A nonprofit is a company whose aim is to support a mission instead of generating profit for its shareholders and owners. Most nonprofits focus on educational, scientific, religious, and charitable goals and are a huge part of the United States’ economic activity.
Since nonprofit organizations focus on charitable missions, they usually get funding from the public and other organizations while enjoying tax breaks.
However, with these benefits come various accounting challenges. Nonprofits must follow specific tax requirements, accounting rules, and regulations. They must be financially transparent, track received contributions, and show the usage of received contributions to further their mission.
With their complexity, managing and keeping track of nonprofit finances is demanding. This blog will explore how nonprofits can effectively manage their accounting needs.
Maintain Financial Transparency
Nonprofit financials are open since each organization submits its Form 990 every year. This form contains important details of the organization’s financials and is publicly available to everyone. Usually, supporters view a nonprofit Form 990 before offering contributions to ensure the numbers are good.
However, aside from submitting your Form 990, it is essential to offer additional context. This content is an additional annual report that tells donors the whole story. An annual report will show the context behind your financial numbers and motivate supporters to view the financial information each year.
Supporters and donors won’t ever wonder if your organization is sketchy financially when they review our transparent financial information regularly. It provides regular trust in your organization, which is important for garnering the support of your community and fundraising.
The financial information from your annual report and statement will go to the nonprofit’s annual forms filed with the IRS. Some of these financial statements include statements of financial position, statements of activities, statements of cash flows, statements of functional expenses, and statements of cash flows.
Perform Audits Regularly
When people hear of audits, they are often scared because they might owe taxes or get into trouble. However, this isn’t a concern for nonprofits, as a registered nonprofit does not pay federal taxes. An audit isn’t meant to force them to pay additional funds or fees or catch them doing wrong. Instead, an audit is a way of bringing your organization’s financial management up to the mark.
There are various advantages to nonprofit financial auditing. It helps an organization enhance its transparency among grantmakers, supporters, and donors, offers constant accountability to ensure efficient financial management, and provides opportunities for improving your organization’s processes. You don’t need to conduct financial audits each year. However, you should conduct one regularly to attain the benefits that come with the evaluations.
You can determine if you need an audit by checking your state’s requirements, organization’s bylaws, grant application, and federal funding requirements. After this, determine the timeline that allows your organization to conduct the required financial audit, then mark the date for preparing your materials. This ensures you are on a good schedule and removes the stress of regular auditing.
Create a Budget
Budgeting can be quite challenging for nonprofit organizations since funding is usually uncertain. However, every organization requires an operations budget based on anticipated revenue to plan their hiring and other expenses properly.
Crafting a well-detailed budget that shows every funding source alongside variable and fixed expenses is crucial. Crafting a budget helps the nonprofit organization make reasonable spending decisions and offers a financial management blueprint.
After you have created a budget, frequently revisit it during the year to ensure that the organization is on the right track to meet the set financial goals or if some adjustments are required. However, with financial uncertainties, it is prudent to have enough cash reserves that can support the organization’s operation for some months. This flexibility allows you to cover unplanned expenses that might arise and offers financial flexibility to plan for the organization’s future growth.
Create Effective Internal Protocols
Transparency and accuracy in accounting are essential for nonprofit organizations. This isn’t just for tax and regulatory compliance reasons. It is also to maintain the trust of donors, supporters, and other stakeholders. A clear and effective internal protocol can be essential in achieving the organization’s set aims and objectives by preventing fraud, errors, and mismanagement.
Create written protocols and policies to help everyone properly understand how to perform common bookkeeping tasks such as recording expenses and donations. When you ensure that the organization’s financial processes are consistently and correctly performed, you can simplify the analysis of the organization’s financial position and easily detect any anomalies. Though it isn’t always easy to document procedures, documentation can make it easier to train employees or volunteers if required.
Utilize Nonprofit Accounting Software
It is crucial for nonprofit organizations to always use accounting software. These kinds of software can provide GAAP-compliant financial statements that are needed from nonprofits. Your chosen accounting software should track the unrestricted and restricted contributions and show the usage of these funds.
For instance, many nonprofit organizations work on grants with specific conditions. Your chosen software should be capable of tracking every expense related to a grant and ensuring the spending meets the conditions and requirements of the grant. An excellent nonprofit accounting software should be able to automate these processes and save your labor and time.
Additionally, maintain up-to-date accounting software. Out-of-date nonprofit accounting software can expose your organization to noncompliance risks with regulatory and tax requirements. This can affect your tax-exemption status. Choosing accounting software can automatically update to accommodate newer changes to accounting rules and tax rules.
Ensure Account Reconciliation and Billing
Always ensure the individuals or groups in charge of your nonprofit accounting needs timely checks of the monthly financial statements and bank statements for unexpected sums and clear errors. This can help reduce future issues.
Create procedures and policies for monthly cutoffs to record vendor expenses and invoices. This can help you improve your accounting function. For example, you can require your accounting departments to receive every invoice one week before the end of every month.
Additionally, reconciling balance sheet accounts every month might also allow you to save some days at the end of the year’s end. Mistakes caught early can be easily fixed. Additionally, reconcile accounts payable and accounts receivable subsidiary ledgers with your financial position statements.
Endnote
It is important to understand the fundamentals of nonprofit accounts to achieve your mission, ensure financial transparency, and maintain compliance. To effectively manage their finances, nonprofits must be acquainted with cash flow and expenses, financial statements, compliance and accountability, and revenue management.
Additionally, you must implement proper accounting practices and nonprofit software to ensure financial health. Staying informed about nonprofit accounting can allow you to navigate the complexity of financial management