Nonprofit Financial Management Handbook

Table of Contents

Introduction Nonprofit Accounting Methods Key Financial Statements Audits Full Cost of Doing
Business Liquidity Avoiding the Doom Loop Roles of Personnel in Financial Management Assessing
Financial Health Key Formulas and Metrics Conclusion

1. Introduction Nonprofit organizations must balance their mission-driven goals with financial
sustainability. This handbook provides essential knowledge on nonprofit financial management,
including accounting methods, financial statements, audits, liquidity, and strategies to avoid
financial pitfalls. By mastering these concepts, nonprofit leaders can ensure their organizations
thrive and deliver impactful programs.
2. Nonprofit Accounting Methods Nonprofits use one of two accounting methods:

Cash Accounting:

Records revenue and expenses when money is exchanged. Simple but less accurate for long-term
financial planning. Similar to balancing a checkbook.

Accrual Accounting:

Records revenue when earned and expenses when incurred. Provides a more thorough
understanding of financial health. Recommended for nonprofits to comply with GAAP.
3. Key Financial Statements Nonprofits rely on four financial statements to assess their financial
health: Statement of Activities (Income Statement)

Shows revenue, expenses, and changes in net assets over a period. Indicates surplus or deficit. Key
sections:

Revenue, Gains, and Other Support: Includes contributed and earned revenue. Expenses: Program
expenses, administrative costs, and fundraising. Change in Net Assets: Surplus or deficit.

Statement of Financial Position (Balance Sheet)

Provides a snapshot of assets, liabilities, and net assets at a specific point in time. Key sections:

Assets: Everything owned that can be converted to cash. Liabilities: Everything owed to others. Net
Assets: Assets free of liabilities, categorized as:

Without Donor Restrictions. With Donor Restrictions (Purpose/Timing or Held in Perpetuity).

Statement of Cash Flows

Tracks cash inflows and outflows. Shows how programs and activities generate and use cash.

Statement of Functional Expenses

Breaks down expenses by function:

Program: Mission-related activities. Administrative: Management and general costs. Fundraising:

Costs related to securing donations.
4. Audits Audits are essential for financial transparency and accountability. They:

Provide an accurate financial picture. Demonstrate compliance with GAAP. Foster donor trust and
confidence. Must be conducted by independent third-party auditors (e.g., certified public
accountants).
5. Full Cost of Doing Business Nonprofits must understand and fund their full cost, which includes:

Program Expenses: Direct costs of delivering services. Operating Costs: Overhead expenses like rent
and utilities. Liquidity: Cash available to manage risks. Fixed Assets: Property, equipment, and
infrastructure. Growth Capital: Funds for expansion. Reserves: Emergency funds for unexpected
expenses. Debt: Borrowed money that must be repaid.
6. Liquidity Liquidity measures a nonprofit's ability to cover expenses and manage risks. Two key
metrics:

Months of Cash on Hand (MOCH):

Amount of time a nonprofit can operate without new funding. Formula: Total Cash ÷ Average
Monthly Expenses. Less reliable as it includes restricted funds.

Months of Liquid Unrestricted Net Assets (LUNA):

Best indicator of liquidity. Formula: (Net Assets Without Donor Restriction - Unrestricted Property &
Equipment) ÷ Average Monthly Expenses.
7. Avoiding the Doom Loop The doom loop occurs when nonprofits fail to fund their full costs,
leading to:

Insufficient staffing. Weak infrastructure. Reduced capacity to deliver programs. To avoid this: Know
your full cost of doing business. Maintain adequate liquidity (3-6 months of LUNA). Be transparent
with funders about program costs.
8. Roles of Personnel in Financial Management Board of Directors
Provides fiduciary oversight. Ensures funds are used responsibly and aligned with the mission.
Reviews financial statements and audits.

Program Staff

May assist with audits and financial reporting. Cannot conduct audits independently.
9. Assessing Financial Health Key questions to determine financial stability:

Are you bringing in enough revenue to cover operating expenses? How much risk can you take?
What is your ability to pursue opportunities?
10. Key Formulas and Metrics Months of Cash on Hand (MOCH)

Formula: Total Cash ÷ Average Monthly Expenses.

Months of Liquid Unrestricted Net Assets (LUNA)

Formula: (Net Assets Without Donor Restriction - Unrestricted Property & Equipment) ÷ Average
Monthly Expenses.

Change in Net Assets

Formula: Total Revenue, Gains, & Other Support - Total Expenses.

