Many nonprofits fail to realize that staying afloat in today’s economy is more than fundraising and marketing; it’s about money management. The biggest mistake organizations make is not keeping track of their money. If you do not know where your money is, how much you have or how it is being used, you do not have financial accountability.
Accounting gives a nonprofit an essential tool it needs to run the business, plan for the future, and provide donors and investors with an inside look at how the tax-exempt funds are being spent and distributed. Now, more than ever, investors want to know that donated funds are being spent in a realistic and conservative manner.
Define who is responsible for what
Good nonprofit accounting requires that an organization know where their funds are going at all times. Nonprofit law states that the board is ultimately responsible for the organization and everything it does, including the accounting and reporting of funds. While the board may handle the initial start-up and spell out the financial responsibilities, the task of accounting is most likely delegated to the organization’s staff or CPA. It is the job of this designated person or group to keep the board updated on the organization’s financial position through reports produced by the staff.
The following reports should be provided to the board of every nonprofit organization for review:
- Cash flow analysis reports
- Balance sheet
- Statement of revenues and expenses, known as “P&L” or “profit-and-loss statement” in the for-profit world, and as the “statement of activities” in the nonprofit world.
Software and Training
Once the board and staff understand their responsibilities in regards to financial reporting, it is important to provide them with the training and systems they need to perform their responsibilities. Software should be updated regularly and continuing training should be provided. Nonprofits should include funding for training within their budget so financial managers make better decisions by staying current with laws and trends in nonprofit accounting.
The software system that a nonprofit chooses is critical to the success of the organization. A smaller organization should work with their accountant to select the software system it needs, while a larger organization should form a committee to decide upon the software system. The organization should make a list of its needs, research various systems and talk to vendors in order to select the right software.
The New Form 990
With the changes in Form 990, accounting is critical in order to provide the financial information nonprofits must report to the IRS. The new Form 990 requires much more detailed information about organizational finances, management and governance. These changes are designed to improve transparency and promote accountability. Since nonprofits are entrusted with funds from various donors and government grants, all of their financial information must be accounted for, accurate and accessible. The new Form 990 requires that the information can be trusted, that issues have been investigated, and the board is informed about what is going on and has enough information to make an informed decision.
Click here for information about nonprofit financial reporting.