How to manage the finance function at a non-profit organisation

Strong financial leadership is critical for a non-profit organisation (NPO) to be sustainable.

However, recent research on the ability of UK NPOs to produce timely and accurate financial data, and make informed decisions using that data, shows many NPOs are struggling in this area.

There are many factors that contribute to this.

Many organisations lack a designated finance person to manage the finance function or have non-finance people fulfilling the role, which is especially the case for smaller organisations.

Knowledge gaps turn basic tasks into time traps, and complex tasks are virtually impossible without using powerful software and tools available for the function today.

Getting the finance function right means:

• Consistently understanding and producing accurate and timely information and reports
• Making informed financial decisions
• Carrying out meaningful financial planning, forecasting and analysis
• Ensuring sound finances and sustainability of the organisation
• Transparency on how funds are spent.

At any level of financial understanding, managing the finance function for an NPO can be complex.

This article breaks down the role and responsibilities within the finance function and offers tips on how to successfully manage it.

What does the finance function do?

The finance function is traditionally responsible for all of the day-to-day transactional accounting for the organisation, such as raising and chasing invoices, paying bills and dealing with bank reconciliation.

This involves managing cash flow and ensuring there are enough funds available to meet the regular payments.

Alongside these activities, the finance leader is also responsible for advising and sourcing longer-term accounting.

Increasingly, as you take a more strategic and less of a purely executive role, you might find yourself making recommendations to your board and other key stakeholders on the strategic direction, funding and activities to pursue to achieve a mission.

In this case, the finance function plays an essential role in preparing the documentation required for presentations to these potential donors.

We divide the finance function into four processes and a set of tasks for each process.

1. Bookkeeping

At a basic level, this includes managing the sales and purchase ledgers, as well as your processes for payroll and expenses.

Bookkeeping also includes complex tasks such as bank and petty cash reconciliation, journals and VAT returns.

2. Accounting

This includes all cash flow analysis, profit and loss, deferred income, depreciation, prepayments, funder reporting, the balance sheet and fund management.

3. Financial management

This is where financial leaders interpret data for budgeting, forecasting, profitability and variances reporting.

This is also where you compare performance year-over-year and performance against forecast.

4. Financial planning and analysis

This involves using data and analysis for big picture thinking, with business planning, financial strategy and investments.

Understanding Organisational Financial Literacy

A successful finance leader or manager is one who:

• Manages funds effectively
• Understands and reports position and risk
• Operates an accountancy method using fit-for-purpose software
• Does routine finance work effectively
• Produces accurate and timely balances, accounts and reports.

To be successful, financial leaders must have a thorough understanding of financial management to improve their NPO’s Organisational Financial Literacy.

We define this as having the tools, capacity and expertise to be able to manage organisational finances.

As you grow in financial maturity and develop a deeper understanding of your current financial position and processes, you’ll be better able to manage all that’s required of the finance function and make a bigger contribution to the overall success of the organisation through growth and greater accountability.

Some of the outcomes of increased Organisational Financial Literacy are:

• The ability to consistently understand and produce accurate and timely information and reports
• Making informed financial decisions
• Carrying out meaningful financial planning, forecasting and analysis
• Sound finances and sustainability
• Greater transparency

Best practices for managing the finance function

Increasing your NPO’s Organisational Financial Literacy and managing your finance function more effectively starts with investing in these three areas:

1. Dedicated expertise

We surveyed 271 participants employed in dedicated finance roles and non-finance roles about their level of confidence in performing activities in the different financial areas of bookkeeping, accounting, financial management, and financial planning and analysis.

Our findings unsurprisingly suggest that among those non-finance professionals fulfilling finance functions (which is common in smaller organisations), confidence in their level of financial understanding and skills are lower than among trained finance professionals.

A substantial percentage consider their skills to be low or basic, with less than 30% having capabilities extending to financial planning.

For those without dedicated expertise, this indicates a reactive approach to managing NPO finances.

Having a dedicated financial expert in place ensures your finance function is handled with the confidence and skill level required for sustainability, accountability and growth.

