One thing that all organizations have in common is finance, and the success of every firm is also dependent on finance. Likewise, the basic goal of financial management is to maximize an organization’s value by ensuring that it has the financial resources to achieve its corporate objectives. By and large, financial management also determines how a nonprofit manages and allocates financial resources thereby determining its financial health.
- An outstanding financial report details how various types of financial management decisions are made
- Budgeting and forecasting allow you to develop strategies and plans for the future while aligning your goals across the organization.
What are the types of financial management?
The use of nonprofit financial resources helps to ensure that the organization has a future that is both worthwhile and sustainable. In this article, we will consider the various types of financial management for nonprofits.
1. Cash Management
Cash management is also known as treasury management. It defines the process of collecting and managing cash flows from an organization’s operating and financing activities. This financial management practice plays a critical role in ensuring a nonprofit’s stability.
Cash is the fundamental asset that organizations and businesses utilize every month to satisfy operating expenses, employee wages, and purchases, among others.
Essentially, the key component of a nonprofit cash flow management is the cash flow statement. The cash flow statement completely covers all cash inputs and outflows from the organization. It consists of cash generated by operating activities, cash generated by financing activities, and cash generated from funds. By and large, the bottom line of a cash flow statement reveals how much cash a nonprofit has readily available.
2. Risk management
Risk management is a critical component of modern finance. Likewise, It provides a great way for financial teams to create plans, policies, and procedures to build resilience in the face of unforeseen circumstances.
To manage risk, there is a need to acquire, integrate, and analyze data from numerous sources and touchpoints throughout the organization. Also, the adoption of integrated risk reporting across the organization is a critical aspect of effective financial risk management.
To begin with, financial risk reporting must include both financial and non-financial metric measurements, as well as historical and forecast data.
3. Investment management
According to MIT Sloan School of Management research, only 11.2% of nonprofits have investing accounts. That indicates that nearly 90% of organizations are not putting their cash to use, hence limiting their potential to accomplish their objective.
Nonprofits fundraise for a variety of reasons. Likewise, each may have varied objectives for investing their reserves. However, according to best practice, organizations should save 6-12 months of operational reserves. Essentially, this is the first step toward achieving financial sustainability as an organization. This acts as an emergency reserve if a grant is lost or an unforeseen circumstance.
4. Budgeting and Forecasting
Budgeting and forecasting allow you to develop strategies and plans for the future while aligning your goals across the organization. This is a critical component of every organization’s growth journey, particularly during times of transition.
With budget forecasting, you can create reasonable and attainable goals, allocate resources, and anticipate obstacles. Likewise, budget forecasting can be done on a monthly, quarterly, or annual basis, depending on your nonprofit needs and preferences.
If your organization is constantly changing, so will your finances and predictions. Also, budgeting and forecasting are approached differently by each organization. The complexity and extent of your processes are defined by your organization’s size, and structure, as well as the nonprofit industry.
5. Financial Reporting
A financial reporting package serves several purposes in addition to addressing compliance and regulatory requirements. In simple terms, financial reporting represents your organization’s financial success in a formalized manner. Also, it tells a story about your nonprofit’s financial health.
Financial reporting is particularly important for internal management. This is because it serves as a platform for assessing operations, measuring KPIs, and even determining employee pay. In addition, financial reporting provides transparency and insight into the financial position and activities of an organization. Its goal is to offer stakeholders detailed information that will allow them make more informed decisions.
Timeliness is an important aspect of financial reporting. Even the most accurate and comprehensive financial report is worthless if it is out of date.
Conclusion
To sum it all up, financial management is an essential requirement for any thriving organization to ensure the sustainability of operations. Likewise, an outstanding financial report is primarily determined by how various types of financial management decisions are made.
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