Nonprofit Information

Jon Osterburg

4 Financial Considerations Before Starting a Nonprofit

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Financial Considerations Before Starting a Nonprofit

Nonprofits are formed because passionate individuals recognize a philanthropic need in their communities and want to provide the answer. Filing taxes, registering with the IRS, and managing yearly finances go hand-in-hand with running a nonprofit, but few feel excitement for setting up effective accounting and bookkeeping systems. 

However, for your nonprofit to have long-term, sustainable success, you must research and create a financial plan in advance. Aspiring organizations should be able to spell out their rough financial plans before they launch their first program. Otherwise, they risk over-spending and crashing before they’ve even gotten started making a difference.  

In addition to your nonprofit’s mission statement, begin drafting a list of steps you’ll need to take to get your nonprofit’s finances in order before opening its doors. In this article, we’ll go over four areas of consideration that most of your financial planning will fall under:

  1. Documentation
  2. Budget
  3. Organization 
  4. Dedicated Accountant

As you create your financial plan, you’ll also need dedicated individuals to take on both bookkeeping and accounting duties for your nonprofit. Most organizations start off with their executive members managing these and other financial duties, but quickly find that it can become overwhelming. Keep this mind as you design your management plan so that your finances are not just in order, but also well-managed over time. 

Without further ado, let’s dive into the financial considerations that are top-of-mind as you get your start. 

Documentation

The majority of nonprofits fall under the umbrella of 501(C)(3) organizations, meaning they have filed for tax-exempt status from the IRS under that specific article of the tax code. The IRS can take anywhere between two and twelve months to process your 501(C)(3) application, and the necessary paperwork (the form 1023) to apply for a 501(C)(3) can also take months of preparation. 

While it might take some time, filing for tax exemption is the most economically efficient practice. Don’t put this step off in your creation of a nonprofit. Otherwise, you’ll find that you’re paying taxes and wasting your hard-earned finances unnecessarily. 

After you’ve filed your Form 1023, keep track of a copy of the form. Some of the information on this form will carry over to future tax paperwork. For example, retaining your nonprofit status requires your organization to file a 990 form at the end of each fiscal year. There will be some information, such as the official name of your organization, EIN, mission statement, etc. that will carry over from form to form. When you have an organized system to track each of these forms, you’ll be able to ensure each of these sections matches exactly from year to year. 

Financial documents become easier to understand and file the more experience you have with them and the better you know your nonprofit. However, it always helps to have an expert on your side. They’ll be able to ensure all of your tax forms are filled out just right and on time so that you can avoid pesky fees or unnecessary taxes.

No matter if you’re going at accounting alone or hiring an expert to help you, here are some tips to help manage your legal financial documents, be sure to:

  • Create a calendar of due dates. Deadlines can sneak up on you, especially when you have a full list of tasks to juggle. Make a timeline for your tax forms and regular financial check-ins to monitor your progress and adjust future deadlines accordingly. Get into this habit early because while self-imposed deadlines may not have specific penalties associated, late filing of your annual tax forms can result in them.
  • Understand what forms you need to file. Filing a 501(C)(3) usually requires filling Form 1023. However, smaller nonprofits with less than $50,000 in projected revenues can apply for the Form 1023-EZ, which is shorter and takes less time to process. Your nonprofit can also be incorporated or unincorporated when you file. Being incorporated grants your nonprofit certain legal protections, so consult with a lawyer ahead of time to decide which choice makes sense for your nonprofit. 
  • Create report templates using your software. Many of your ongoing forms, from 990s to 1099s will require reference to other aspects of your nonprofits’ finances. Creating templates for commonly used reports (cash flow statements, statement of activities, etc.) will ensure your financial information is organized the same way from year to year, ensuring consistency and form accuracy. 

Creating good documentation management habits early will benefit your nonprofit in the long run as you grow to manage donation forms, employee contracts, and vendor invoices.

