How to Have Confidence in Your Nonprofit Accounting
Managing your nonprofit accounting can be a daunting task; however, don't fret; with the right tactics and team by your side, you can have confidence in your organization's finances.
Below are our top 5 action items to build your confidence:
#1 Build a Finance Committee You Can Rely On
Your board provides immeasurable value to your organization. Their expertise, knowledge, and passion for your organization keep it moving forward by setting the vision and a strategic plan to atchive it.
One of the effective ways to get the most support from your board members is to create various committees where their skill sets could be fully utilized. One of the most important committees is the finance committee.
The finance committee can review reports, guide monetary decisions and help determine policies to keep your organization in good fiscal shape. 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!
If you don't already have a finance committee, build one. You won’t regret it.
#2 Understand the Basics of Nonprofit Accounting
If you are new to running a nonprofit organization or want to refresh your knowledge, it would be good to take a course on financial management, budgeting, and grant reporting or have deep-dive conversations with your current financial support team. Don't be shy to ask questions. Nonprofit accounting differs from the for-profit corporate world. The better you understand your numbers, the more comfortable you'll get at making the big decisions for the organization.
Here are a few examples of how nonprofit sector accounting differs from the corporate world.
Revenue Recognition. While for-profit companies rely on sales of goods and services for revenue, this is different for nonprofits. In most cases, nonprofits rely on grants and donations to support their operations. Considering this money is given in various ways, they have to be appropriately recorded based on when and how the funds are used.
Tax Exemption. Most nonprofits are registered as 501c3s, meaning they do not pay state or federal taxes on revenue. However, organizations still need to file a Form 990 with the federal government. This informational filing includes all of the financial details in addition to a narrative about your organization, its mission, and programs. It’s also made available to the public - Use it as a tool to tell your story!
Functional Expense Allocations. Unlike traditional businesses, nonprofits have to create a statement of functional expenses in addition to reporting natural classifications. Functional classifications include expenses for programs, management and general, and fundraising. This tells a story to your donors about how your organization uses its resources.
#3 Know Your Financial Reports and What They Tell You About Your Organization
Financial reports are an essential way to understand how your nonprofit organization performs; most importantly, they show how much money is coming in and out of your organization.
Knowing what these reports are saying lets you see where your organization is succeeding and points out areas that need improvements so you can course-correct before they turn into larger issues.
The four primary reports you will want to get a grip on:
Statement of Financial Position. Shows assets, liabilities, and net assets at a certain point in time. Use this report to get the big picture of the health of your organization, monitor your cash and keep an eye on debt and restricted assets.
Statement of Activities. Shows revenues and expenses for a particular period. This helps you track progress toward your current goals, paired with a budget, use this report to meet targets and keep expenses under control.
Statement of Functional Expenses. Shows how resources were spent on programs, admin, and fundraising functions. Though support costs (admin and fundraising) are necessary and acceptable, keep an eye on the proportion of program to support costs. Regular review of this report helps remind you to review how you allocate support costs to programs or if you need to start so you have an accurate picture of what it takes to run your programs.
Statement of Cash Flows. Shows the movement of cash in and out of the organization. Since the net income on your Statement of Activities doesn’t always translate to cash changes (due to timing differences, accruals, and non-cash line items like depreciation and in-kind support), this report helps you see what affects your cash balances.
#4 Build a Strong Tech Stack
Today, technologies can help automate processes and improve operations in every facet of nonprofit management. Nonprofits can invest in a technology stack that automates time-consuming manual processes while providing better internal controls.
Automation tools can be used to:
Eliminate manual data entry in the bookkeeping
Expedite accounts payable and receivable payments and collections
Capture electronic documents
And so much more
Accounting automation drives efficiency while allowing leaders to see the numbers in real-time.
#5 Call on a Trusted Accounting Partner for Assistance
Whether you outsource your accounting or have an in-house chief financial officer, partnering with an accountant who understands the nonprofit world is the key to financial success. Bringing someone experienced in the nonprofit sector could make a difference between having control over your finances vs. constantly figuring out the users' requests (board, funders, auditors, etc.). Having a trusted advisor to reach out to when a question arises could bring you peace of mind knowing that you can handle it with your team, whatever comes your way.
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.
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