Nonprofit Accounting Blog

Starting a nonprofit organization can be an exciting time. As you gather support for your new nonprofit startup in your community, you’re probably imagining all the ways your nonprofit organization will impact the surrounding community for years to come. Your dream of building a nonprofit organization from the ground up and finally coming true, and you couldn’t be more excited to begin the journey.

Over the years, we’ve seen too many nonprofits fail due to lack of planning and/or insufficient tools. These devastating mistakes can cause many nonprofit organizations to fail before they even begin. With so many governmental and private donor regulations, it can be difficult  to navigate the many requirements expected of nonprofit organizations in addition to the complicated steps required of setting up a nonprofit.  We’ve advised  nonprofit startups for several years and have witnessed firsthand the many challenges involved in starting a nonprofit organization from the ground up. In response, we have developed 7 crucial steps to help nonprofits achieve a smooth startup.

1. Make sure there is a need for your organization in your area
   Ultimately, your nonprofit organization is a business. In order for your nonprofit to be successful, there needs to be a demand for the services and programs your organization will offer. Research the community you are planning your startup and see if there is a need for your organization. Is there another organization in the area that offers similar services and programs? If so, is there a way to team up with the existing organization? Research the area and your options before you set up your organization. If there is an existing organization already offering the same services to the community, there may not be a need for your organization.
2. Create a “Business Plan”
   As we said before, a nonprofit organization is essentially a business. While there are stark differences in the way nonprofits and businesses are run, there are many similarities. Like a business, your organization needs to have a healthy cash flow in order to survive (meaning there needs to be more money – or “funds” – coming into the organization than going out of the organization).Your business plan does not have to be complicated, and you can always change it as your nonprofit grows and progresses. A business plan is a like a roadmap; it brings focus to your goals for the organization and details plans you have for future growth. For more information about what your business plan should include, click here (link to July Article # 1).
3. Make sure your organizations qualifies for nonprofit status
   While your idea for a nonprofit organization may seem substantial, are you sure it qualifies as a charitable cause? There are many types of nonprofit organizations, and it is crucial to know what kind of organization you will operate as. Research the types of nonprofit organizations and determine which type of organization you will be running. If you need help determining your status, contact your CPA. They will be able to help guide you through the nonprofit qualification process and answer any questions you have about achieving nonprofit status for your organization.
4. Meet all legal requirements
   Many nonprofit owners are shocked at the number of legal requirements organizations are faced with. Nonprofit organizations are heavily regulated on a government, state and private funder level. Research all of the requirements you will have to meet, and enlist the help of your CPA or accountant. They can help you navigate the seemingly endless list of legal requirements and set you up for success.
5. Maintain accurate records
   Keeping  good  records (financial, organizational, etc.) is key to the success of your organization. As we mentioned above, nonprofits are subject to many legal requirements, and accurate records will alleviate the stress related to meeting those requirements. Many funders have special reporting expectations, and a good set of records will help your organization effectively meet those expectations. If you maintain good records from the beginning, you will be less likely to run into problems in the future.
6. Create a fundraising plan for your organization
   Fundraising is crucial to your nonprofit’s success. Without funds, you will not be able to provide the services and programs your community needs. It is important to have a strategic plan in place when it comes to fundraising for your organization. Brainstorm how you wish to obtain the majority of your funds. Do you want to apply for government grants? Would you rather receive funds from private donors? Determine what is best for your organization, and develop a plan. Without proper planning, your fundraising efforts will most likely fail.
7. Choose your board members wisely
   Your board is crucial to the success of your nonprofit organization. The board is legally responsible for keeping your nonprofit on track with its mission, providing you with the expertise you need, and helping you raise the necessary funds to keep your organization running effectively. Make sure you choose the right people with the right expertise to serve on your board. The wrong board members can cause serious – and potentially costly – issues in the long run.

