It is common knowledge that effective accounting practices are essential for the success and sustainability of your nonprofit organization. By adopting these key steps, you can help ensure that your nonprofit’s finances are managed responsibly and transparently, allowing you to focus on advancing your mission and serving your community. In today’s podcast, Sean Hale Nonprofit CFOs, and Stephen Halasnik from Financing Solutions discuss what your organization should do about accounting

A Ride Through Nonprofit Finances: What Your Organization Should Do About Accounting

Nonprofit organizations are a vital part of our society, working tirelessly to make a positive impact and bring about meaningful change. However, in a world where every dollar counts and resources are scarce, nonprofit accounting has become more important than ever before. Remember, proper financial management is not only a legal requirement but also an aspect of ensuring your organization’s longevity and effectiveness. Whether you are a budding nonprofit or a well-established one, it is essential to have a comprehensive understanding of your accounting practices. With the right tools and strategies, you can ensure that your organization is financially stable and able to achieve its goals. So, if you’re looking to improve your nonprofit’s accounting practices, read on for a detailed guide that covers everything you need to know.

Be Transparent

Like in every sector, transparency is the cornerstone of trust in the nonprofit sector. Hence,  make your financial information easily accessible to stakeholders, including donors, volunteers, and the community you serve. Also, provide clear, concise financial reports regularly, and ensure they are understandable to non-financial audiences. Transparency creates accountability and strengthens your credibility as a responsible steward of resources.

Institute Clear Financial Policies and Procedures

Developing clear financial policies and procedures is crucial for any organization, regardless of its size. A comprehensive set of financial policies and procedures can help your organization manage its finances and avoid potential financial risks. 

To create effective financial policies and procedures, it is important to first identify the specific needs and requirements of your organization. This can be achieved by assessing your organization’s financial practices, identifying areas that require improvement, and setting objectives for your financial policies and procedures.

Your financial policies and procedures should cover various areas, including budgeting, expense approval processes, financial reporting timelines, and internal controls. These policies should clearly outline the processes and procedures that staff and board members should follow to ensure that financial transactions are accurately recorded and reported. 

It is essential to communicate these policies to your staff and board members and provide them with adequate training to ensure that they understand the policies and procedures. Regular review and updates of these policies will help your organization adapt to changing circumstances and ensure that your financial practices remain effective and efficient.

Invest in Qualified Accounting Professionals

Although nonprofits often operate on tight budgets, the need to invest in qualified accounting professionals can never be overstated. Therefore, hiring or outsourcing to certified public accountants (CPAs) with experience in nonprofit accounting will be a giant step. They can provide valuable insights, ensure compliance with accounting standards and regulations, and help you make informed financial decisions. So, one of the things your organization should do about accounting is to invest in qualified accounting professionals.

Implement Sound Accounting Software

In recent times when there has been tremendous technological advancement, there are a lot of accounting software that could help you track and manage your funds. So, what Your organization should do about accounting is utilize accounting software specifically designed for nonprofits to streamline financial management processes. Look for features such as fund accounting, grant tracking, and donor management functionalities. Cloud-based solutions offer flexibility and accessibility, allowing staff to manage finances from anywhere with an internet connection.

Segregate Funds Effectively

Many nonprofits typically receive funds from several sources, including grants, donations, and program fees. However, proper segregation of these funds to maintain transparency and ensure compliance with donor restrictions is important. Implement clear accounting practices to track revenue and expenses associated with each funding source separately.

Conduct Regular Financial Reviews

Another thing your organization should do about accounting is to schedule regular financial reviews to assess your organization’s financial health and performance. Analyze income and expenses, cash flow, and key financial ratios to identify trends and potential areas for improvement. Engage board members with financial expertise to provide oversight and guidance during these reviews.

Stay Compliant with Regulations

You can’t discuss what your organization should do about accounting without talking about the need to abide by the rules. Nonprofit accounting is subject to specific regulations and reporting requirements, such as IRS Form 990 for tax-exempt organizations. So, stay updated on regulatory changes, ensure compliance to avoid penalties, and maintain your organization’s tax-exempt status. Also, consider consulting legal and accounting professionals for guidance on complex compliance issues. 

