As an accountant, it’s important to be on the top of your financial game. Understanding healthy nonprofit accounting practices, the latest rules and regulations, and protecting your organization’s financial data is key.
Below we highlight 10 nonprofit accounting best practices you can adopt as you go into the new year.
10 Nonprofit Accounting Best Practices
1. Have Internal Policies and Controls
Fraud is a real concern for nonprofit organizations. In fact, 40% of NPO professionals say they put “some or minor effort into helping prevent fraud”, according to Abila’s 2016 Nonprofit Finance Study.
By creating internal policies and controls, you significantly improve your fraud protection.
Code of Ethics:
Implementing a Code of Ethics is one way to show your donors, board of directors, and employees the values and morals your organization upholds. It also reminds your employees to uphold those morals while they’re working.
2. Assign Different Financial Practices to Different People
Similar to the above, you want to protect your organization from any type of possible fraud. An easy way to do that is to assign different financial tasks to different people. Why do this?
To protect the integrity of your accounting data and help keep your employees ethically honest. If you have an employee regularly completing another employee’s task and you notice discrepancies, then you can begin to troubleshoot the issue and get to the root of the problem.
Nonprofit fraud is still a huge concern for organizations – and this allows you to be proactive in preventing it from happening to you.
3. Use Accounting Software Designed for Nonprofits
Nonprofits have unique accounting challenges. And the best way to solve those challenges is to use nonprofit accounting software.
Nonprofit accounting software can streamline, simplify, and strengthen your budgeting, forecasting, HR management, grant management, and fundraising. The software can also provide internal controls over your financial data, helping you secure and protect your information.
4. Create an Annual Operating Budget
Every organization needs a budget, whether you’re a nonprofit or for-profit. Each year you should create a realistic operating budget that you can adhere to as much as possible.
Changes are going to happen though – so don’t think that once you set it, all is good. Your budget will evolve throughout the year, limiting expenses at certain times and allowing you to spend more at others to help meet certain goals.
It’s also ideal that your budget get approved by your board. This way your board of directors will understand the upcoming initiatives – and will be more likely to approve increases if necessary because they understand how it’s contributing to your organization’s overall success that year.
Read Tips for Nonprofit Budget Review and Maintenance to learn more about nonprofit budgets.
5. Have Realistic Operating Expenses
Not only should you create an annual operating budget, but you should also have realistic expense expectations. Your donors want more of their hard-earned money to go towards the mission, but you also have to pay the lights, pay your employees, and put money back into marketing to generate more donations.
Don’t cut operating expenses too thin just to meet the wants and needs of your donors. In order to effectively support your mission, you have to take care of the items needed to do business.
6. Understand Nonprofit Tax and Accounting Regulations
Nonprofit accounting is a completely different animal than regular for-profit accounting. Two things to be aware of are GAAP and IRS requirements.
GAAP: The Generally Accepted Accounting Principles (GAAP) are guidelines that all accounting professionals must follow. They cover both for profit and nonprofit tax rules. It’s imperative that accountants and financial professionals understand the current GAAP rules and any changes that happen throughout the years.
IRS Requirements: When filing and claiming your tax exempt status, you definitely need to be aware of nonprofit IRS requirements.
7. Create a Multi-Year Plan that Supports Your Strategic Plan
Where will your nonprofit be in 3 years? 5 years?
By creating a multi-year financial plan you can support your nonprofit’s growth. If you want to raise a certain amount of money by year 2020, you’ll probably need to hire some new employees, look at upgrading your fundraising/accounting software, and create some amazing marketing campaigns. By planning for it, you’re able to support that growth and get buy-in from your board ahead of time.
8. Develop Strong Relationships with Other Departments
While you might not think of communicating as a necessary accounting function, it is actually one of the most important ones. Communicating with other departments about policies, procedures, grants, etc. should be handled regularly to keep everyone on the same page.
How can you develop healthy relationships with your fellow departments?
- Schedule regular meetings, once a week or biweekly, to keep them updated on policy, procedure, etc.
- Hold trainings on GAAP or other accounting principles so they know why you’re holding firm on certain things
- Reconcile difficult records together – this can help you talk through the different reasons a department did a particular item and explain how it affects accounting overall
9. Your Board is 100% Independent of Your Organization
Your Board of Directors is a critical component to the success or your organization. That’s why it’s important that everyone on the board is 100% independent of your nonprofit.
By independent we mean that they are not employed by the nonprofit or have family members who work for the nonprofit. This is to ensure that they can vote in the organizations best interest and not base their decision on other internal factors.
10. Have Realistic Fundraising Plans
When you’re planning your fundraising strategy, it can be really easy to get wrapped up in the fun and think that you’ll be able to raise all the money in the world for your cause. I mean, your cause is the best, right? Who wouldn’t want to donate and support your mission?
However, even the best laid plans can go wrong. And the same can happen to your amazing fundraising strategy.
To prevent this, set realistic fundraising goals and plans. Use historical data to set your upcoming goals and develop a plan with these figures in mind.
If you’re planning on using new tools or fundraising techniques, consider lowering your goal a bit until you feel comfortable that your new tactic will work.
And don’t be afraid to change your plans or goals if you find that you won’t be able to achieve them. There’s nothing wrong with adjusting plans to reflect a new strategy.