11. Conclusion Nonprofit leaders must prioritize financial transparency, full cost funding, and
liquidity to ensure long-term sustainability and avoid the doom loop. Regularly reviewing financial
statements and engaging in strategic planning are critical for achieving mission success. By
mastering the concepts in this handbook, nonprofits can build resilience, manage risks, and deliver
impactful programs to their beneficiaries.

Appendix

Glossary of Terms:

Liquidity: Cash or assets readily available to cover expenses. Net Assets: Assets free of liabilities.
Restricted Funds: Funds with donor-imposed limitations. Unrestricted Funds: Funds available for any
legal purpose.

Sample Financial Statements:

Statement of Activities. Statement of Financial Position.

Resources:

GAAP Guidelines. Fiscal Management Associates.

This handbook serves as a practical guide for nonprofit leaders to navigate financial management
effectively and ensure their organizations thrive.

Financial Management Essentials Training Handbook For Nonprofit Organizations

Table of Contents Introduction & Course Overview

Nonprofit Accounting Methods

Roles in Financial Management

Nonprofit Audits & Financial Statements

Understanding Full Cost

The Doom Loop

Knowledge Checks & Activities

Statement of Activities (Income Statement)

Statement of Financial Position (Balance Sheet)

Liquidity Management

Comprehensive Assessment

Glossary
1. Introduction & Course Overview Key Principle: "No money, no mission." Financial health is
essential for long-term sustainability. Topics Covered:

Accounting methods

Roles of personnel

Audits and financial statements

Full cost funding

Liquidity and risk management

2. Nonprofit Accounting Methods Cash Accounting Records: Revenue/expenses when cash is
exchanged.

Pros: Simple, resembles personal checkbook.

Cons: May not reflect future obligations.

Accrual Accounting Records: Revenue when earned, expenses when billed (regardless of cash flow).

Pros: Accurate financial picture, GAAP-compliant.

Cons: Complex, requires tracking receivables/payables.

Best Practice: Nonprofits should use accrual accounting for transparency.

3. Roles in Financial Management Board of Directors: Provides oversight, reviews audits, ensures
compliance.

Staff/Management: Manages day-to-day finances, prepares reports.

Program Staff: Supports data collection for audits (but cannot conduct audits).
4. Nonprofit Audits & Financial Statements Audit Requirements Initiated by: Federal/state laws, grant
requirements, or the nonprofit itself.

Conducted by: Independent CPA or auditor.

Functions:

Verify financial accuracy.

Ensure GAAP compliance.

Build donor trust.

Required Financial Statements Statement Purpose Statement of Activities Shows revenue vs.
expenses (surplus/deficit). Statement of Financial Position Lists assets, liabilities, net assets (snapshot
in time). Statement of Cash Flows Tracks cash sources/uses. Statement of Functional Expenses Breaks
costs by program/administration/fundraising. 5. Understanding Full Cost For-Profit vs. Nonprofit For-
Profit: Full cost covered by customer payments (e.g., coffee sale includes direct costs + profit).

Nonprofit: Full cost requires external funding (donations/grants) to cover:

Program expenses

Operating costs (rent, HR, IT)

Liquidity reserves

Fixed assets (buildings, equipment)

Growth capital

Consequence of Underfunding: Inability to invest in infrastructure/staff → "Doom Loop."

6. The Doom Loop Cycle Triggered by Chronic Underfunding:

Lack of Liquidity → Unable to handle emergencies.

Disinvestment in Human Capital → Staff cuts/overwork.

Limited Capacity & Weak Infrastructure → Obsolete technology/facilities.

Inability to Meet Demand → Mission failure.

Solution: Fund full costs and maintain liquidity reserves.

7. Knowledge Checks & Activities True/False Quiz True:

Audits boost donor trust.

"Statement of Activities" = "Income Statement."

False:

Full cost includes ONLY program/operational expenses (it includes reserves, liquidity, etc.).

Program staff can lead audits (must be independent).

Activity: H-Operation Case Study Task: Analyze financial statements to determine:

Largest expense (Program Expenses: $82,421).

Unrestricted surplus/deficit (Surplus: $92,799).

Funding adequacy ("Revenue covers expenses; we are financially healthy").

8. Statement of Activities (Income Statement) Structure: Section Purpose Revenue/Gains
Contributions, grants, program fees. Expenses Program, administration, fundraising. Change in Net
Assets Surplus (revenue > expenses) or deficit (expenses > revenue). Key Insights: Unrestricted
Revenue: Critical for covering expenses.

Negative Change in Net Assets: Signals funding crisis.

