What This Covers
This hub is for program managers, finance staff and the leaders of small and mid-sized nonprofits and NGOs who plan, monitor and account for money from budget to final report. Good financial management rests on four building blocks: keeping records, internal control, budgeting and financial reporting. Pick the task you face today below; where OpenAid has a page for it, the task links to it. There is also a short note on using an AI assistant without putting your financial data at risk.
Start Here
- Build an annual budget. Budgeting is planning, so begin several months before the financial year ends. Work through the seven stages (design the process, articulate goals, decide the structure, estimate costs, forecast income, draft the budget, adopt and implement), and bring program, fundraising and finance staff into the drafting. People stand behind a budget they helped write.
- Compare budget to actual. Calculate the variance on each line and decide which ones need action. Some organizations treat a result within plus or minus 10% of budget as reasonable, though that is only one rule of thumb. Look at under-spending as well as over-spending. The variance prompt helps you explain the ones that matter.
- Sort direct and indirect costs. Split costs into direct and indirect in your accounts so managers can plan, monitor and control project resources. For costs shared by several grants, see allocate shared costs across grants.
- Set a reserves policy. Decide how much unrestricted money to hold, and write down why. Reserves: how much and how to build them explains how.
- Put basic controls in place. Reconcile the bank at least monthly and make sure the person who authorizes a payment is not the person who made it.
- Forecast cash. Look three to six months ahead, starting from the cash you actually have. The cash flow forecast template can help you spot cash problems in good time.
Key Concepts
- Annual budget: the financial picture of what you expect to accomplish over twelve months.
- Direct costs: costs that clearly belong to one activity, such as a trainer's salary and room rental on a training project.
- Indirect costs: general costs that serve the whole organization or several activities, such as headquarters rent, the audit fee and the chief executive's salary.
- Cost recovery: the ways an organization makes sure it recoups every cost of delivering donor-funded projects (full cost recovery). Weak recovery can start a starvation cycle, where there is no money to invest in the systems that keep you going. Overhead ratios are a poor proxy for effectiveness.
- Restricted funds: income with conditions on how it is used, usually with a duty to report back to the funder (restricted and unrestricted funds).
- Reserves: the part of unrestricted funds you are free to spend on any of your purposes. No single level suits every organization.
- Variance: the difference between budget and actual. It can be positive, negative or zero, and is often shown as a percentage.
- Burn rate: the share of a budget or grant used up so far, also called utilization.
Templates
- Cash flow forecast template: use it to spot cash problems in good time.
- Proposal budget template: use it to cost a project for a funding request.
- Financial health check (on Humentum's site): anyone on staff or the board can use it to review planning, accounting, controls, staffing, grants and reporting.
- Cost recovery good-practice checklist (on Humentum's site): use it to assess practice, prioritize improvements and track progress.
Using AI Assistants
Avoid pasting raw financial data into AI assistants. Losing personal or financial data can expose your organization and others to theft and fraud.