All nonprofits are powered by accounting. There are simply so many elements within running a nonprofit that without financial management and insight, the organization will fail.
The most successful nonprofits are the ones with effective nonprofit accounting. Simply put, beyond the federal requirements and day-to-day accounting needs, your finances fuel the change you want to make in the world.
While having a strong mission and dedicated team of staff and volunteers is important, nonprofit accounting is what will ultimately help your organization succeed in its goals. Understanding how this branch of accounting works is the first step to navigating your nonprofit’s books and setting your mission up for success.
Let’s dive into what you need to know to navigate nonprofit accounting!
Do Nonprofits Make Profit?
The first thing to wrap your head around as a nonprofit is that while the goal is not to accumulate wealth, you do need to make revenue in order to keep your organization secure.
How does this work? If your donations cover only the bare minimum for what’s needed to run the organization, your organization is in jeopardy of not having the resources necessary for the unexpected events that can and do crop up.
Covering only your basic financial needs doesn’t leave a cushion for rising expenses, emergencies, environmental incidents, staffing costs, equipment, and other financial burdens that can fluctuate suddenly. It’s not enough to save and allocate your donations to pay your expenses; you need to keep generating revenue to fund and grow your nonprofit.
Again, profit is not the end goal. Because nonprofits are basically earning support towards a cause or mission, the mindset behind nonprofit accounting shifts to taking the funds received and redistributing them into the organization’s initiatives in some capacity.
Instead of income directly creating a profit for individuals, it continually feeds the organization. This is how nonprofits remain steady and are able to increase their programs.
What are Some of the Financial Regulations for Nonprofits?
As a nonprofit, you are exempt from paying taxes to the federal government. However, you must meet tax-exempt criteria and file required documentation to continue retaining this benefit. To do this you must qualify for Internal Revenue Service (IRS) 501(c)(3) by annually submitting the 990 tax exempt form.
The 990 itself requires you to record the exact rates of income, expenses, and also details of accomplishments. This basically serves to assess the value and authenticity of your organization. Satisfying these requirements not only keeps your tax-exempt status, but also helps you gain more credibility as a nonprofit and the opportunities within.
Providing inaccurate financial records could jeopardize your status and could incur legal backlash, or at the very least potentially mar your organization’s reputation. Failing to report your finances adequately could make it harder to retain your tax-exempt status and other nonprofit benefits.
Remember, the burden falls to you to provide the accurate accounting data to comply with the 990. This means documenting your finances to show that you are spending your donations/revenues in ways that directly impact your cause. You also have to show the expenses generated as a result of your organization’s impact – this emphasizes the financial need your work incurs.
Besides helping you finance and manage the day-to-day nonprofit business; structured accounting gives you accurate documentation needed to satisfy all your organizational requirements. An audit trail report or year-to-end-close will provide all the details you need to verify your financial record keeping and complete required paperwork.
What’s Involved in Nonprofit Accounting?
When looking at the main distinguishing factors behind the nonprofit as an organization and how that affects it’s accounting, it’s important to understand the accounting techniques used to run a nonprofit. At a basic level nonprofit carries a similar goal as a for-profit organization: the goal of a nonprofit’s accounting system is to manage debits and credits in order to support the success of the organization.
As a result, there are some similar processes in nonprofit accounting as with corporate financial management. However, you’ll rely on different methodologies as well. Here are a few central components of nonprofit accounting.
Typically, donations – money given by donors to support your organization and its mission – are the cornerstone of nonprofit income. These donations can arrive in several capacities and are managed accordingly.
Nonprofits also bring in revenue through things like events and merchandise sales, but again, these are funds that are recycled into the mission – you might think of them as donations by proxy. Your nonprofit’s ability to grow donations and fundraising is what keeps it afloat.
Donations must be accounted for as income and that income must be allocated within the limits of your nonprofit’s program. In other words, donations must be recorded in the general ledger according to what you’re using them for, as well as what type of asset each donation is.
Very common in business, cash flow reporting examines the cash receipts that arrive into your organization, alongside the payments going out of your nonprofit’s accounts. This includes day-to-day transactions and major program events.
Besides managing your day-to-day operational expenses, careful accounting helps you ramp up your nonprofit’s revenue potential. You do this by tracking the financial transactions flowing into and out of your nonprofit.
This makes cash flow one of the most critical ways to assess your nonprofit’s financial health. Cash flow lets you, potential donors, and auditors examine how efficiently your nonprofit gains funding and then redistributes it to support the mission. Maintaining positive cash flow helps you meet key goals and avoid or mitigate costs. Statements of cash flow also help with compliance paperwork like the 990.
For a nonprofit, fund accounting is critical for allocating your revenues effectively throughout your organization to achieve central goals while maintaining operations. Grouping your finances into funds also prevents money from being used on inappropriate expenses – which could jeopardize both workflow and organizational transparency.
Fund accounting allows you to track and manage the income, expenses, and progress for multiple programs or organizational dimensions to ensure financial accuracy. You’ll also be able to assess the value of these areas and develop ways to improve efficiency to conserve money and resources.
Financial statements must be filed for your 990 and whatever other state or industry requirements with which your nonprofit must comply. However, financial analysis is also highly valuable for your own use in monitoring performance..
Analysis of donation transactions and program performance should tell you what’s working. Assessing the effectiveness of your outreach and fundraising events will help you refine and improve your strategies to increase revenue opportunities and donor relations to expand your mission’s scope.
You need to be able to assess your organization’s performance and financial health at all times to make the best decisions for your nonprofit. It is also critical to have processes in place to identify and avoid accounting mistakes that could cause your nonprofit serious harm.
Should Your Nonprofit Use Professional Accountants?
There are many layers to nonprofit accounting, which can make it seem daunting and complicated. In truth, unless you’re particularly well-versed in nonprofit accounting or have a lot of spare time to learn it on your hands, you may be better off using financial professionals to help you manage your nonprofit’s day-to-day accounting needs and financial compliance.
Your nonprofit’s success hinges on accurate, meaningful accounting to help it succeed in its mission. Does this mean that you have to staff an entire financial department? Not necessarily!
Accounting firms like Temple Management are fully equipped and experienced to manage all of your nonprofit accounting needs in any capacity. We’re accomplished in leading nonprofits with little to no solid record keeping to establish functional accounting systems that help them achieve their missions.
Besides having regulatory and accounting expertise at your disposal, working with a nonprofit-experienced accounting firm alleviates the demands of time and resources on your organization. Instead of your staff struggling to do the books, we do them for you!
This means more time to focus on your cause and more available funds to do it with because of how much money you’ll save through dedicated accounting. You can simply prioritize running your nonprofit. That sounds like real peace of mind!