9. Statement of Financial Position (Balance Sheet) Structure: Category Includes Assets Cash,
receivables, property (listed by liquidity). Liabilities Payables, debt. Net Assets Without donor
restrictions (flexible); with restrictions (purpose/timing/perpetuity). Liquid Unrestricted Net Assets
(LUNA): Formula:
LUNA = Net Assets (Without Restrictions) – Unrestricted Property/Equipment Months of LUNA =
LUNA ÷ Average Monthly Expenses Healthy: 3–6 months of LUNA.
10. Liquidity Management Ratios: Months of Cash on Hand (MOCH):

Total Cash ÷ Avg. Monthly Expenses.

Flaw: Includes restricted cash.

Months of LUNA:

Uses only unrestricted funds.

Best indicator of true liquidity.

Interpreting Results: LUNA (Months) Status <1 Crisis (unable to handle risks). 1–2 Worrisome (rely on
credit lines). 3–5 Moderately healthy. 6+ Healthy. 11. Comprehensive Assessment 30 Exam Questions
(Examples):

Q: An income statement is also called a _______. A: Statement of Activities.

Q: What covers hurricane repairs? A: Reserves.

Q: What triggers the doom loop? A: Lack of full-cost funding.

Q: Calculate Months of LUNA (Net assets: $61,573; Unrestricted P&E: $79,250; Avg. monthly
expenses: $225,000). A: –0.0786 months (crisis).
12. Glossary Term Definition LUNA Liquid Unrestricted Net Assets (cash/assets free to use). Full
Cost All expenses to run programs + sustain operations. Doom Loop Cycle of decline due to chronic
underfunding. With Donor Restrictions Funds limited to specific purposes/timing. Conclusion:
Nonprofits must fund full costs, monitor liquidity (LUNA), and use accrual accounting to avoid the
doom loop and achieve mission sustainability.

Merge the two content and prepare a well presented training handbook ,

Nonprofit Financial Management Handbook

Table of Contents
1. Introduction
2. Nonprofit Accounting Methods
• Cash Accounting
• Accrual Accounting
3. Key Financial Statements
 • Statement of Activities (Income Statement)
• Statement of Financial Position (Balance Sheet)
• Statement of Cash Flows
• Statement of Functional Expenses
4. Audits
5. Full Cost of Doing Business
6. Liquidity
• Months of Cash on Hand (MOCH)
• Months of Liquid Unrestricted Net Assets (LUNA)
7. Avoiding the Doom Loop
8. Roles of Personnel in Financial Management
• Board of Directors
• Program Staff
9. Assessing Financial Health
10. Key Formulas and Metrics
11. Knowledge Checks & Activities
12. Comprehensive Assessment
13. Glossary
14. Conclusion
15. Appendix
• Sample Financial Statements
• Resources

1. Introduction
Nonprofit organizations must balance their mission-driven goals with financial sustainability. This
handbook provides essential knowledge on nonprofit financial management, including accounting
methods, financial statements, audits, liquidity, and strategies to avoid financial pitfalls. By mastering
these concepts, nonprofit leaders can ensure their organizations thrive and deliver impactful
programs.

2. Nonprofit Accounting Methods

Nonprofits use one of two accounting methods:

Cash Accounting
• Records: Revenue and expenses when money is exchanged.
• Pros: Simple, resembles personal checkbook.
• Cons: May not reflect future obligations.
Accrual Accounting
• Records: Revenue when earned and expenses when incurred.
• Pros: Provides a more thorough understanding of financial health; recommended for nonprofits to
comply with GAAP (Generally Accepted Accounting Principles).
• Cons: More complex, requires tracking receivables and payables.

Best Practice: Nonprofits should use accrual accounting for transparency and accuracy.

3. Key Financial Statements

Nonprofits rely on four financial statements to assess their financial health:

Statement of Activities (Income Statement)

• Purpose: Shows revenue, expenses, and changes in net assets over a period; indicates surplus or
deficit.
• Key Sections:
• Revenue, Gains, and Other Support: Includes contributed and earned revenue.
• Expenses: Program expenses, administrative costs, and fundraising.
• Change in Net Assets: Surplus or deficit.

Statement of Financial Position (Balance Sheet)

• Purpose: Provides a snapshot of assets, liabilities, and net assets at a specific point in time.
• Key Sections:
• Assets: Everything owned that can be converted to cash.
• Liabilities: Everything owed to others.
• Net Assets: Assets free of liabilities, categorized as:
• Without Donor Restrictions.
• With Donor Restrictions (Purpose/Timing or Held in Perpetuity).

Statement of Cash Flows

• Purpose: Tracks cash inflows and outflows; shows how programs and activities generate and use
cash.