As you can see, starting a nonprofit organization involves more than simply providing a few cool programs and services in the community. It is a business venture and requires proper planning to be successful. If you have any questions regarding your nonprofit startup, contact us today. We’d be more than happy to help guide you through the legal and financial requirements involved in starting your organization and prevent these devastating mistakes from occurring.

As we’ve discussed in the past, nonprofit organizations are not much different than their for-profit counterparts. In fact, we can learn a lot about running a nonprofit organization simply by researching how businesses and corporations perform certain functions. In addition to ensuring the proper bookkeeping and accounting tasks are being done, business owners create and maintain a business plan. This plan serves as a roadmap for the entire organization. It brings focus to your business goals, details your business plans extensively, and provides the necessary information required for the successful running of a business.

Nonprofit organizations can benefit greatly from implementing a business plan. Detailing the organization’s goals, strategies, and financial situation, a business plan can be revised and changed throughout the organization’s lifecycle. Keep the following structure in mind as you develop a solid business plan for your nonprofit organization:

• An Executive Summary that describes your nonprofit’s mission and vision, services, programs, marketing plans, and funding options.
• The Organizational Structure section should detail how your nonprofit will be structured. List all board members and staff positions necessary to run your organization effectively. Describe your objectives, growth plan, and any trends relevant to your organization’s industry in this section.
• The Products, Programs and Services section should list and describe all of the products and services your organization plans on offering. Provide as much detail as possible (including delivery methods, the benefits of provided programs and services, and future development plans).
• The Marketing Plan section should describe your organization’s unique approach to marketing. Ask yourself these questions: Who will your nonprofit be serving? How will you reach your targeted client? Explain your plans for getting your programs and services out in the community, and provide examples of marketing collateral in the appendix of your business plan.
• Your Operational Plan should describe how you plan to run your nonprofit organization. This is where you will detail where your nonprofit will be located, what kind of equipment/inventory/etc. will be needed to provide the services, how you plan on maintaining your organization, how you plan on delivering services, and how you plan on measuring the effectiveness of those programs and services.
• The Team and Staff section should provide information about key organizational staff, including board members, nonprofit managers, and general team members. List important information (such as a bio and a list of their expertise) along with each staff member profile. Include an organizational chart, explain responsibility, and provide an assessment of current and future staffing needs.
• The Financial Structure section should detail your organization’s current financial situation and projected financial status. List any outstanding loans/debts, holdings, bonds, and endowments in this section, along with your financial plan for the organization. If you are currently accepting (or plan on accepting) any grants or donations, list the details within this section. All sources of income should be detailed in this section. You should also consider including an income statement, balance sheet, financial projections, and a cash flow statement in this section. Include your fundraising plan and any other information related to the financial success of your organization.
• The Appendix should contain the resumes of key staff and board members, charts and graphs detailing important information, marketing materials, the organization’s strategic plan, and the annual report.

Imagine how much more organized your nonprofit can be by simply develop a comprehensive business plan. While this plan is ideally created at the beginning of an organization’s lifecycle, it can be created or updated at any point in the process. With a clear and concise business plan in place, your organization is more than likely to succeed.

If you are in need of any bookkeeping and accounting services, contact us today. While having a business plan in place for your nonprofit organization is important, you will also need to have your books and accounts in order to maintain a certain level of success. Our certified CPAs and accountants will come alongside you to help you develop the most beneficial business and financial plan for your organization.

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:

1. 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.
2. 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.
3. 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!
4. 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.
5. 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.
6. 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.
7. 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.

Nonprofit organizations, as we discussed last week, need guidance when it comes to the financial aspect of the organization. Dedicated to running the programs and providing the support their communities need, nonprofits often lack the time and attention to successfully manage their finances. With the help of a trusted financial advisor or CPA, nonprofit organizations can gain a better grasp of their finances and ensure that they are adhering to all of their financial obligations in terms of grants and federal requirements.

As you begin your search for the perfect CPA for your nonprofit organization, keep the following tips in mind. While the search for the right CPA is not an easy process, the time and dedication you commit to finding the right person to handle your organization’s finances will pay off in the long-run.