Imbibe a Culture of Financial Responsibility

Building a culture of financial responsibility and accountability throughout your organization is one thing your organization should do about its accounting. How do you achieve this? By educating staff, volunteers, and board members about the importance of sound financial management practices and their role in upholding them. Again, encourage open communication and collaboration to collectively steward resources effectively.

Engage Stakeholders in Financial Planning

The financial planning process is not what you do in isolation. Therefore, involve key stakeholders, including board members, staff, donors, and beneficiaries, in financial planning processes. It is advisable to solicit their input on budget priorities, fundraising strategies, and resource allocation decisions. Engaging stakeholders creates a sense of ownership and ensures that financial plans align with your organization’s mission and goals. So, involving stakeholders is part of the thing your organization should do about accounting.

Monitor and Measure Financial Performance

Another important thing your organization should do about accounting is to monitor and evaluate your organization’s financial performance regularly. You must measure it against established goals and benchmarks, using key performance indicators. Track progress toward fundraising targets, programmatic outcomes, and financial sustainability metrics. Use this information to inform strategic decision-making and adjust plans as needed to achieve long-term viability.

Key Factors for Nonprofits to Watch Out for in Accounting and Financial Documents

To ensure financial transparency and integrity, nonprofits must watch out for key factors in their accounting and financial documents. Here are some important considerations:

Accurate Recording of Revenue

Nonprofits should carefully document all sources of revenue, including donations, grants, and program fees. It’s essential to accurately record the nature of each revenue source and ensure that it complies with accounting standards and legal requirements.

Expense Allocation

Proper allocation of expenses is crucial to demonstrate accountability and transparency. Nonprofits should clearly categorize expenses related to programs, administration, and fundraising. Ensure that expenses are allocated accurately and reflect the organization’s mission and objectives.

Compliance with Accounting Standards

Nonprofits must adhere to relevant accounting standards, such as the Financial Accounting Standards Board (FASB) guidelines for nonprofits (e.g., FASB ASC 958). Compliance ensures that financial statements are prepared in accordance with accepted accounting principles.

Transparency in Reporting

Transparency is key to building trust with stakeholders. Nonprofits should provide clear, concise, and understandable financial information in their reports, including annual reports, tax filings, and fundraising materials.

Internal Controls

Establishing strong internal controls is essential to prevent fraud and ensure the accuracy of financial information. Nonprofits should implement policies and procedures to safeguard assets, verify the reliability of financial reporting, and comply with laws and regulations.

Monitoring and Oversight

Regular monitoring and oversight of financial activities are crucial to identifying and addressing potential issues. Nonprofits should conduct regular audits, review financial statements, and ensure that appropriate oversight mechanisms are in place.

Donor Restrictions and Reporting

Nonprofits often receive donations with specific restrictions on their use. It’s important to properly account for and report on restricted funds, ensuring that they are used in accordance with donor intent.

Budgeting and Financial Planning

Developing a comprehensive budget and financial plan helps nonprofits allocate resources effectively and achieve their mission. Regularly review and adjust the budget to reflect changing priorities and circumstances.

Risk Management 

Identify and manage financial risks that could impact the organization’s stability and sustainability. Develop a risk management plan that addresses key risks, such as funding volatility, regulatory changes, and economic uncertainties.

Professional Advice and Training

Nonprofits should seek advice from financial professionals with experience in nonprofit accounting. Additionally, provide training to staff and board members on financial management best practices and compliance requirements.

About Our Guest, Sean Hale From Nonprofit CFOs

Sean has served a variety of nonprofits professionally since 1999. During his 20 years as a nonprofit employee, he made improvements that reduced waste, generated new revenue, boosted staff productivity and morale, grew financial transparency, and shrank risk. In 2020, he founded Nonprofit CFOs, a 12-person team that helps small and medium-sized nonprofits ensure they have strong, effective financial management. 

Learn About Stephen Halasnik

Stephen Halasnik co-founded Financing Solutions, the leading provider of lines of credit for nonprofits and church financing. The credit line program for nonprofits & churches is fast, easy, inexpensive, and costs nothing to set up, making it a great backup plan when cash flow is temporarily down. Mr. Halasnik is also the host of the popular, Nonprofit MBA Podcast. The podcast brings experts to discuss fundraising, nonprofit grants, executive director leadership, nonprofit boards, and other important topics. You can learn more about the nonprofit line of credit program here or call 862-207-4118.