Best Practices for Nonprofit Fund Accounting

For a nonprofit, accounting is very important to keep a high level of financial transparency. Nonprofits wanting to keep their tax-exempt status must keep accurate financial records which document that the funds received were used for charitable purposes.

I had a chance to sit down with Michelle Carley, founder of Big E-Z Bookkeeping Software, which hundreds of nonprofits use to understand common mistakes nonprofits make and best practices when doing their accounting records.

Common Nonprofit Accounting Mistakes

Just like for-profit organizations, nonprofits make mistakes. Do you have one major tip for nonprofits regarding their accounting?

Michelle: One problem I see with nonprofits over and over is a lack of good backups of their important electronic files and documents. Nobody thinks their computers will crash, but as an expert in accounting who has seen thousands of scenarios, I’m here to tell you they do!

It even happened to me once long ago. I was working as the accountant for a nonprofit organization when the owner to my surprise decided to have a crew come into the office one weekend to do renovations. I was not aware of the renovations to take place and, to be honest, I would not have known how to protect the computer from its demise either way. I later found out that the computer should have been covered with plastic wrap and tape or removed from the office entirely, so dust from the sawing of wood would not find its way into the hard drive. When I tried to access it on Monday morning the hard drive crashed. Fortunately for me, I had a backup and could recover the nonprofit’s accounting data except for the last two weeks. Another nonprofit I know of was not so fortunate with the important documents they had on their computer. They had no backups and had to re-enter all of their data from the beginning of the year. Sadly the nonprofit learned a costly and time-consuming mistake, so remember to backup often.

Transitioning From One Treasurer to Another Treasurer

Nonprofits usually have a treasurer handle the bookkeeping for the organization. Treasurers of small nonprofits are not usually paid to keep the books and so there can be a frequent turnover of volunteer treasurers. Do you have a tip for how to make this transition easy?

Michelle: First, it is so important that the accounting software you choose for your nonprofit be easy to use. If it’s a burden for the current nonprofit’s treasurer, it will be much harder to train someone new to use it. Make your volunteers happy with an easy-to-use program that won’t waste their time and you will find it easier to get volunteers to keep the books.

Many nonprofits overlook an important aspect of accounting software which is, how easy the software is to correct? Face it, all nonprofit treasurers make mistakes and when they do, it is so important that they can find the accounting mistake and correct it easily. No nonprofit staff or volunteer wants to spend tons of time searching for answers online to correct an error in their nonprofit accounting software. It should be just as easy to correct as it was to enter.

Nonprofit Accounting Regulations

The IRS has certain nonprofit accounting requirements and the generally accepted accounting principles (GAAP) are important for nonprofits to follow too. Nonprofit accounting rules and regulations change throughout the years. Where are the best places for nonprofits to keep up with the current rules and regulations? Which sites do you see as most informative and accurate?

Michelle: The Financial Accounting Standards Board (FASB) is an authority for U.S.-based nonprofits. There are always new things being proposed and improved. The FASB has a page called “In the News” and they post to it often: You might consider reading up on what is happening in the nonprofit world. Like everything on the web, you will need to use your discretion to determine what affects you and your nonprofit and weed out the rest.

Nonprofit Annual Operating Budget and Operational Expenses

What are the rules of thumb when putting together a nonprofit operational budget? And how do you keep your donors happy that you are supporting your nonprofit’s mission, but make them understand there are operational expenses?

Michelle: Budgets can be difficult to determine. When you are starting out you have nothing to compare your actual numbers against, so you have to dream them up. You will need to try to base your income and expenses on what the industry standard is for your type of non-profit. Of course, that will be a guess because no two nonprofits are exactly the same. It’s once you have some history behind you that you can better determine how much income to expect and how much you can spend in the coming year. The old saying “practice makes perfect” certainly applies here.

As for your donors, the same is true. You need to ask yourself what are other nonprofits doing to make their donors happy, then tweak it with responses from your own donors. Donors like to know where their money is being spent. Over time they will let you know, but if they don’t, a well-thought-out survey may be in order.

Nonprofit Terminology and Accounting Software

Some nonprofits need or want to use inexpensive accounting software to track their revenue and expenses. Sometimes the software will be for-profit accounting software. Is it okay to use the less expensive programs if they have terminology that isn’t consistent with fund accounting or nonprofit accounting?

Michelle: Absolutely! All accounting software does the same thing: it crunches numbers down to totals that make sense to you and those totals are so necessary to stay compliant and so needed for tax time. Whether you call it donations, income, revenue, or sales, it is still the same thing.

Nonprofit Policies and Procedures Pertaining to Accounting

It is critical that nonprofits reconcile their accounting and development schedules on at least a monthly basis. Nonprofits also need clear protocols for communicating important accounting activities. Otherwise, nonprofits experience negative consequences such as low to no funds, or, even worse, embezzlement.

For example, if grants or fundraising teams fail to inform nonprofit accounting departments about funds on a timely basis, the latter won’t be aware of the grants or funds for financial reporting requirements and could forfeit funds for noncompliance. And, if the accounting department doesn’t record funds from fundraising, grants, or pledges in the proper financial period according to GAAP, the organization could run into significant issues during its audit — which could jeopardize funding and lose tax-exempt status. Therefore, what would be the best procedures to put in place to keep all departments running smoothly so the accounting books stay up-to-date and accurate?

Michelle: You are correct. Accounting needs to be done on a regular basis, and reconciling your records against your bank accounts is of the utmost importance. Some reconcile each month and I’ve even seen some reconcile each day. It all depends on how tightly you want to control your records. Those who reconcile whenever they feel like it or only when push comes to shove can get into real trouble.

When I first started bookkeeping, I was startled to find out the head bookkeeper was let go. When I inquired, it was because she had not reconciled the payroll account in three months and someone was embezzling.

We have a step-by-step plan on our website for keeping your records up-to-date and current. It’s one of our Getting Started Guides and you can find it here:

In your example, you mentioned if the grant writers and fundraising teams don’t communicate properly with accounting that some income could get missed and not recorded which could jeopardize the nonprofit’s status. This scenario would only refer to larger nonprofits using an accrual system of accounting. This would not be an issue for smaller nonprofits operating on a cash basis.

Michelle Carley’s Final Thoughts on Nonprofit Accounting Best Practices.

Michelle: If I were running a nonprofit, I would like to see that the Fund Balance (or money left in the checking account) at the end of the year is equal to at least a year or two of expenses for the organization. I would try to develop a budget that works based on the past year’s revenue and expenses and tweak it each year. If I were a starting a new nonprofit, I would choose to use the cash basis system of accounting over the more difficult accrual basis. And finally, I would watch the revenue closely to be sure it has not reached the threshold for more stringent record keeping and procedures.

Happy Bookkeeping!

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