Budget

Your budget rests at the heart of your nonprofit’s financial plan. Treat your budget as a living document as you continuously monitor and update various known and predicted revenue and expenses throughout the year. 

Nonprofit budgets consist of two components: your expected revenue and your expense budget. Both of these numbers are calculated using data from previous years. This means your budget for your first year will require educated guesswork and regular check-ins as you experiment with new fundraising strategies and program activities. This guide goes into more detail about calculating your expected revenue and expense budget, which should be your first priority once you have the data to do so. In the end, your budget might look something like this: 

You can make certain inferences about your organization’s budget during your first year as a nonprofit based on the industry averages for various expenses. For example, your mission programming should account for approximately 65% of your expenses, while overhead costs may rest right around 35%. You may need to allocate a larger portion of your budget during your first year to overhead costs as you get established, but 35% is a good goal to shoot for. 

Overhead costs tend to have a bad reputation, but they are vital for creating and maintaining any sustainable organization. A few overhead costs that you’ll encounter right off the bat and will need to account for in your budget include: 

  • Marketing costs. New nonprofits need to get their name out to potential supporters. Email service providers, direct mail service providers, social media managers, graphic designers, and content writers all require money. Fundraising events and the necessary software to support them also need to be factored into your budget.
  • Employee salaries. Many nonprofits say that lack of staff is a major factor that holds them back from fulfilling their mission, applying for grants, or completing other tasks vital to their nonprofit’s financial health. Your employee compensation rates will determine how many employees you should factor into your budget and how much you’ll rely on outsourced services and volunteers. 
  • Administrative and office expenses. Bills, office space rent, and management software all cost money and need to be paid on a regular basis. Your expenses are likely to fluctuate (especially during your first year of operations as you figure out what your nonprofit needs to function), but most office expenses are fixed costs that will stay the same from year to year. This makes them a constant that you’ll need to account for in your budget.

When you prepare your budget, look for the opportunities that you have to save funds, but don’t be afraid of spending necessary funds to stay afloat. Because your first year might be a little pricier than other years, consider the small things you can do to make the most of your budget. For example, you set the office thermostat lower in the winter and warmer in the summer to reduce heat and air conditioning costs, lowering your constant utility expenses. 

Organization 

As your nonprofit grows, you’ll need to answer questions about your nonprofit’s finances such as who gets to make purchasing decisions? Or, who approves payroll?

Nonprofit finances run on accountability. Nonprofit annual tax forms are public so that any donor can look to make sure you are living up to your mission. Additionally, donors and grant-giving foundations can set restrictions on what their money can be used for, and your nonprofit has to follow through with their requests. 

As you establish your internal financial practices, ask the following questions:

  • How much oversight does your board have? Your board should be independent from your nonprofit to provide insight with minimal bias. Determine ahead of time how often you’ll meet with your board and what spending choices will require board approval in addition to your final budget sign-off.
  • Are there checks and balances on spending? Setting effective internal controls for your financial system is absolutely necessary for maintaining a secure and accountable structure. Proper security ensures your donors feel safe providing their payment information to your organization and that you’re using the funds you’re given in a respectable manner, according to supporters’ wishes. 
  • What financial software are you using and how is it maintained? Accounting software helps your nonprofit track your various funds all in one system. The solution you choose should be designed for nonprofits to ensure it’s set up with the necessary fund accounting features. Then, assign access to that system for your bookkeeper, accountant, and other financial department employees, spelling out very specific maintenance protocols for effective data hygiene.

As you get started establishing your nonprofit’s structure, consider hiring a consultant. Use resources like Aly Sterling’s list of nonprofit consultants to both find consultants and understand different roles and responsibilities you’ll need to account for as you set up your nonprofit. Your exact organizational structure may be unique to your nonprofit, but consultants with years of experience can be an invaluable source of knowledge to ensure all of your bases are covered. 

Dedicated Accountant 

Nonprofit accounting is a full time job. Nonprofits have unique financial restrictions, and don’t  manage expenses and accounts like for profit businesses. Your nonprofit will need a dedicated bookkeeper and a dedicated accountant to record, analyze, and help adjust your financial plan. 

