What NPOs Wish Their Funding Partners Knew About Their Financial Management

It is a myth that non-profit financial management and accounting is exactly like that of a profit-making business.  While there are many similarities, it can often seem like a parallel universe. After many years of working with non-profits, here are some of the peculiarities of financial management within a non-profit entity that we have learned.

Imagine a project that operates solely with perfectly-skilled volunteers, operates from a coffee-shop but does not purchase coffee, has no bank account and possibly no money, has pro-bono auditors, accountants, and lawyers and donated equipment that is maintenance-free and stored in someone’s garage. This sounds pie-in-the-sky, and it certainly is! Sometimes, non-profit organisations are treated as if only funding that is channelled directly to a beneficiary is worthwhile funding. Taken to the extreme, it is sometimes believed that salaries are not worth funding. Many non-profits require a large number of people with skills to serve their constituencies – such as counsellors, social workers, activists, or teachers – with a high proportion of their expenditure being paid as remuneration. These costs must always be included in budgets, and should be supported by funders.

Some funders believe that a separate bank account guarantees transparent accounting for their funds paid to an organisation. However, for many non-profit entities, there may be numerous employees and suppliers to be paid and it is likely that most outgoing amounts from the bank account would simply be transfers to the organisation’s operating bank account, from which most payments to employees and suppliers will be made.

Additional bank accounts create extra administration and bank charges for the entity and, in our view, are unnecessary where the organisation operates an accounting system that is able to track income and expenditure per funder or grant separately.

There is no doubt that non-profits need a cash-flow buffer to help them through delayed funding and short-term lean times. Last year, an organisation we know endured a few months where a whole batch of funding agreements were ending before new ones were starting. If that organisation was without any saving in reserve, they would have had to close their much-needed operations. Fortunately, due to a modest reserve fund, this was a mere blip that didn’t sink them. Those supporting non-profits need to recognise the need for this type of savings and reserves, and even actively support it – imagine a world in which each funding contract contributes a small amount to the reserve as a budget line item!

Some non-profits may be perceived to be sitting on vast amounts of reserves or savings that do not ever get to the intended beneficiaries. In some cases this may well be true. However, in other cases, this may be a misinterpretation of financial statements. For example, where a non-profit discloses “accumulated funds” on its statement of financial position, those funds may not necessarily made up of cash, but possibly of fixed assets, say, buildings used to house the organisation’s operations. Sometimes, this could also just be poor financial statement presentation or ignorance of the image it projects. In our opinion, it is important to dig a bit deeper in this situation.