Financial Records: the Jugular Vein of your Nonprofit Organization (Then and Especially Now!)

We visited our first nonprofit organization over forty years ago and immediately “fell in love” with the people who worked there. They were capable and truly dedicated to the mission of the organization, but they knew little about financial record keeping because they were essentially educators and not business-oriented people. One of the things that made the organization successful was that they listened to us when we preached about the need to run the organization like a business so we were able to teach them the importance of good record keeping and how essential quality financial information is to the management process.

We think being the CEO or Executive Director of a nonprofit organization is absolutely the most challenging management job there is. After having worked with thousands of nonprofit organizations, from the smallest to the largest, we are still in love with those organizations and the people who work for them. The difficulties and challenges faced by the person “keeping the books” of a nonprofit organization are a close second to the challenges faced by the CEO. Whether the title is head bookkeeper, director of finance, controller, or CFO, the top financial person’s knowledge, ability, and job performance are very closely tied to the long-term success or failure of the organization. Poor management will close your doors forever, and a big piece of managing a nonprofit relates to keeping not just adequate financial records but excellent financial records. And in these turbulent economic times, excellent financial records are a must because nonprofits are under enormous scrutiny from all aspects of our society. In many instances, funding sources require regular financial reports regarding monies they have granted or contributed to you. If you keep sloppy or inadequate records, newspapers love to write that investigative report about your activities, both operational and financial.

The following list is a mantra that we have been repeating in different venues for more than forty years. Your nonprofit organization must implement the following standards to have financial records which are “bullet proof” and designed to withstand scrutiny from all comers—the Senate finance committee if you’re a large nonprofit such as a university or hospital or the local newspaper if you are a small, local charity.

Financial Standards for Success
1. Implement written Policies and Procedures
2. Widely distribute those Policies and Procedures to staff, volunteers and board
3. Find the right Accountant /CPA to work with the organization
4. Find and train the right person to keep your financial records
5. Ensure that the finance person is in the information loop
6. Create and monitor proper Internal Controls designed to protect your money
7. Create and use accurate, realistic, and documented budgets
8. Create and use accurate, realistic, and documented Cash Flow Forecasts
9. Produce and use Monthly Financial Reports and analysis by location, program, grant, and organization on a timely basis
10. Acquire proper Insurance Coverage
11. Arrange for Annual Audited Financial Statements that are complete and prepared on time
12. Arrange for Annual Tax Filings that are accurate and prepared on time

When we began working with the nonprofit sector, there was very little actual formal guidance for accountants or nonprofit organizations to follow. Few books on finance for nonprofits had been published to help accountants or nonprofit organizations to create the financial records they actually needed. When we went to a library in 1965 to do some initial research on the area, we found little literature. Whatever literature that did exist was frequently not relevant to the nonprofit world of 1965 and was focused on large institutions. When we subsequently started doing training sessions for clients, we found we had to create special materials to help attendees understand the topics and their relevance to the organization. Please remember the twelve items above and make sure they are part of the financial management “culture” at your organization.

Murray Dropkin is president of CMS Systems, Inc., a consulting firm that specializes in improving the financial operations of nonprofit and for-profit organizations. He is the coauthor of The Budget-Building Book for Nonprofits, 2nd Edition (Jossey-Bass), Bookkeeping for Nonprofits (Jossey-Bass) and The Cash Flow Management Book for Nonprofits (Jossey-Bass).

Jim Halpin has written articles for technical publications and has developed accounting software and other applications for clients in a wide variety of industries. He is the coauthor of The Budget-Building Book for Nonprofits, 2nd Edition (Jossey-Bass), Bookkeeping for Nonprofits (Jossey-Bass), and the coauthor, with Dropkin, of the newsletter Nonprofit Report.