Essentially, your bookkeeper is the one who does the day-to-day financial input and record-keeping for your nonprofit. Meanwhile, your accountant dives deep into financial analysis, finding improvement opportunities and options for organizations. Jitasa’s guide to nonprofit bookkeeping vs accounting provides an in-depth explanation as to the differences between the two roles:

  • Bookkeepers’ responsibilities include:
    • Entering data. Your bookkeeper records expenses, donations, and any other financial transactions into your financial software system.
    • Writing checks and making deposits. As they record transactions, bookkeepers tend to all make deposits and handle payments before recording the transaction. 
    • Allocating costs. Bookkeepers help organize your expenses by deciding how to divide costs between different aspects of your nonprofit. 
  • Accountants’ responsibilities include:
    • Reconciling all accounts. Accountants resolve discrepancies between the totals in your bank accounts and the totals on your bookkeeping sheets. Ensuring all discrepancies are resolved is necessary for meeting compliance standards and passing your nonprofit audit. 
    • Comparing actual expenses and income against your budget. Your accountant will help you understand and explain variances between your budget and your projected income and spending. Additionally, by explaining why and how your expected vs. actual expenses differed, your accountant can help your nonprofit create more accurate future budgets. 
    • Filing your 990 form. As mentioned, your Form 990 ensures your nonprofit keeps its tax exempt status from year to year. This form reports your financial information to the government to prove you’re handling your finances responsibly and according to your philanthropic intentions.

While an executive, employee, or experienced volunteer can handle bookkeeping duties, accountants are trained and CPA certified professionals. Most small nonprofits don’t have the resources to hire full time in-house accountants and rely on outsourcing accounting duties to accounting and bookkeeping consultant firms. 

Nonprofit finances are complex and can be overwhelming when you first get started. However, the more you understand your nonprofit’s financial situation, the more you can control the direction of your organization (and the easier filing accurate financial documents will become). 

Many nonprofits regularly seek out help from third-party experts by outsourcing their accounting and bookkeeping needs when they first get started. Do your own research, but don’t be afraid to reach out as it’s better to solve financial problems when they first come up rather than close to a deadline. 

6 Ways to Effectively Show Fundraising Impact to Donors

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Nonprofit DonorsThe global pandemic has changed the day to day lives of individuals and nonprofit organizations alike. Nonprofits are struggling to get the fundraising revenue they need as everyone is feeling the effects of the economic downturn resulting from the virus. 

Many nonprofits are focusing their efforts on their long-term fundraising plans and in the meantime, simply keeping their doors open and their staff members paid. 

However, as we adjust to the “new normal” and resources provided by the government such as the CARES Act start running out of funding or expiring, nonprofits need to find fundraising strategies that will sustain them through these troubled times. 

One of the most important things that nonprofits can do to improve their fundraising strategies and adjust for the times is to put an emphasis on impact. 

Individuals contribute to causes rather than to organizations. Therefore, showing them how their gifts are making a difference for your cause through financial transparency is always a great idea to further your fundraising efforts.

There are three different types of impact that your organization can show to your supporters. You can show them the impact donors make:

  • On your long-term annual strategy and goals. 
  • Toward reaching your fundraising goal during campaigns. 
  • Toward your short-term goals and mission. 

Within these categories are various strategies that your nonprofit can use to communicate the impact that your supporters have on your mission. We’ll walk through six of our favorite strategies within the categories in this article. 

Ready to learn more? Let’s get started. 

Annual Impact 

All of the combined contributions made by your supporters help your nonprofit achieve your long-term annual goals. Expressing your accomplishments that have resulted due to this combined generosity is a great way to explain the large-scale impact of supporters. 

1. Form 990

Your nonprofit is required to communicate some elements of impact you’re making toward your mission to the IRS each year as a part of your Form 990. 