How do I even begin finding a CPA for my nonprofit organization?

• Inform your staff members and volunteers of your need for a CPA, and ask them if they have any referrals.
• Mention your search for a CPA in your regular newsletter.
• Call your state’s CPA society for referrals.
• Search through your member or donor list for active CPAs. Give them a call and see if they are interested in helping your organization.
• Ask surrounding nonprofits for their CPA’s contact information.
• Join an online professional networking site. Once you’ve joined some groups, go online and post your need. You never know who may be willing to help!

Building a quality relationship with your nonprofit CPA is essential. Remember that a quality CPA will benefit your organization more than it costs. If your current CPA is costly your organization more time and money, you should looking elsewhere for your organization’s accounting services.  Once you’ve found the right CPA for your nonprofit organization, make sure you discuss the estimation of fees and desired tasks in length. You don’t want to be surprised later on down the road with any unexpected costs.

It’s important that you feel comfortable enough with your CPA to ask any questions you may have about their experience, responsibilities, knowledge, etc. After all, he or she will be your trusted business advisor from now on, so don’t leave any questions unasked! Keep the following questions in mind as you begin talking to your chosen CPA about their involvement with your nonprofit organization:

• How many nonprofit organizations does he or she currently work with? Does your CPA work with organizations of a similar size?
• What is his or her area of specialty? Some CPAs only conduct audits while others specialize in preparing the IRS Form 990. Make sure you’ve chosen a CPA that matches your organization’s needs.
• Ask who you will be working with. Larger CPA firms generally have several people handling their accounts, and the original person you interviewed with may not be the person working on your account. Find out who you will be working with so you know who to go to with any questions or concerns.
• Ask your CPA to explain the financial reporting requirements specific to your nonprofit organization. This is really a test to see if the CPA you’ve chosen knows the guidelines. Do you understand his or her explanation, or are you lost in the professional jargon? Getting on the same page is crucial to the success of your CPA-nonprofit relationship.
• Find out if they charge by the hour or by the project.

After your first audit, your CPA will be able to tell you a lot more about your organization. They can compare your nonprofit to other nonprofits they work with and give your organization suggestions for improvement. Remember that your relationship with your CPA is an on-going relationship that will benefit your organization for the long-haul. Make sure you choose your CPA wisely!

Should your nonprofit organization hire a CPA? Discover why you should make the decision to move your financial management to a nonprofit CPA here.

It’s safe to say that they majority of nonprofit organizations do not run on a substantial amount of money. In fact, three-quarters of the nation’s nonprofit organizations operate on less than one million dollars each year, and most operate on an even smaller amount. Where these nonprofit organizations lack large funds, they make up for in impact. These nonprofits not only respond to their community’s needs and desires, but they are also staffed by members of the community who care about their community and strive to make it a better place.

We’ve worked with numerous nonprofit organizations over the years and have discovered that smaller organizations often struggle with the financial challenges unique to their size and structure. While the directors and leaders of these organizations generally have substantial knowledge in the area of nonprofit programs, they often lack the financial knowledge that larger nonprofit organizations possess. In addition to this, smaller nonprofits with limited budgets often have difficulty bringing someone with financial expertise in-house. As a result, the executive director ends up handling the nonprofit’s finances, often relying on the aid of a part-time bookkeeper who is not as committed to the organization’s strategic goals. Without the right financial guidance, nonprofit organizations struggle through audits and have difficulty making financial-based and data-driven decisions for the organization.

Due to the lack of funds, smaller nonprofit organizations are forced to run as lean as possible. Many nonprofits cannot invest in infrastructure or software systems to help them better manage their finances and programs, pay their employees competitive wages, or operate in their desired building location. Executives often work at all-hours trying to deliver the organization’s programs, run the organization effectively, raise funds, and pay the bills.

