At its core, a nonprofit organization is still a business.
These businesses must follow a unique set of rules and guidelines. Instead of prioritizing sales, nonprofits must demonstrate an appropriate use of assets and resources for charitable purposes. All of this happens in the bookkeeping records.
Most nonprofit leaders spend most of their time serving a mission. But there needs to be an equal focus on accurate accounting and bookkeeping.
I’ve spent decades specializing in nonprofit bookkeeping. My experience inspired me to share some basic bookkeeping best practices for nonprofit organizations.
1. Follow Standardized Accounting Principles
This might sound obvious, but you’d be surprised how many organizations do not adhere to the latest accounting standards in the industry.
You should stay up to date with FASB (Financial Accounting Standards Board) and AICPA (American Institute of Certified Public Accountants).
Both are reliable organizations where you can find the latest bookkeeping principles. This applies to nonprofit and for-profit organizations.
There are ten principles of bookkeeping, known as GAAP (generally accepted accounting principles). These rules ensure that all businesses use the same methodology for financial reporting. Even nonprofit organizations must follow these guidelines.
2. Track Grants and In-Kind Contributions
Most nonprofits know that they’re supposed to keep track of monetary donations. While I never assume anything, I’m hoping that you’re already doing this.
But lots of nonprofits forget to track other types of contributions.
Your charity might receive trades for goods or services. Or maybe you have donors that buy items on behalf of your organization. It’s crucial that you account for all in-kind or non-cash contributions as well. This is especially important if your nonprofit would have otherwise bought those goods or services in question.
Sometimes foundations or businesses will match any contribution made by employees with a grant. Nonprofits must also track these types of donations so the funds can be matched.
3. Implement Internal Policies and Controls
Every business, including nonprofits, must protect themselves from fraud. While you’d obviously like to trust everyone that volunteers or works for your organization, you cannot assume that you’re immune from these types of problems.
Establishing internal bookkeeping controls and policies is the first step to reducing your risk of fraud.
You should also create a code of ethics. These guidelines are made to showcase the morals and values of your nonprofit. It’s a reminder to your donors, employees, and board of directors that the code of ethics must always be upheld while they’re working.
4. Use Nonprofit Accounting Software
Accounting software can make your life much easier when it comes to managing your books.
But not all accounting software is created equally. There are specific solutions on the market today that are designed for nonprofit bookkeeping.
Look for software that helps you track donations, automate recurring tithes, manage grants, manage donors, and prepare financial statements. Some software will even integrate with third-party donation apps like Fundly or DonorPerfect.
These are some of the best nonprofit bookkeeping solutions to consider:
- Nonprofit Plus
- Sage Intacct
You can even get discounted accounting software for your nonprofit if you use certain software on this list.
5. Assign Financial Responsibilities to Different People
This relates back to one of our earlier best practices about establishing internal controls. One of the most important aspects of that process is role delegation, which is why I’m mentioning it separately.
The key of delegating responsibilities is to limit the power that one specific individual has when it comes to handling finances. You’ll want to establish a system that reduces the chances of fraud.
All tasks should be divided in a way that minimizes the possibility for volunteers and employees to steal or commit a fraudulent act.
For example, whoever is responsible for collecting donations shouldn’t be the same person updating your financial statements. Performing internal audits on a regular basis is an excellent way to keep everything in-check as well.
6. Create an Operating Budget
Every business needs a budget. Nonprofits are no exception to this rule.
It’s important to create an annual operating budget that you can stick to throughout the year. This operating budget needs to be realistic. It should be based on a combination of your history, upcoming plans, and other factors as well.
Your operating budget is always changing. So, don’t just create it once and think you’re all set for the rest of the year. At a minimum, it should be reviewed on a quarterly basis.
I’d recommend getting your operating budget approved by the board of directors. This ensures that everyone is on the same page with upcoming plans and activities. It’s more likely that the board will approve potential budget increases if they understand the big picture.
7. Understand Tax Regulations for Nonprofits
As I said before, all accounting professionals must follow GAAP (generally accepted accounting principles). But you still need to understand the different tax regulations for your nonprofit.
The IRS has specific filing requirements and protocols to claim your exemption status.
It’s important that you’re using a bookkeeper and accountant who have experience preparing financial statements for nonprofit organizations. If you do something incorrectly, it could have a damaging effect on your organization. You might even be subject to IRS penalties.
8. Use an Experienced Nonprofit Bookkeeper
If you’re managing the books on your own or using a bookkeeper who doesn’t have experience working with nonprofit organizations, it could lead to significant problems in the short and long-term.
I’ll give you an extreme analogy to illustrate my point.
If you’re going through a divorce, you wouldn’t want a criminal defense attorney to represent you; you’d find a divorce lawyer. Even though both people are lawyers, their practices are very different.
The same goes for bookkeeping. Just because a bookkeeper has experience working at a small business, it doesn’t mean they have the knowledge required to accurately manage the books of a nonprofit.
Instead, you can use an outsourced bookkeeping service that specializes in nonprofits. These firms have the experience you need for accurate nonprofit bookkeeping.
Anyone running a nonprofit organization has more important things on their mind than bookkeeping. But with that said, you can’t neglect your accounting department.
Make sure you follow these best practices for nonprofit bookkeeping.
For most of you, it’s in your best interest to find an outsourced bookkeeping service that specializes in nonprofits. This will allow you to focus on the mission of your nonprofit, without having to worry about managing the books.