2. More capacity

Capacity issues are among the most prevalent for our survey participants.

The amount of work that can be done is limited when there isn’t a designated finance expert in place and when too much time is spent on one task because of knowledge gaps and outdated tools.

With better capacity, you can manage all of the processes required of the finance function efficiently without risk to coverage or accuracy.

3. Better tools

Today’s technology options means there are more efficient ways to stay on top of the organisation’s accounts. Despite this, the reliance on spreadsheets and paper-based accounting methods still remains high.

The capacity issues within the sector can be easily addressed with the wider use of appropriate tools.

Interestingly, only those in finance roles identified a lack of tools as an obstacle to achieving higher levels of Organisational Financial Literacy.

This could indicate that professionals are more aware of what the NPO needs for Organisational Financial Literacy and can more easily identify a solution.

If your NPO was better equipped with finance management software and training on how to use it, you could automate time-consuming processes and focus more on financial planning.

Managing the finance function with technology

Dedicated accounting software is a must for an organisation to report accurately and be accountable to stakeholders.

The first step to improving Organisational Financial Literacy is to upgrade to using accountancy software and digitise your financial processes. Here are some of the outcomes of doing this:

• Digital invoicing: Manual invoicing slows down cash flow. From start to finish, it can take days to process a payment from invoices sent through the post. Digital invoicing eliminates time spent sending and receiving manual invoices. Instead, accounting software can create and send invoices via email on a professional invoice template. The software uses built-in automation to pull donor information, send automatic recurring invoices, and send email reminders to speed up late donations.
• Bank feeds: Accounting software can connect with the organisation’s bank accounts to feed real-time transaction data into the system 24/7. This gives the financial leader constant access to all data about the organisation’s financial health. Accounting software allows you to customise notifications and reports so you only see the information that is most important to you as often as you need it.
• Easy accountant access: Should the organisation decide to outsource the accounting function, cloud-based accounting software can grant your accountant secure access to your financial data from virtually any internet-connected device.

Build capacity

Automation within accounting software holds the key to building the finance function for the future of your organisation, as it removes the need for you to spend hours collecting data and ensures its quality.

Finance tasks can be done digitally, in a sense creating a digital workforce that can perform these tasks.

This will leave you with more time to spend on analysis and reporting. Automated solutions can work 24/7 without stopping, while reducing errors and minimising costly risks.

Make donating easier

Supporters and donors are increasingly expecting the same high quality of customer service and ease of interaction with the NPOs they work with as they experience with the likes of online retailers, banks and travel companies.

If, as a charity or NPO, you can use digital technology to replicate this level of service, you can increase engagement and donations, and gain a competitive advantage.

Technology will help you to assess whether this is actually the best way to solicit donations. Would it be better, for instance, to focus more on social media or a paid advertising campaign?

It can also help you to evolve payments and donations methods alongside donor expectations, says Matt Smith, a consultant at Think Consulting Solutions, an international consultancy that helps charities and others with fundraising.

He says: “The Royal British Legion’s 2019 Poppy Appeal raised £780,000 from over 146,000 donations via 900 contactless terminals, an increase from £211,000 in 2018.

“We expect this to be one of the major areas of technological investment for charities in the next three to five years as cash disappears from potential donors’ pockets.”

NPOs can also leverage developments in customer relationship management (CRM) tools and email service platforms to enhance the onward supporter journey.

Smith adds: “Charities will be able to more easily segment and tailor their journeys across multiple channels and offer different content based on a supporter’s location, previous actions and preferences.

“This kind of segmentation will become far more widely available and cheaper, meaning charities with smaller budgets will have access to many of the same tools and engagement metrics previously reserved only for the largest organisations.”

Final thoughts

Technology can empower finance leaders with the resources and support they need to be effective in their role.

With accounting software, finance leaders can make decisions confidently knowing their data is accurate and insights about the organisation’s current and future financial health are easily accessible and understandable.

But this goes a step further too.

By having the right software and processes in place, you’ll be able to work more efficiently and effectively. That will give you the time back to better support the mission, people and communities you serve with your organisation.