When you think of making financial decisions on behalf of your nonprofit, who do you picture? While your mind might go to your finance committee or CFO—who are certainly key players in the decision-making process—involving a variety of internal and external stakeholders can bring diverse perspectives and expertise to the table.
As a result, you can develop a comprehensive financial strategy that reflects everyone’s input and guidance, even your constituents. In this guide, we’re diving into the five main parties who should be involved in nonprofit financial decisions and their associated responsibilities in ensuring your organization’s financial health. Keep this guidance in mind next time you’re dealing with an important financial decision, whether during strategic planning or in the course of your day-to-day work.
Board of Directors
Your board of directors provides strategic guidance to your nonprofit, which includes overseeing your organization’s finances. They not only ensure that your nonprofit complies with legal and regulatory requirements, but also that staff members steward funds responsibly in pursuit of your organization’s mission.
Financial Responsibilities of Your Board of Directors
- Creating financial policies. Your board guides your organization’s fiscal management by establishing financial policies, procedures, and controls. They develop guidelines for budgeting, financial reporting, cash management, investments, and fundraising. Then, they’ll update these policies as the organization evolves.
- Approving your nonprofit’s annual budget. After your leadership team determines the annual budget, your board reviews and approves the budget, making sure it aligns with your organization’s strategic priorities.
- Monitoring financial performance. The board also ensures your organization is sticking to its budget by comparing actual financial performance to benchmarks and targets set by leadership. They use key performance indicators (KPIs) or objectives and key results (OKRs) such as donor retention rate, program services ratio, months cash on hand, and fundraising efficiency ratios to evaluate the organization’s financial standing.
- Developing your strategic plan. Lastly, the board helps develop your strategic plan. The financial aspects of this process include identifying financial goals, priorities, risks, and opportunities.
To ensure all board members know their exact responsibilities—financial and otherwise—before settling into their roles, Double the Donation recommends running a comprehensive nonprofit board orientation. During orientation, you should have current board members discuss their roles and offer training to fill in any gaps in financial knowledge.
Leadership Team
Your nonprofit leadership team includes your executive director or CEO and your senior management staff. These team members are responsible for implementing the financial strategies established in your strategic plan and managing your organization’s day-to-day financial operations.
Financial Responsibilities of Your Leadership Team
- Developing your nonprofit’s annual budget. Your leadership team develops an annual budget that reflects your organization’s current priorities and mission. They strategically allocate resources to support your mission and operations.
- Updating the board with regular financial reports. To keep the board informed of your nonprofit’s financial status, leadership regularly communicates updates on the organization’s financial health and engages them in discussions about fund stewardship.
- Managing financial risks. Members of leadership are responsible for identifying any potential financial risks and addressing them accordingly. They also ensure internal controls are in place so no one party has absolute power over the organization’s finances.
- Securing financial support. As the face of your organization, your leadership team builds relationships with donors, funders, and government agencies to obtain the donations, grants, and other financial resources that fuel your cause.
Overall, your leadership team provides the context from your nonprofit’s activities to its finances so all financial decisions reflect the organization’s current priorities.
Finance Committee
The finance committee comprises board members dedicated to financial oversight of your organization. Committee members typically have expertise in this area that allows them to effectively keep your nonprofit accountable and transparent about its financial management.
Financial Responsibilities of Your Finance Committee
- Analyzing financial reports, budgets, and performance metrics. While the leadership team develops the annual budget, your finance committee reviews the budget to ensure it’s reasonable. They also analyze financial reports and performance metrics to provide guidance on the organization’s financial health and sustainability.
- Recommending financial policies and procedures to the board. The finance committee lends its financial expertise to the board, ensuring all policies align with legal, regulatory, and accounting standards.
- Managing assets and investments. If your organization has endowment funds or reserves, your finance committee is typically responsible for managing those assets. They also establish investment policies and guidelines.
- Overseeing the audit process. To maintain financial integrity, the finance committee oversees the audit process. Their responsibilities may include hiring auditors, reviewing audit findings, and assessing audit recommendations.
With the finance committee’s financial expertise, you can be confident that your organization is making sound financial decisions that reflect your nonprofit’s current financial standing.
Accounting Staff
According to YPTC’s nonprofit accounting guide, a nonprofit accountant plans, records, and reports on your organization’s financial transactions. They typically have a four-year degree and previous experience in finance, accounting, or business administration and may have a Certified Public Accountant (CPA) license.
Responsibilities of Your Accounting Staff
- Compiling financial statements. Your accounting staff prepares nonprofit financial statements, including a statement of financial position (balance sheet), statement of activities (income statement), statement of functional expenses, and statement of cash flows. These documents provide the financial data other stakeholders need to make informed financial decisions.
- Reconciling accounts. Nonprofit accountants ensure all of your financial records are correct so that you’re basing decisions on updated, accurate financial information.
- Overseeing the annual budgeting process. Alongside your leadership team, your accounting staff helps develop your annual budget, financial plans, and revenue projections.
- Preparing for audits. Your nonprofit accountant supports the auditing process by preparing audit work papers and schedules, compiling financial reports, and preparing financial information so the auditor or tax accountant can file a Form 990.
- Managing grants. Nonprofit accountants can also assist with grant management, ensuring you properly record, report, and track these funds.
While you may hire a full-time accountant to join your team, it’s best to outsource your accounting needs to a dedicated nonprofit accounting firm. In addition to specializing in nonprofit-specific accounting best practices, these firms are typically more cost effective than a full-time accountant.
External Stakeholders
Although we’ve reviewed the main internal stakeholders involved in major nonprofit financial decisions, it’s important to adopt a shared power mindset when it comes to financial decision-making. Those impacted by your organization should have a stake in your financials, considering they’re the ones seeing the direct effects.
While there aren’t designated financial responsibilities for external stakeholders—such as constituents, volunteers, and donors—you can seek their input in these areas:
- Strategic planning and goal-setting. Since your volunteers are doing mission-critical work on behalf of your nonprofit, involving them in strategic planning allows them to lend their firsthand volunteer experiences to your discussions. Similarly, constituents can update your nonprofit on their current needs and priorities while donors can express areas of your mission they’d like to support.
- Program development and evaluation. Combine financial data with actual insights from constituents, volunteers and donors who have hands-on experience with your cause. Consult constituents to identify room for program improvement, volunteers to provide feedback on program effectiveness, and donors to discuss how their contributions make a difference.
- Fundraising and resource allocation. Constituents can help guide your funding decisions by informing your staff of their most pressing priorities. Volunteers may offer ideas for upcoming fundraising events and campaigns. Lastly, donors will appreciate your transparency in allowing them to observe resource allocation discussions and can provide insight into how they’d like their funds to be used.
- Crisis management and decision-making. Your nonprofit may coordinate with partner organizations to temporarily meet the needs of their constituents during times of crisis or increased need. For example, a Goodwill thrift store may donate in-kind contributions of overflow clothing to a local shelter for people without housing.
To get your external stakeholders involved in financial decisions, try assembling a stakeholder board of constituents, volunteers, and donors willing to lend their guidance. This group can lend important perspectives on all kinds of strategic challenges, financial and otherwise.
Involving as many parties in your nonprofit’s financial decisions as possible ensures that you catch mistakes, identify risks, and capitalize on opportunities that allow you to advance your mission. Remember to consistently review each stakeholder’s specific responsibilities with them so their roles in upholding your organization’s financial health are clear.
