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7 Mistakes to Watch for in Nonprofit Accounting

Running a nonprofit organization is the art of juggling program goals with operations, fundraising, managing team, and financial resources. Staying on top of the economic situation is critical for any nonprofit. We’d like to highlight seven mistakes to avoid here when it comes to your finance department:

1. Not Paying Attention to the Numbers

You know better than anyone that your nonprofit's purpose is not to produce a profit. However, this does not mean your organization's bottom line doesn’t matter.

The success of your programs depends on the healthy funding and financial management of those funds.

It is essential to stay on top of your numbers; it ensures you know where you stand.

A few sure-fire ways to do this are by:

  • Review your financial reports in detail monthly or at least bi-monthly to ensure there are no glaring issues.

  • Stick to your budget as closely as possible. This will help stay on track.

  • Know your unrestricted cash balance (working on building 3-6 months' operating cash reserve, you’ll be happy you have it when you need it!)

2. Not Having a Finance Committee

It’s not uncommon for nonprofit organizations to lack a Finance Committee.

Adding a Finance Committee with members who have the right mix of knowledge and experience in nonprofit financial management is a big part of the success of your organization. You can count on your finance committee to:

☑ Review and recommend the budget to the Board for approval

☑ Monitor periodic financial statements in detail

☑ Overseeing financial reporting, including the annual IRS Form 990 and financial audit

☑ Advice on the use of cash reserves and investments

☑ And much more!

It might take an extra effort to find the board members with the right skill set, but you won’t regret you did it!

Check out this article from Nonprofit Leadership Center for more detail about Finance Committees:

3. Board Underestimates its Fiduciary Responsibility

Speaking of your board, they must understand the full scope of their responsibilities.

Their purpose as board members is to bring their skills to the table to steer your organization to a sustainable future and advance its mission. From a financial standpoint, board members should be assisting with fundraising, budgeting decisions, and resource allocation.

To have your board members started right, consider the following:

  • Consider creating a job description when recruiting new board members. This could help board members feel comfortable in their roles as officers of nonprofits and set clear expectations.

  • Create an annual "work plan" for your board and its committees. What month will the board approve the upcoming fiscal year budget, review current policies, evaluate CEO performance, elect new board members, and things like that? Create the rhythm in the board workflow.

  • Build an onboarding process for the new board members.

  • Invest in board members' training. Many programs are available through national and local nonprofit associations and educational groups. There are options for lessons on-demand or in-person.

For more information about board roles and responsibilities, check out this article from the National Council of Nonprofits.

4. Inefficient Accounting System

As a nonprofit director, your time is your most valuable resource. This means it’s to your benefit to find ways to make your organization’s accounting more efficient. It’ll save you time and eventually, money.

One of the first places to start is your processes. If you are still relying on manual processes, you could be opening the door to inaccuracies and inefficiency.

Instead, consider taking a more modern approach: automation.

There are plenty of tools to help you automate your nonprofit accounting. Here are a few tools our team recommends:

Your processes will be much more efficient with the help of these tools, and you’ll be gifted with more time to manage programs and do what you love!

5. Not Understanding the Functional Expenses and Proper Allocations of Costs to Programs

Functional expenses tracking and reporting are unique to the nonprofit sector. Besides tracking the costs by the natural classification (payroll, rent, utilities, etc.), nonprofits are required to report expenses by function (programs, management, and general and fundraising) as well. Funders, donors, and regulators are the primary readers of the organizations’ financial reports. These stakeholders are interested in understanding the relationship between a nonprofit organization’s program expenses and its supporting (management and general and fundraising) expenses.

There are different allocation methods for functional expenses. The methods could include square feet, time study, FTE counts, and direct costs. Working with your accountant to implement the best allocation method for your operations would bring the best, most accurate results to your fictional expense schedule.

It is important to be aware of the commonly accepted rule of thumb in keeping administrative and fundraising expenses (overhead) at 25% or less of the total operating costs. There are no rules stipulating that nor a single formula to follow. This commonly accepted rule has been challenged over the recent years, highlighting the negative impacts on nonprofits functioning with low overhead. The challenges that nonprofits face are insufficient administrative support, a lack of technology, inadequate office space, limited training, and as a result, an underperforming team. This could lead to the inability to meet the organization’s goals and objectives.

6. Misaligned Chart of Accounts

Your chart of accounts keeps financial records by the following categories:

  • Assets

  • Liabilities

  • Net Assets

  • Income

  • Expenses

Aligning the chart of accounts with the 990 tax form structure and audited financials would ensure that the internal financials you are looking at during the year align with your annual audited/reviewed financials. This gives you and the board more control and familiarity with the numbers, whether an audit report or a mid-year internal financial statement. It also helps with the audit and 990 prep process going more smoothly.

7. Not Working with an Accountant Specializing in Nonprofits

Whether you work with a contract accountant or hire an in-house financial manager, choosing the person with the nonprofit sector knowledge and prior work experience would help to avoid these common mistakes. At Koteff Accounting Group, we take pride in helping nonprofits with:

  • Financial systems re-alignments

  • Automation implementation

  • Industry-specific financial reporting

  • Being your trusted outsources finance department

  • And more

Katya Koteff, CPA, is the principal and founder of Koteff Accounting Group and specializes in working with nonprofits and socially-responsible businesses. Katya's work is grounded in building long-term trusted relationships with her clients through mutual respect and open and proactive communication.

If you'd like to learn more about how we can help your organization and set up a time to meet with us, please fill out this form.

Talk to you soon!

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