The same concept applies to expenses.
You want, and actually need, to know exactly what you’re spending your money on. Past and present patterns help you plan for the future!
Can you afford to hire someone now or do you need to wait 3 months?
Can you afford to rent that space next month based on cash flow projections?
What about that old horrible computer, can you afford to replace it by year end?
Most importantly, are you spending wisely so that you can make the most impact on the most lives?
Using your Accounting System Smartly
The categories and sub-categories in your Accounting system should give you fast and accurate information to make important decisions without jeopardizing your financial stability.
As long as they’re set up right and properly maintained, they’re super helpful.
If not? Well, your tool won’t exactly do its job.
If you have multiple people entering data and they’re categorizing stuff all willy-nilly, that’s where the mess starts. You’ll wind up with duplicate categories, mislabeled expenses, and more — none of which is fun to clean up. And if you have to hire someone to clean up your mess, that can get really costly.
So, set it up right, and use it right from the beginning.
Then, you can use reports from your Accounting software to manage your nonprofit and see things you might not notice otherwise.
Maybe you’re spending a little too much money on office supplies and not enough on your programs. A simple report with a pie chart can easily show you that.
Maybe you’re spending significantly more this year compared to last year without a significant increase in the number of program participants. A report showing comparisons can help you see this increase.
The only way to learn and to grow your organization is to understand where you’re spending, where you need more, and where you need to cut back.
Your Accounting system should be your # 1 tool in managing your nonprofit’s finances and keeping it financially healthy.
Applying for Financial Help
If you are in a position to apply for a grant, apply for a business credit card, or even apply for a loan or line of credit, you will NEED to have comprehensive data to present.
Lenders and grantors want to see a snapshot of your finances to get a sense of how well your nonprofit is doing.
They will want to know that you’ll be responsible with the funds they offer you and that you won’t be closed in, say, 6 months.
And more than anything, they’ll want to know that you truly need the funds you’re asking for.
They’ll discern all that from the financial statements and reports you provide them.
When your Accounting software is set up right, this should be an easy report or two.
Filling Out Form 990 or Other Government Reports
Having an organized Accounting system can make your tax filing a breeze.
You no longer have to dread the IRS Form 990 because with just a few clicks, you’ll generate all the reports you need.
Print, sign, send. Done.
Who Should Do Your Bookkeeping
One really important piece of your nonprofit accounting system is identifying who will do the day-to-day data entry and who will manage the whole system.
When your nonprofit is new, it’s tempting to use the cousin, friend, neighbor, or in-law that does “bookkeeping.”
And many of those people are willing to volunteer their time to help you out, which saves money!
While this may seem like an ideal situation, proceed with caution.
You need a qualified bookkeeper who understands the software system you’ve chosen, who understands the basic principles of nonprofit accounting, and who can keep your system current — meaning, they have the time to spend keeping everything entered.
Volunteers can be awesome, but with no skin in the game, they can get behind or take shortcuts just to get the job done (I’ve seen it happen).
It might be better, since your Accounting is critically important, to spend the money on a paid contractor to tend to your books.
As a nonprofit organization, full transparency is required of you and it’s crucial to have a clean, well-kept set of books.
On top of the day-to-day bookkeeping needs, you should also work with a Certified Professional Accountant (CPA) to review your financials and do your tax filings (a separate person than the one doing your bookkeeping). There are a few reasons for this.
- A professional CPA will take full responsibility if anything in your filings is inaccurate.
- It’s always a good idea to have more than one set of eyes on your books and your finances.
- CPAs keep up-to-date on filing requirements, deadlines, and tax changes that may affect you.
- If you’re ever subjected to an audit, the CPA will know how to answer any questions or inquiries that arise.
Set It Up Right From the Beginning
Trust me, it’s a PAIN to have to clean up a Quickbooks file!
So set up your Chart of Accounts right from the get-go.
That means you need to think about the different ways you’ll both generate and spend money.
And customize your accounts so they make sense for YOUR nonprofit.
One size does NOT fit all here.
