By Ryan Alexander
When proper financial procedures are absent, problems rarely appear all at once. They surface gradually through confusion, delays, and avoidable risk. Even well-intentioned organizations can find themselves here as they grow. If these issues are not addressed early, the consequences can be significant.
The problems
Weak internal controls
Strong internal controls define how money moves through the organization, who approves it, and how oversight is maintained across the organization. This includes approval thresholds, invoice processing, payroll review, reconciliations, segregation of duties, and clear channels to report irregularities.
Without adequate internal controls, an organization becomes vulnerable to errors and fraud that can be costly and damaging.
Inefficient grants management
Grants management, particularly for restricted grants, is mission-critical. Missteps include overpromising outcomes, chasing off-mission funding, overlapping grant budgets, misallocating restricted expenses, or missing reporting deadlines. Any of these can erode donor confidence and jeopardize future funding. Nonprofits must not only spend money wisely but spend it exactly as each donor intended. This creates layers of complexity that require coordination across finance, development, and program teams.
Flawed planning and budgeting
A disciplined annual budget anchors strategy to spending. Leaders and department heads should agree on priorities before setting responsible spending levels based on size, history, funder mix, and expected grants. Budgeting is also uniquely complicated in nonprofits because much of the revenue is restricted, uncertain, or received on irregular schedules, making accuracy and discipline even more essential.
Once the board approves the budget, operate to it unless the board later approves a revision. Hold budget owners accountable and report budget-to-actuals regularly. If a director spends $15,000 on a conference, was it budgeted and approved? If not, another line item may need to be cut to stay on budget.
Insufficient cash management
Healthy liquidity requires intentional reserves and active cash flow management. Pledged or expected funding can be delayed or fall through, which makes active cash flow management essential. Without timely cash forecasts, leadership can’t adjust spending when funding is delayed. This challenge is amplified in nonprofits because restricted grants cannot be repurposed for general operating needs, meaning an organization can appear well funded on paper while being cash-poor in practice.
The causes
Most financial problems stem not from negligence but from growth. As organizations expand, informal systems collapse under the weight of complexity. There are more grants, more staff, and more reporting. Leaders who once had a hand in every detail struggle to adapt to the demands of scale.
What worked when the organization was small no longer works as it grows. Informal oversight gives way to the need for documented policies, defined roles, and consistent procedures.
The consequences
The consequences of weak financial procedures can be serious. Organizations may struggle to make effective day-to-day decisions, run afoul of regulatory requirements, lose funder trust, encounter audit complications, and in extreme cases risk shutdown.
Unreliable decision-making
Leaders and board members need clear insight into how the organization is performing at any given time. Two questions matter most.
First, does the organization have the necessary levels of cash on hand to continue to fund its operations? For example, while you might be projecting annual receipts of $10 million in grants, if all those funds come in on the last day of your fiscal year, you could have a serious cash flow issue and problems operating the organization.
Second, how is the organization performing against budget? Let’s say your organization has a $9-million annual budget, which equates to $750,000 a month on average. If you have spent $4 million in the first three months of the year, there is a real danger that you will run out of funds, unless your organization is highly seasonal or has substantial one-time or capital expenditures.
A well-managed budget becomes the organization’s financial reference point throughout the year.
Shutdown
In extreme cases, weak financial systems can prevent accurate tax filings. This can trigger investigations from the IRS and state authorities and may ultimately result in loss of tax-exempt status.
To conclude
Financial problems must be identified and addressed before they undermine an organization’s stability. Many nonprofits face similar challenges as they grow, including weak controls, inefficient grants management, poor budgeting, inaccurate reporting, and insufficient cash oversight. These issues often arise not from misconduct but from increasing complexity and systems that have not kept pace. When sound financial practices are in place, leaders gain clarity, risk is reduced, and the organization is better positioned to operate with confidence.
About the author
Ryan Alexander, author of Protect Your Mission, is the founder of RA Partners, a firm that helps nonprofit leaders and boards build financial systems that support effective decision-making and oversight. Drawing on more than two decades of experience across finance, operations, and social impact, he created the IMPACT Framework for Nonprofits™, a practical model for strengthening nonprofit financial systems.
Ryan has served as chief financial officer of a rapidly growing education organization and led a large facilities investment program supporting high-performing schools nationwide. He has worked extensively with public charities and private foundations to bring clarity and structure to complex financial operations.