity Advisor. Our not-for-profit team is well versed in these and other not-for-profit best practices.
