7 Steps to Mastering Nonprofit Accounting

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Poor financial decisions are one of the reasons why many organizations with a nonprofit status fail during the early development stages. And accounting practices are of high importance for your financial health.

As a nonprofit organization, you have different accounting duties than your for-profit counterparts. Compared to any for-profit business, nonprofit organizations have various tax filing, financial reporting, and bookkeeping procedures.

Therefore, to aid nonprofit organizations like yours in understanding their accounting requirements, we decided to compile this guide of nonprofit tips. Let’s start with understanding what nonprofit accounting is!

What is Nonprofit Accounting?

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Nonprofit organizations use a special planning, recording, and reporting process called nonprofit accounting to manage their financial data.

As a nonprofit accountant, you need to prioritize accounting’s accountability component, whereas for-profits accounting professionals prioritize making a profit. Nonprofit accountants adhere to a particular set of guidelines and practices that aid in keeping them answerable to their contributors and donors.

Accounting for Your Nonprofit Organization: 7 Easy Steps to Follow

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Nonprofit organizations frequently have tight finances, so there isn’t always room on staff for a specialist financial manager or accountant. Because of this, every team member who handles spending or allocating money needs to be knowledgeable of the best practices.

While it might seem challenging at first, thankfully, we have got you covered. Here are our effective nonprofit accounting tips for financial health:

1.    Understand the Nonprofit Accounting Regulations

The accounting regulations for nonprofit organizations are completely different from those that apply to traditional for-profit accounting.

You must adhere to certain CRA regulations or IRS rules for nonprofit organizations, as well as Generally Accepted Accounting Principles (GAAP) when applying for and claiming your nonprofit’s tax-exempt status.

However, always check for updates, as the GAAP standards are subject to change from year to year. You can get moving in the right direction by selecting the best qualified accounting team.

2.    Keep an Eye on the Regular Financial Reports

An important task in nonprofit accounting is to create reports and keep a close look on your financial statements.

Here are the financial statements you need to keep an eye on as a nonprofit organization for long-term financial health:

●      Statement of Cash Flow

The cash flow statement outlines the inflow and outflow of funds. It enables you to determine how much cash is always accessible to cover your expenses.

The operating, finance, and investment activities are broken down in the cash flow statement to indicate the organization’s cash management.

Analyzing the cash flow statement can help you understand how your nonprofit uses the money it raises through fundraising events, grant applications, and other sources of income.

●      Statement of Activities

The statement of activities is the nonprofit version of the well-known income statement. It keeps track of all the company’s outlays and income throughout a predetermined time period, typically a fiscal quarter or a year.

The ultimate computation of a statement of activities, as opposed to the net revenue reported on an income statement, is the change in net assets.

●      Statement of Financial Position

The standard for-profit balance sheet also has a nonprofit counterpart, the statement of financial position.

Much like the balance sheet, the statement of financial position typically lists the nonprofit’s assets, liabilities, and cash on hand. Since nonprofit organizations do not have owners, the remaining funds are usually referred to as net assets on traditional balance sheets instead of equity.

●      Statement of Functional Expense

To make bank reconciliation and stakeholder communication easier, the statement of functional expense categorizes the costs incurred by your nonprofit.

Administrative costs, program costs, and fundraising expenses are typical categories for disclosures of functional expenses.

3.    Put Together an Operating Budget

Your organization will use the nonprofit budget to allocate finances and make future financial plans.

Similar to for-profit budgets, nonprofit ones also have diverse funds set aside for various uses, including:

  • Restricted funds: Any cash amount designated for a particular purpose, coming with clear donor restrictions.
  • Temporarily restricted funds: It is a fund restricted by the donor that may be planned to last for a specific period of time before being released and becoming an unconstrained fund.
  • Unrestricted funds: Nonprofit organizations can use the unrestricted grants or donations however they see fit in order to reach their objectives.

4.    Record In-Kind Donations

You must track and disclose in-kind contributions similar to financial contributions if you operate a nonprofit organization.

The in-kind donations can be split into two categories:

  • In-kind goods: Material things that can be used or sold again for money. All items that may be traded in, including tradable financial securities, automobiles, and items like food, garments, or equipment, fall under this category.
  • In-kind services: Activities that would explicitly or implicitly assist the mission of a nonprofit organization. All services provided voluntarily by private citizens, small and large businesses, corporations, institutions, and organizations fall under this category.

5.    Conduct Regular Audits

Although audits are typically mentioned in terms of finances, they can also apply to internal analyses of operations, external reviews of your finances, evaluations of your adherence to compliance rules, and so forth.

The goal of conducting audits is to identify areas for improvement. On one side, you have the ownership interests, while on the other you have the financial decisions made throughout a period of time.

Such nonprofit audits essentially let your organization step back from daily activities and decide what the best course of action is for advancement.

6.    Use Accounting Software

Charitable organizations face particular accounting difficulties. Using nonprofit accounting software is a great method to overcome these issues.

Budgeting, forecasting, HR administration, grant management, and fundraising may all be strengthened, streamlined, and made simpler with the help of nonprofit accounting software. Additionally, the accounting system can offer internal controls over your financial data, assisting you in securing and safeguarding your data.

7.    Outsource Your Nonprofit Accounting Activities

Nowadays, most organizations are shifting toward outsourcing their nonprofit accounting needs to accounting firms or freelancers.

Nonprofit organizations might think about outsourcing their finance and accounting tasks for five main reasons:

  • diminished internal expenses
  • higher level of expertise
  • improved controls
  • expanded access to resources
  • timeliness

Zivo — Making Accounting Easier for Nonprofit Organizations

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Nonprofit accounting might start as trouble for your organization, but worry not, you’ll get a handle on it. Your nonprofit will be better able to assess its financial status if you comprehend the fundamental concepts of accounting.

However, an important resource that you don’t see in your financial documents is time. At Zivo, we think that the demand on nonprofit executives to perform well and expand their organizations while attempting to strike a healthy work-life balance is already big enough. This is why we are here to help you with your nonprofit bookkeeping,accounting and fully-fledged virtual CFO services.

Book your free consultation with us and let’s start working on your nonprofit’s financial management!