The Best Strategies for Nonprofit Accounting and Financial Management
Charities and nonprofits should be able to operate without worrying about their financial situation. Here are some of the best strategies for nonprofit accounting. Get the right tools for the job.
You’ll want to start gathering resources and tools so your organization can operate effectively. Your nonprofit organization is a living entity, so separate it from all other activities and interests. Open up a dedicated bank account that can house all the inflows and outflows of the business.
But that’s just the first step. You will also need an accounting system that can record all the donations, create budgets, track net assets, and produce financial statements. There are certain statements that nonprofit organizations refer to:
Balance sheet (or statement of financial position)
- Income statement
- Statement of cash flows
- Statement of functional expenses
- Statement of activities
Find a dedicated nonprofit accounting software that you feel comfortable with and can produce the necessary information you need to operate the organization.
Maintain accurate records
Nonprofits have inflows and outflows like a typical business, and the organization must keep a documented trail of their finances to maintain integrity.
To manage expenses, utilizing purchase orders can help keep the organization’s hands clean of any questionable transaction. A purchase order is a document sent from the purchasers to the vendor offering the product or service.
Purchase orders are an ideal asset for creating an understanding of what was purchased, the amount, and from whom.
The nonprofit accounting software chosen to use will have tools available for tracking donations as they come from different sources. Fundraising events, membership dues, one-time contributions, and grant funding may be available depending on the organization.
But what happens if an individual or an entity wants to contribute to the organization beyond cash? These types of donations take the form of in-kind donations, and keeping track of in-kind donations is a different approach.
In-kind donations are valued by the fair market value standard, which the CRA defines as “the highest price, expressed in dollars, that property would bring in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.”
Collecting receipts of would-be purchases helps the organization keep an accountable record of in-kind donations.
Reconcile bank statements
When you have a bank account set up and a system for keeping records in place, the next step is to develop a practice that ensures the information in both areas is consistent. A process of bank reconciliation can do just that.
When reconciling, compare the information in the bank statement to the information you have on the books for consistency. This process helps detect any misinformation, errors in banking and accounting, or potential fraud.
Install a code of ethics
Unfortunately, fraud exists no matter what measures are put in place, and nonprofit organizations are vulnerable to it as much as for-profit businesses. Creating policies around fraud can mitigate the potential impact it has on the organization.
Installing a Code of Ethics shows potential donors, the CRA, the board of directors, employees, and volunteers what the organization stands for. It may also serve as a great reminder of why the organization exists and the impact it has on the community.
Separate your Board from your organization
A board of directors is crucial when determining future actions, plans, and expansions. They are a vital part of creating success for your organization by way of independent and objective reasoning and decision-making.
That’s why it’s essential to create complete independence from the board members. It creates conflict when members of the board have personal relations with the actions of the organizations.
If they have ties to employees within the organization or are benefiting from the actions of it, then it may be likely that the recommendations they make are compromised.
Create clear and realistic budgets and plans
All organizations must understand what their spending capabilities are, whether it is for short-term or long-term forecasting. It’s best to have the organization’s leaders and board of directors create a multi-year plan based on future goals.
The plan should highlight what expenses the organization is expected to make to achieve those goals, set forth a budget to plan for the costs, and set the standard for fundraising needs.
If the fundraising needs are vastly different from what the organization has been capable of collecting to that point, it may be necessary to review its plans.
Adopt fund accounting
Sometimes, there are rules put in place that control how donations may be used. In this instance, fund accounting can make sense of donor restrictions and differentiate the intention of contributions instead of pooling all the gifts into one lump sum.
Depending on the organization, it may look more or less expansive. Universities collect money through an assortment of sources, and there are strict regulations around how these contributions can be used.
Smaller organizations such as youth programs may need to divide specific donations between general operating expenses and campership funding (or money that is used as a scholarship to help kids attend summer camp).
In both instances, learning and using fund accounting can help maintain immaculate records when reconciling accounts.
Partner with a nonprofit-minded accounting professional
Self-servicing your accounting and bookkeeping can quickly overwhelm anyone. For ultimate accountability, partnering with a group of accountants and bookkeepers trained for not-for-profit entities can save your organization not only time and money but also headaches.
The financial landscape is constantly changing. Navigating tax-exempt status, CRA regulations, and how the AcSB handles generally accepted accounting principles requires expert insight.
At E&E Ltd., we believe that you shouldn’t have to constantly stress about your financial situation. That’s why we help our clients maintain immaculate financials. If you want to learn how we can help your nonprofit organization, contact us.