Jitasa’s article on Form 990 filing explains the purpose of filing saying, “The Form 990 is the tax form that tax-exempt organizations fill out each year to remain compliant with the requirements of the IRS. It’s the IRS’s method of evaluation to make sure your nonprofit is legitimate and that you’re being financially honest.” 

In order to ensure your organization is being “financially honest,” your nonprofit is required to report on key financial information about your organization as well as how you’ve used your finances in order to work toward your mission. 

It’s important to recognize that your Form 990, due to the honest and transparent nature of the document, is a valuable fundraising tool because of the transparency it encourages. 

  • As you file your tax forms each year, your nonprofit should consider: 
  • Hiring an accountant to ensure all of the information on the forms is correct and well-documented. 
  • Posting your 990 so that you provide the financial data directly to your supporters. 

Your nonprofit’s Form 990 is publicly accessible, so your supporters can go look it up if they so choose. However, even better than encouraging supporters to view this official documentation is providing them an extended version that offers additional context. This comes in the form of an annual report.

2. Extended Annual Report

Your nonprofit’s annual report is your organization’s opportunity to express the progress you’ve made toward your long-term goals and recognize the supporters who have helped you achieve this progress. 

In your annual report, your nonprofit has the opportunity to express your financial information, including your fundraising campaign successes, your completed projects, and your plans that may not have turned out how you had originally planned. That’s right, you should be sure to include the “failures” that you’ve encountered. 

By creating an extended annual report, your nonprofit can communicate the context in which things did not go as planned and outline how things will change in the future. This shows that you’re not only transparent with supporters, but constantly learning from your experiences. 

In Bloomerang’s nonprofit annual report guide, they explain that the primary elements of a complete annual report include the following: 

  • Your financial information. A visual representation such as a pie chart of this information helps ensure your supporters can read it effectively. Be sure to express your fundraising expenses, your overhead expenses, and the costs associated with projects and programs in this chart. You can make a similar one with revenue, charting out the revenue from fundraising, grants, and fees for goods and services. 
  • A project report. This is your time to explain to your supporters all of the victories and project successes you’ve had over the past year. Essentially, it’s your time to really show the larger impact of all of the fundraising gifts you’ve received. Give an overview of the new projects that you’ve launched, those that you’ve completed, and others that are in progress. Get supporters excited about all of the philanthropic steps you’ve taken towards your mission. After all, this is what they’re funding by contributing. 
  • Appreciation for your supporters. In your annual report, you can give a shout out to your major donors who have made an incredible impact towards the successes you’ve had over the past year. By acknowledging their generosity in this wide-spread report, you not only show your gratitude, but you also provide an incentive for other supporters to give at the level of the acknowledged major supporters. 

Expressing the impact of your combined donations and contributions from supporters allows them to see the big picture goals and achievements that have come about from their and other’s gifts throughout the year. 

Campaign Impact

While annual reports and tax forms provide an effective overview of the annual goals and successes at your organization, rarely is this the only way that you should communicate impact to supporters. You should also make sure that supporters have an immediate understanding of how their contribution has made an impact on the specific campaign. 

3. Fundraising Thermometer

A fundraising thermometer is a gamification strategy that provides additional incentive for supporters to give and help your nonprofit reach your campaign goal. The thermometer is generally placed directly on your fundraising page and provides a visual representation of your campaign goal. 

When you choose your revenue goal for each campaign, you should make sure it’s based on your philanthropic need, is aspirational as to push the limits of your fundraising capabilities, and is achievable as to motivate your supporters to reach it. 

Representing that goal on your fundraising thermometer allows supporters to see exactly how their donation will affect your progress to that overall goal. It provides the incentive to give more in order to help the bar reach the top of the thermometer and help your nonprofit reach its overarching objective. The many benefits of a fundraising thermometer include: 

  • It shows the immediate impact of a donation to help reach a goal, satisfying the desire for instant gratification after contributing to a campaign. 
  • It provides an effective and visual way to track your progress transparently with donors. 
  • It provides additional incentive to give, which encourages supporters to give more. 
  • It motivates your staff and volunteers to maintain momentum as the campaign continues. 