We had a client that worked with an accountant to set up their chart of accounts and it was clearly copied from some standardized list.
The list contained several accounts that were business-oriented that had nothing to do with the nonprofit or its operation.
There were also lots of duplications of accounts that made it difficult to get accurate information from the system, requiring hours of manual data manipulation to get what was needed.
The worst part was, at the end of the day, we still didn’t trust that the numbers we had crunched were accurate because of how they were entered initially.
So, take the time to plan out what you’ll need from your system and set it up right from the beginning so YOU don’t have to clean up a mess later!
Sharing Isn’t Always Caring
Your nonprofit should have its own bank account without exceptions.
That means you should never mix or commingle yours or anyone’s personal funds with the nonprofit’s funds.
Not only does this create a very gray area in terms of finances, it’s also illegal in some states.
The same rule applies to credit cards and loans.
As a general guide, keep everything that belongs to the nonprofit completely separate from things that belong to you — money, equipment, tools, credit cards, and anything else you can think of.
Handling Restricted Funds Correctly
Getting donations is one thing. Handling them correctly is another.
And depending on how you ask and the donor’s intent in giving, you may have restricted funds on your hands that need to be carefully managed to prevent your nonprofit from getting in trouble with the donor or the government.
Any donation given with the intent that it be used for something specific needs to be carefully recorded in your Accounting software so you can be sure the money is spent appropriately.
It’s important to track, manage, and spend restricted funds carefully and purposefully so you can report back to the donor exactly what happened to their donation.
Here in the U.S., the IRS is serious about restricted funds. Improper use can result in severe penalties or even loss of your tax exempt status. Boards can be sued by donors for misuse of such funds.
And maybe worst of all, your reputation and future fundraising potential can be destroyed by mishandling donations.
So, take this one seriously. Figure out how to track restricted funds in your system and do it.
Every month, you and your Board should be reviewing the financials from the previous month to see how the nonprofit did and to decide if there are any adjustments you need to make to spending or fundraising for the coming months.
Specifically, you should be monitoring:
- Organizational profit/loss to see if you stuck to your budget or had a surplus or deficit for the month.
- Month vs Year-To-Date numbers to see if your monthly income and expenses were on track and if you’re on track year-to-date.
- Cash in the bank to see if you have enough money to pay upcoming bills.
- Debt to see where you stand with anything you owe.
- Next 90 days to see what’s coming up and if you’re ready financially.
Depending on your situation, there may be other things that you need to monitor each month, too.
If you don’t monitor your nonprofit’s financial health each month, it will be easy for things to get real bad real fast. Then, you’ll find yourself facing some very difficult decisions about which programs to scale back and who gets laid off first.
Annual Operating Budget
One HUGE part of any good nonprofit accounting system is a detailed annual budget that’s written and tracked.
Let’s be honest here — without a budget, you’re operating on hope that things will work out.
So take the time to create an operating budget for your nonprofit.
Even if you’re busy and don’t have time. Even if you don’t have a lot of money coming in. Even if you’re not a numbers person.
Take the time to create an operating budget so you can better manage your growing nonprofit.
Bonus points if you enter it into your Accounting software and let the system track your progress for you!
We have a saying that if it’s not in writing, it’s not real.
That means that any process that isn’t documented isn’t a real process.
It may seem silly, especially if your nonprofit is brand new or tiny, to write down how you do things.
But you won’t be a new or tiny nonprofit forever.
And it’s much easier to train new hires or new volunteers if there’s a documented system in place.
So, whatever decisions you make about how you’ll do things, write them down somewhere so that it becomes part of your nonprofit’s operation.
Count Your Eggs Before They Hatch
Developing and organizing a nonprofit accounting system well before you think you need it is one time when we recommend putting the cart before the horse.
Any successful nonprofit starts with planning, planning, planning, and more planning.
And while you may not have gotten into this to deal with numbers and manage money, it’s part of the job.
Taking care of this task now will actually free up your time so that you can focus on what you WANT to do: Change Lives.