I absolutely love my non-profit clients. They play a crucial role in addressing the many needs of their communities. Managing the finances of non-profits comes with its own set of unique challenges.
Revenue Recognition:
One of the primary challenges for non-profits is the diverse nature of their revenue streams. Contributions, grants, sponsorships, and in-kind donations may all be part of the financial landscape. Unlike for-profit organizations, non-profits typically use fund accounting to track resources designated for specific purposes. This method requires meticulous record-keeping to ensure that funds are allocated appropriately and that financial statements accurately reflect the organization's financial health.
Managing grants involves tracking expenses, ensuring compliance with grant terms, and providing accurate and timely reporting to grantors. Proper grant accounting is crucial to maintaining positive relationships with funders and securing future support. If you have individual donor contributions, you’ll need to keep all your donor information up to date so that you can provide them a year-end statement. Non-profit organizations must separate donor restricted funds from unrestricted funds, and only use those funds for the purpose and time allotted.
One of the best things you can do as a non-profit manager is set up your accounting system correctly to track all these different funding sources. If you are a QuickBooks user, be sure to upgrade your software subscription to allow the use of classes to track your revenue sources. You can even use the projects feature to track special projects that you want to accumulate expenses and donations.
Compliance with Regulations:
Non-profit organizations are subject to various regulations and compliance requirements, varying based on their size, purpose, and geographical location. Among those are tax regulations, accounting standards, and reporting requirements specific to this complicated sector.
Make sure your organization is set up as a non-profit organization in your accounting software. This will ensure the proper formats of the financial statements and tax status for payroll, sales, and other taxes. If you have a CPA preparing your 990, be sure they have access to your accounting system, so that they can properly prepare your tax forms.
Be sure to understand the type of organization you’re established as under IRS regulations, and any restrictions over what you can and cannot do. If you are a 501c4 organization that takes part in lobbying efforts, be sure to track all costs associated with lobbying and any restrictions or caps related to those efforts.
Expense Management
Effectively managing expenses is crucial for non-profits. Balancing program costs, administrative expenses, and fundraising costs requires careful consideration. Non-profits should establish robust internal controls to monitor and allocate expenses appropriately, ensuring that donor funds are used efficiently to advance the organization's mission.
Expense reimbursements to employees or volunteers for out of pocket costs should be well documented and approved before cash is administered. Your general ledger expense accounts should be set up to track the program costs vs. administrative costs. Fundraising costs should also be separated on your statement of activities.
Cash Flow Management:
Cash flow management is also very challenging for non-profit organizations. Relying on grants and donations that come in sporadically, and require significant efforts to fundraise, can leave a hole in the budget during the slow giving seasons.
Consider setting aside a small amount of your revenue (between 1% and 3%) to cover those shortfalls that tend to happen seasonally or unexpectedly. You may also consider adjusting your fiscal year to better match up with your typical cash flow cycles. For instance, many municipal grants run on a July to June cycle, so it may be wise to set your fiscal year accordingly. You may also need to hold back payment of expenses until you receive the funds pledged for those items.
Volunteer and In-Kind Contributions:
Non-profits often receive non-monetary contributions in the form of volunteer time and in-kind donations. When recording these contributions, you will need to record revenue and an expenditure for the value of the item. Valuing and accounting for these contributions can be challenging but is crucial for presenting a comprehensive financial picture, and you will need clear policies and procedures in place ahead of time to do so.
Stewardship and Accountability:
Maintaining the trust and confidence of donors is paramount for non-profits. Proper accounting practices can enhance transparency, providing donors with a clear understanding of how their contributions are utilized.
Find unique ways of sending your donors the annual report, showing them how their contributions were utilized to help support your mission. For an extra layer of accountability, consider an annual audit of your financial statements. In fact, some grant programs require it!
These are just some of the daily challenges facing non-profit organizations. I am often amazed at what non-profit organizations can do with limited resources. If you are a manager of a non-profit organization, keep doing what you do for your community and be sure to contact us if you have any questions along the way!
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