The reality of an overworked staff, limited funds, basic technology, and minimum financial training leaves nonprofits vulnerable, particularly in the time of economic uncertainty. However, with the right steps, nonprofits can improve their financial health and chances of success.

1. Remember that your financial practices are just as important as your organization’s mission statement. If your organization lacks the adequate resources to develop sufficient financial tools, look to other nonprofits in your area for guidance. See if you can borrow a template from a peer organization, or bring in board or staff members with expertise in the financial field.
2. Make smart decisions about facilities. Don’t jump at the chance to secure a cheap facility only to drown in the price of up-keep. Look at the whole picture when selecting the facilities for your nonprofit organization and keep in mind that depreciation is a very real thing. If you are unsure about the lasting value of your facilities, bring in outside help.
3. Recruit your board members based on your organization’s needs. Smaller nonprofit organizations typically need more from their boards than just governance and fundraising support. Put the desired functions of your board members in writing, revise your expectations as your organization evolves, and work toward specific goals for your organization’s board and purpose.
4. Remember that growth comes with a price. As your organization grows and adds new programs, keep in mind that these changes cost money. Be wary of the mission creep and imbalances that can result from adding new programs. Added revenue – as beneficial as it may be – also means added expenses.
5. Embrace in-kind donations, but have a plan for their replacement. The donation of time and work is invaluable to small nonprofit organizations; however, your organization cannot rely on these in-kind donations all of the time. Make sure that you have a concrete plan for replacing volunteer labor and worn-out equipment as necessary. Remember that it’s ok to turn down donations that you don’t need or want. Added donations often add responsibility that small nonprofits have a hard time keeping up with.

The above tips –when put into effect – can help improve your organization’s overall financial health. By making smart decisions now, your organization’s finances will be better off later. In addition to these financial tips, your organization should consult a financial advisor or CPA. A financial advisor can help guide your organization to a greater level of financial success and keep your organization running smoothly and effectively, as well as help you understand the various financial requirements you must adhere to.

Stay tuned for next week’s blog on finding the right CPA for your nonprofit organization.

A few months ago, we posted an article about the proposed A-133 audit changes and the ultimate goals of the Federal grant policy reforms. Currently, any state or local government and nonprofit organization that receives money from the government may be  required to obtain an A-133 audit (also known as an Office of Management and Budget or “OMB” A-133 audit). These audits ensure that government and nonprofit organizations are spending the money received from grants according to the various program requirements.

As we discussed a few months ago, the Office of Management and Budget has proposed some changes to the A-133 audit structure that could potentially impact nonprofit organizations. While the proposed changes could decrease the number of organizations required to undertake an A-133 audit, nonprofit organizations need to be prepared to determine what their specific funders will require in terms of any changes or additional procedures in response to the A-133 audit reforms.

What are the proposed changes?
As of February 2013, the Office of Management and Budget proposed that the annual spending threshold for federal funds that require nonprofit organizations to undergo an A-133 audit be raised from $500,000 to $750,000. Once an organization determines that they must undertake an A-133 audit, major programs over a certain threshold must undergo a compliance audit. . The proposed changes raise this threshold from $300,000 to $500,000.

In addition to these changes, the coverage rules for high risk and low risk audits are also changing. The “coverage” means the program dollars covered in the compliance audit as a major program. The proposal suggests reducing the coverage rules to 40% for high risk audits (down from 50%) and 20% for low risk audits (down from 25%). The Office of Management and Budget has also proposed to streamline the compliance testing areas from fourteen to six. This will help them focus on the areas of greatest risk and put a number of costs and administrative principle guides into one cohesive document.

When will these proposed changes take effect?
These changes are currently still in the proposal form. The comment period has been extended to June 2^nd, meaning the earliest changes would be in effect staring June 1, 2014. This will give nonprofit and government organizations time to prepare for the upcoming changes.

