Financial Management

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Nonprofits have an obligation to act as responsible stewards in managing their financial resources. Nonprofits must comply with all legal and financial requirements and should adhere to sound accounting principles that produce reliable financial information, ensure fiscal responsibility, and build public trust.

Nonprofits should use their financial resources to accomplish their missions in effective and efficient ways and should establish clear policies and practices to regularly monitor how funds are used. Nonprofit organizations should seek to maintain or sustain a business model that will offer reliable, flexible, and diverse resources to accomplish the organization’s mission.

1. The board should annually review and approve a detailed written budget of revenues and expenditures and gain a sufficient understanding of the assumptions behind the budget’s development when doing so.

2. Individuals responsible for an organization’s financial reporting should prepare and present to the board consistent, timely, and accurate financial reports at least bimonthly, with comparisons to the organization’s budget.

3. A nonprofit should ensure separation of financial duties to serve as a checks and balances system to prevent theft, fraud, or inaccurate reporting to the greatest extent possible. This system of internal controls should be formally adopted by the board and appropriate to the size of the organization’s financial and human resources.

4. Nonprofit organizations should adopt written financial procedures and have appropriate financial management software to record revenues and govern major expenses and use of assets, including:

  • cash and in-kind contributions,
  • payroll,
  • leases,
  • expense reimbursements,
  • travel,
  • contracts,
  • consultants,
  • investments, and
  • use of debt.

5. Nonprofit organizations accepting funds from government entities should be conscientious in negotiating contract terms to ensure that payment levels, conditions, and reporting requirements are consistent with the mission of the organization and the interest of the people being served.

6. Nonprofits should periodically assess their risks, take appropriate actions to minimize these risks, and purchase appropriate types and levels of insurance to wisely manage their liabilities.

7. A nonprofit’s board should use comparable market data to set compensation for the organization’s executive director and stay informed of compensation levels for other key personnel.

8. A nonprofit’s board should strictly prohibit financial loans to board members, the executive director, and other key personnel.

9. Board members and key staff should clearly understand how to read and interpret financial statements, including the limits on the use of restricted funds in nonprofit organizations and the role of debt.

10. The board treasurer should take a leadership role in helping the board understand its duties with regard to financial management. The treasurer also should foster board awareness of the organization’s current financial condition, forecasted revenue, and need to make timely adjustments in expenditures to keep the organization healthy.

11. Nonprofit organizations must comply with all financial regulations, such as withholding and payment of federal, state, and Social Security taxes, and manage donated funds according to their restrictions.  Gavel

12. Nonprofit organizations must complete the relevant version of the IRS Form 990 annually. The organization’s board should be provided with a copy of the completed IRS Form 990 before it is submitted. The organization should seek to meet the initial four-and-a-half-month reporting deadline to the IRS.  Gavel

13. If a Minnesota nonprofit organization’s total revenues for the previous fiscal year exceed $750,000, it must have its financial statements audited, certified, and prepared in accordance with general accepting accounting principles (GAAP). The board should designate a board committee to hire the auditor, oversee the audit process, meet with the auditor to review the audit’s content, and present the audit’s findings to the full board for its review and approval.

14. Nonprofit organizations should have systems in place, including a whistleblower policy, to protect individuals who report financial misconduct from any negative repercussions for doing so.

15. A nonprofit organization must openly communicate the annual reporting information contained in its IRS Form 990 for the previous three years to make available to those who request it. The organization should make this information available on its website.  Gavel

16. Nonprofit organizations should secure appropriate levels of funding to carry out their missions and activities and, when possible, diversify their revenue sources to avoid being dependent on a single funding type.

17. Nonprofit organizations should work diligently to avoid recurring deficits and aim towards building up sufficient operating reserves.

18. Nonprofits must spend funds in compliance with conditions attached to their funding. Organizations should develop a system to ensure that donor funding restrictions are maintained.  Gavel

19. A nonprofit organization has a responsibility to ensure that its assets are used solely for the benefit of the organization and not for personal or other gains. To carry out this duty, an organization should have a clear conflict of interest policy that is annually signed by board members and key staff and actively enforced by the officers of the board.

Note to Readers: Please be aware that certain words have particular meanings in this document.

  • “Must” is used to describe practices required by state or federal law, and is noted with a gavel symbol (An icon of a red gavel); the online version of the Principles and Practices will soon include direct web links to relevant federal and state statutes and reporting forms.
  • “Should” is used to describe highly recommended practices.
  • “Constituents” describes people with a stake in the success of the organization and may include members, neighbors, clients, volunteers, and contributors.