Statement of Functional Expenses

• Purpose: Breaks down expenses by function:
• Program: Mission-related activities.
• Administrative: Management and general costs.
• Fundraising: Costs related to securing donations.
4. Audits
Audits are essential for financial transparency and accountability. They:
• Provide an accurate financial picture.
• Demonstrate compliance with GAAP.
• Foster donor trust and confidence.
• Must be conducted by independent third-party auditors (e.g., certified public accountants).

5. Full Cost of Doing Business

Nonprofits must understand and fund their full cost, which includes:
• Program Expenses: Direct costs of delivering services.
• Operating Costs: Overhead expenses like rent and utilities.
• Liquidity: Cash available to manage risks.
• Fixed Assets: Property, equipment, and infrastructure.
• Growth Capital: Funds for expansion.
• Reserves: Emergency funds for unexpected expenses.
• Debt: Borrowed money that must be repaid.

6. Liquidity
Liquidity measures a nonprofit's ability to cover expenses and manage risks. Two key metrics:

Months of Cash on Hand (MOCH)

• Definition: Amount of time a nonprofit can operate without new funding.
• Formula: Total Cash ÷ Average Monthly Expenses.
• Note: Less reliable as it includes restricted funds.

Months of Liquid Unrestricted Net Assets (LUNA)

• Definition: Best indicator of liquidity.
• Formula: (Net Assets Without Donor Restriction - Unrestricted Property & Equipment) ÷ Average
Monthly Expenses.

7. Avoiding the Doom Loop

The doom loop occurs when nonprofits fail to fund their full costs, leading to:
• Insufficient staffing.
• Weak infrastructure.
• Reduced capacity to deliver programs.
To avoid this:
• Know your full cost of doing business.
• Maintain adequate liquidity (3-6 months of LUNA).
• Be transparent with funders about program costs.

8. Roles of Personnel in Financial Management

Board of Directors
• Provides fiduciary oversight.
• Ensures funds are used responsibly and aligned with the mission.
• Reviews financial statements and audits.

Program Staff
• May assist with audits and financial reporting.
• Cannot conduct audits independently.

9. Assessing Financial Health

Key questions to determine financial stability:
• Are you bringing in enough revenue to cover operating expenses?
• How much risk can you take?
• What is your ability to pursue opportunities?

10. Key Formulas and Metrics

Months of Cash on Hand (MOCH)
• Formula: Total Cash ÷ Average Monthly Expenses.

Months of Liquid Unrestricted Net Assets (LUNA)

• Formula: (Net Assets Without Donor Restriction - Unrestricted Property & Equipment) ÷ Average
Monthly Expenses.

Change in Net Assets

• Formula: Total Revenue, Gains, & Other Support - Total Expenses.
11. Knowledge Checks & Activities
True/False Quiz
• True:
• Audits boost donor trust.
• "Statement of Activities" = "Income Statement."
• False:
• Full cost includes ONLY program/operational expenses (it includes reserves, liquidity, etc.).
• Program staff can lead audits (must be independent).

Activity: H-Operation Case Study

• Task: Analyze financial statements to determine:
• Largest expense (Program Expenses: $82,421).
• Unrestricted surplus/deficit (Surplus: $92,799).
• Funding adequacy ("Revenue covers expenses; we are financially healthy").

12. Comprehensive Assessment

Sample Exam Questions
1. Q: An income statement is also called a _______.
• A: Statement of Activities.
2. Q: What covers hurricane repairs?
• A: Reserves.
3. Q: What triggers the doom loop?
• A: Lack of full-cost funding.
4. Q: Calculate Months of LUNA (Net assets: $61,573; Unrestricted P&E: $79,250; Avg. monthly
expenses: $225,000).
• A: –0.0786 months (crisis).

13. Glossary
Term Definition
LUNA Liquid Unrestricted Net Assets (cash/assets free to use).
Full Cost All expenses to run programs + sustain operations.
Doom Loop Cycle of decline due to chronic underfunding.
With Donor Restrictions Funds limited to specific purposes/timing.
14. Conclusion
Nonprofit leaders must prioritize financial transparency, full cost funding, and liquidity to ensure long-
term sustainability and avoid the doom loop. Regularly reviewing financial statements and engaging in
strategic planning are critical for achieving mission success. By mastering the concepts in this
handbook, nonprofits can build resilience, manage risks, and deliver impactful programs to their
beneficiaries.

15. Appendix
Sample Financial Statements
• Statement of Activities: Shows revenue vs. expenses (surplus/deficit).
• Statement of Financial Position: Lists assets, liabilities, net assets (snapshot in time).

Resources
• GAAP Guidelines.
• Fiscal Management Associates.

This handbook serves as a practical guide for nonprofit leaders to navigate financial management
effectively and ensure their organizations thrive.