Financial Management: Introduction

For nonprofits, the operating budget is more than just a financial plan projecting income and expenses for the year—it’s a tool you can use to monitor your organization’s activities. Use your operating budget to determine the best uses of funds to accomplish your mission. Throughout the year, you should monitor your budget monthly and compare it to your actual results so you can stay on track and make adjustments where needed. Since nonprofits don’t secure revenue for internal gain, nonprofit accounting is all about staying accountable for your finances, instead of making accounting services for nonprofit organizations a profit. Charitable organizations rely on donors and grant funders to obtain the funds they need.

Merging Nonprofit Organizations: What Nonprofit Leaders Need to Know

Cash flow projections are essential to ensuring an organization can meet its financial obligations and take proactive measures against potential cash shortages. Additionally, it can help your nonprofit ensure its budget lines up with its strategic plan by providing a clear picture of available funds. When talking about managing funds, you might hear the terms “accounting” and “bookkeeping” used interchangeably. However, these concepts are far from synonymous—bookkeeping is the process of recording financial transactions, while accounting involves analyzing key data and reports to make informed financial decisions.

• While it’s fairly straightforward for a for-profit company, it’s one of the most challenging aspects of accounting for nonprofits.
• Take for example, the Northeast Louisiana Arts Council (NLAC), dedicated to enriching their local community through art education and events.
• The outcome is a clear view of how donations are being used to share with an accountant, board members, or other stakeholders.
• Proper accounting and financial management are necessary for nonprofit organizations to stay viable and remain accountable to the public, donors, funders, and other stakeholders.
• Auditing is the process of inspecting and reviewing your financial statements to guarantee the accuracy and completeness of your financial records.

Accounting Basics for Nonprofits – A Primer for Non-Finance Leaders

Nonprofits must adhere to FASB’s ASC 958, which requires a statement of financial position, a statement of activities, and a statement of cash flows. Each provides a distinct perspective on the organization’s fiscal status, including asset management, revenue streams, and liquidity. Nonprofits must maintain detailed ledgers for each fund to ensure accurate records and reporting. This is critical for preparing financial statements that reflect the organization’s financial position and performance. Additionally, fund accounting is essential for completing Form 990, the IRS-required annual tax return for tax-exempt organizations. Accurate fund accounting ensures compliance with IRS regulations and helps avoid penalties for misreporting.

Implement Checks and Balances Internally

This tax form is not only necessary for your nonprofit to stay compliant with federal and some states’ regulations, but it can also be key for your fundraising efforts. Some prospective donors will search for your Form 990 to be sure your nonprofit is effectively using your funding before they make a contribution. The statement of functional expense is especially helpful when it comes time to file your nonprofit’s annual Form 990, which we’ll cover later on. Because expenses have to be separated into the three categories above on your tax forms, this report makes it easy to find specific allocation information. Nonprofit accounting, similar to other aspects of your nonprofit’s strategy, requires your organization to compile several key reports and documents to organize your financial data.

Using this report, nonprofits can determine the trends that are impacting the revenue and expenses incurred at their organization. Nonprofit accounting is the way a nonprofit’s financial transactions are planned for, recorded, and reported over time. Accounting for nonprofits also differs from that in the for-profit sector in a number of other ways. For instance, nonprofits have no legal ownership interests and they earn their funding from supporters who do not expect a financial return on their investment. Managing a nonprofit organization’s overhead (management and general) expenses is just as important as managing program and fundraising expenses. From the granular financial details to big-picture takeaways, accounting is an important aspect of accomplishing your nonprofit’s goals.

Strategic financial planning poses a unique challenge in the nonprofit sector. Unlike businesses that can focus primarily on profit margins, nonprofits must balance mission impact with financial sustainability. For instance, mental health nonprofits often have high administrative costs because of licensing and compliance requirements. Common mistakes include using restricted funds for the wrong purpose or forgetting to “release” funds from restriction when you’ve met the requirements.

Nonprofits must abide by the laws concerning taxes, filing deadlines, and any other applicable regulations that pertain to their special tax status. Failure to comply with these requirements can result in loss of tax-exempt status, significant penalties, and fines. Consider using a zero-based budgeting system to track and identify potential areas to cut spending.

• Nonprofits are exempt from income tax on donations and much of their earned revenue.
• Learn all the best practices of CRMs to simplify customer relationship management and elevate your bond with loyal customers.
• Studying financial data enables management to discover trends, scrutinize the viability of new endeavors, and develop realistic goals.
• By maintaining these three focus areas, your nonprofit accounting system helps build donor trust while ensuring compliance with all requirements.

Make sure your accounting practices are transparent and responsible by following the rules from big organizations like FASB, GAAP, and the IRS. Alignment & ConsistencyPlanning (budgeting), accounting, and reporting must all be in alignment to usefully compare performance to budget and to enable making good decisions based on that data. Names used for line items in the accounting system should exactly match the budget line items. Program and accounting folks need to use the same language if there is to be accuracy and efficiency in planning, accounting, and reporting. Focusing on your nonprofit’s revenue, the statement of cash flow details the organization’s inflows and outflows of cash. This categorizes cash flow according to its source and reveals how much cash is available to cover your expenses to the organization.