Your supporters want your nonprofit to reach its goals. By engaging them and showing them how their donation can make this happen, your nonprofit can maximize the support you have from contributors to your campaign. 

4. Supporter Acknowledgement

Another way to show your supporters the impact they’ve had on your specific campaign goals is to tell them! This is an especially effective strategy when it comes to major campaigns and major donors. 

Take, for instance, a capital campaign that your nonprofit has been working so hard to carry out. You’re working your way through the quiet phase of the campaign, having synced up with your nonprofit bookkeeping and accounting team to make sure you have the fundraising capacity to reach the aspirational goals in both the quiet and public phases of the campaign. 

You have five incredibly generous major donors who support you during the quiet phase of this campaign, contributing a bulk of the revenue that you need to reach your goal. 

These are the supporters that you should acknowledge for their generosity in order to communicate the immense impact that they’ve had on your campaign. 

You can acknowledge them in a few different ways: 

  • Keep these supporters in the loop as you proceed with the campaign. Give them progress updates and ask for their opinions and feedback on various aspects of the campaign. 
  • Shout out to the supporters on public platforms such as social media, your newsletter, or in your annual report. 
  • Organize an appreciation event with an exclusive invitation list. Be sure this event (or virtual event) is focused on stewardship and acknowledgment rather than fundraising. 

Simple acknowledgment can make an enormous difference in your efforts to communicate the amazing impact your donors have on your nonprofit’s campaigns. Do your part to make sure they feel appreciated and understand the difference they’ve made for your mission. 

Mission Impact

5. Upfront Explanation of Gift Impact

As stated earlier, nonprofit supporters give to causes, not to organizations. Therefore, one of the best ways to reel in your supporters is to provide them examples of what their generous contributions will accomplish for the cause before they even give. 

On your donation page, we recommend providing a simple explanation of the impact that various sizes of gifts can make toward your mission. This is an especially effective strategy when your nonprofit has included suggested giving levels on your donation page because it makes it easy for supporters to choose the impact they want to have before donating. 

For example, a city homeless shelter asking for donations may use the following explanations of donation impact on their giving page: 

  • A donation of $25 will feed a homeless individual for a week. 
  • A donation of $100 will feed a family of four for a week.
  • A donation of $500 will provide all food and shelter for a family of four for a month. 

This shows the potential impact of specific gift sizes on the goals of the cause. When a supporter chooses to give $100, they’re really choosing to support that family of four for one week. 

6. After-the-Fact Explanation of Gift Impact

Just as you can provide the explanation of impact before a donor gives, you may also choose to share the impact of gifts in response to the donations. This should become a natural part of your organization’s letters of thanks to supporters. 

When you write a thank-you letter to your supporters, be sure to make it specific, personal, and include the impact statement regarding their contribution. 

There are two ways you can accomplish this. The first is to explain the impact of each donation made to the organization. For instance, this letter may include phrasing like this: 

Dear Susan, 

Thank you so much for your gift of $100 to the Thoughtful Thanksgiving campaign. Your generosity has provided the Smith family, a family of four, with food for the entire week of Thanksgiving. 

Or, you may decide to explain the impact of the entire campaign while still specifically referencing their individual donation. This letter may look something like this: 

Dear Susan, 

Thank you so much for your gift of $100 to the Thoughtful Thanksgiving campaign. Due to generosity like yours, this campaign successfully provided food for 500 families who would’ve otherwise had very little for the week of Thanksgiving. 

Both approaches are effective, although the first is more personal and may better connect with the donor’s emotions. If you’re looking for more examples of full-length letters of thanks, check out the free templates from resources like this one.


As your nonprofit adjusts to the “new normal” that society has been hurdled into, remember the importance of communicating impact to your donors both and now and into the future. It’s a great way to show them that they can still make a difference even in these troubled times.

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