What steps should my nonprofit take to prepare for these upcoming changes?
First of all, if your nonprofit organization has anything to say regarding these proposed changes, take advantage of the extended comment period. Then follow up with your major funders (including state, local and county agencies) to discuss the upcoming changes so there are no surprises. Ask your funders how they think they are going to respond to these changes and how that will affect your organization. Ask funders if they are planning to add additional requirements are part of their oversight. Getting all of the answers you can beforehand will help your organization in the future.

While your nonprofits costs may go down as a result of these changes, those costs may need to be reallocated. If your nonprofit organization is subject to an A-133 audit, the costs can be allocated to the federal portion of your budget. If those audit costs are coming from another source, you will need to talk to that organization and see where the allocation will be allowable. If a particular state is requiring any additions, the audit ought to be paid with state money.

Remember, these proposed changes do not mean that auditors will no longer be looking at your organization. Your organization will still have to comply with federal regulations, and there is always a chance that someone, at some time, will be looking at your organization’s financial accounts.

Stay tuned to our blog for more information about these proposed changes and how your organization can prepare for what is coming.

Nonprofit organizations – like their for-profit counterparts – have experienced many changes in the past few years. From the recession to the slow economic recovery, nonprofits have experienced cuts in funding, loss of programs and resources, and staff reductions. Many nonprofit organizations have worked to streamline their processes and have been forced to rely on their reserves just to survive the economic challenges.

With so many nonprofit organizations struggling to simply maintain, many organizations have become lax in their routine efforts, putting them at great risk for fraud. Nonprofit organizations need to operate smoothly and efficiently, and part of that effectiveness must include having sufficient safeguards so that organizations have the proper internal controls to prevent fraud. Nonprofit management and the Board must be aware of the vulnerabilities in a nonprofit organization’s structure so that the proper measures can be taken to fill those gaps. Nonprofit staff members should also be educated about the threat for fraud and trained on ways to go about preventing fraud (such as whistle blower policies, the appropriate ethical behavior, and conflicts of interest). Regular communication about the topic heightens awareness of fraudulent activity within the organization and even discourages potential perpetrators from acting.

Staff reductions can also put your organization at risk for fraud. When an organization’s staff is reduced, the internal controls that were once sufficient  may be weakened, putting the organization at great risk. In order to safeguard the organization, nonprofits need to re-evaluate their internal controls every time a large-scale change has been made.

Regular check-ups and evaluations of an organization’s processes and documents is critical in fraud prevention. Schedule routine evaluations of your organizations processes and procedures, including the routine reconciliation of asset and liability accounts and their review and approval. Train employees on organizational policies regarding document submissions (such as requirements to submit receipts and disbursements to upper management). Nonprofit organizations should also develop strict credit policies and ensure that employees are adhering to those policies. Supervisors should regularly review employees’ credit card statements, and board members should be responsible for reviewing the charges submitted by nonprofit executives.

Finally, it is important for nonprofit organizations to not forget back-end vulnerabilities that can occur in their technology systems. Organizations need to maintain internal controls in their IT departments and ensure that their computers and network are secure. Software should always be up-to-date, passwords should be changed regularly.  Proper security policies and procedures should be followed by all employees. To further prevent fraud, nonprofit organizations should invest in virus and malware protection to safeguard their most valuable data and information.

Identifying all potential areas of risk for fraud should be part of a nonprofit organization’s risk assessment program. Fraud is not limited to financial loss; it can cause damage to an organization’s public image that could last for years (long after the financial impact has been absolved). Misappropriated assets can be publicly disclosed on the IRS Form 990, causing potential embarrassment to the organization if irregularities are discovered. Upper management needs to fully understand their protection under the organization’s insurance policies so that in the event of fraud, the full extent of financial damage may be covered.

While thinking about fraud may not be appealing, it is a necessary to safeguarding your organization. When there is a breach in your organization’s financials or when fraud is discovered, upper management must take immediate action. Knowing the vulnerabilities of your organization and responding to those vulnerabilities as best as you can will make all the difference. Your organization will be protected from financial loss, and your reputation will be upheld in the eyes of your supporters and contributors.