Financial management is not always high on the list of a nonprofit organization’s priorities; however, it must be done. In order to effectively carry out a program’s mission and desired impact, nonprofit organizations need to properly manage their finances and adhere to government and grant-funder requirements. This includes running periodic reports detailing how the organization is spending donated funds, balancing the budget, and detailing the organization’s fund allocation.
Because nonprofit leaders are not financial gurus, many nonprofit organizations risk having financial errors in a nonprofit audit. Protect your organization from financial risk by keeping the following 7 tips in mind:
- Follow your organization’s general accounting policies and procedures
The first thing your nonprofit organization should have developed after its mission is the organization-wide accounting procedure. Every nonprofit should have a formal and documented accounting plan in place detailing all aspects pertaining to the organization’s finances. This plan should detail how the organization manages its finances (accepting donations, paying bills, allocating donated funds, depositing funds, etc.). This plan should be in writing and followed by the key financial leaders in the organization every time. - Maintain accurate data (and data entry)
Accurate data entry is crucial when trying to prevent costly errors during a nonprofit audit. One small mistake often leads to a huge mistake if gone unchecked, so make sure that you double-check entries each time they are entered into your accounting system and compare each entry to your bank statement every month. - Establish a budget
As we have already discussed, the nonprofit budget plays an important role in keeping a nonprofit’s financial health in top shape. Budgets serve as a baseline to prevent the overspending of funds. If your organization does not currently have a budget in place, start out by developing a basic budget that can be adjusted over time. A basic budget is better than no budget at all! - Allocate funds
All money that enters into the organization needs to be allocated properly. Does your organization receive grants for particular programs? Then make sure those funds are going to the corresponding programs. Every penny that goes in and out of the organization should be accounted for and allocated correctly. Every employee should understand the different accounts and how they should be used. - Hire a CPA or accountant that specializes in nonprofit accounting
Nonprofit organizations face many financial requirements and reporting obligations. Because nonprofit leaders are often too busy running the organization, nonprofits turn to outside help in the form of nonprofit CPAs (or nonprofit accountants). A nonprofit CPA will have the knowledge to guide nonprofit organizations through the financial management process and assist them with meeting their financial reporting requirements. - File!
Use a filing system and make it a priority to file all accounting paperwork at least once a week. This will ensure that your accounting files will be available and accessible any time you need them during your nonprofit audit. - Keep backups of important financial data
You should always have backups of your most important files and documents. If you do not store backups at an alternative location, consider starting now. In the case of a natural disaster or computer glitch, you will want your financial data to be safe and available. Consider storing all of your data backups in the Cloud or in a system off-site. You never know what will happen, and it’s best to be prepared for any catastrophic event rather than lose your organization’s mission-critical information.
The above tips were designed to assist you in coming out of a nonprofit audit error-free. If you’d like to learn more about preparing for your audit, click here.