The Importance of Internal Controls
Internal controls, though not a glamorous topic, are crucial for the sustainability of nonprofits. Implementing basic measures such as an accounting manual, policies and procedures, and oversight can make a significant difference. Many nonprofits lack these essentials, putting themselves at risk. Ensuring that the board reviews financials, annual budgets, and engages in proper oversight is fundamental to the organization's success.
Resources and Recommendations
For organizations looking to improve their financial management, there are many free resources available online, including checklists and guidelines from organizations that serve nonprofits. Hiring a consultant for a financial management review can also be a worthwhile investment, providing an objective assessment and identifying gaps and red flags.
Many financial service businesses serving nonprofits offer free evaluations, providing a quick assessment of an organization's financial operations to identify areas for improvement. Nonprofits should either conduct their own reviews or hire experts to ensure they are following best practices.
Creating an Effective Annual Budget
Create an annual budget and stick to it. The budgeting process should be formalized, with the board approving the budget annually. Simply repeating the previous year's budget with slight adjustments is not adequate. Instead, organizations should start fresh each year, considering their revenue projections and prioritizing expenses accordingly.
Conservative vs. Aspirational Budgeting
Organizations should base their budgets on the most conservative revenue projections, allowing for potential shortfalls. While dreaming big and setting ambitious goals is important, relying on uncertain funding can be risky. It's better to budget conservatively and revise the budget if additional funds come in, rather than facing financial shortfalls.
Conclusion
By focusing on internal controls, proper oversight, and conservative budgeting, nonprofits can ensure they are well-equipped to fulfill their missions and serve their communities effectively.
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