Nonprofits exist to make positive improvements in their community (or however far their impact reaches). They meet needs and raise awareness of issues in our world in ways that lone individuals usually cannot. And they are an incredibly valuable part of our society.
Unlike traditional businesses, whose primary goal is to generate maximum profit for their owners and shareholders, nonprofits manage their money with their mission in mind. As a result, accounting for nonprofits is different in many ways from standard business accounting.
To help you navigate it all…welcome to “Accounting for Nonprofits: A Complete Guide.”
Accounting For Nonprofits: A Complete Guide
While there is no way we can cover every possible accounting situation your nonprofit may face (because every organization is unique), this guide will provide you with the basics you need to handle your nonprofit’s accounting successfully.
Ultimately, the wisest way to ensure the good stewardship of your organization’s money is to partner with a trusted CPA firm that has plenty of experience with accounting for nonprofits. However, as the executive director or financial manager of a nonprofit, you still need to be familiar with the terms and concepts that we will cover in this post since you are the one your donors and supporters have trusted with their hard-earned money.
Nonprofit Finance
Speaking of funds, let’s start there. Without them, you wouldn’t have much of a nonprofit…at least not for very long. And since we assume you hope to be around for quite a while to make a significant impact in your community for your chosen cause, we need to explore the different ways you can finance your nonprofit.
Accounting for nonprofits isn’t simple. Because you are stewarding other people’s money, you are held to much higher standards of accuracy and accountability.
There are 3 basic types of nonprofits, and they are distinguished by the way they are funded.
- Charities – These organizations receive money from donors who choose to support their particular cause. They also raise funds through grants, fundraisers, and membership dues. Some charities additionally make money by selling items to the public for profit. (Learn more about that in another post we did: “Unrelated Business Income 101”.)
- Private Foundations – A foundation is a nonprofit that exists to help other nonprofits by funding them with private money that an individual, family, or company has invested. They don’t do any hands-on charity work themselves, but instead issue grants to several organizations they choose to support.
- Private Operating Foundations – Imagine this type of nonprofit as a blend of the first two. They are charities that anyone can donate money to, but they then use that money to give grants to other nonprofits.
Nonprofits, regardless of which type they fall into, handle their accounting differently than standard businesses. Regular accounting practice for business uses a single fund for all expenses. In the nonprofit world, we utilize what is known as “fund accounting.”
With “fund accounting”, money is distributed into one of two categories: unrestricted or restricted. “Unrestricted” money can be used however the organization sees fit within its overall mission. Money that is “restricted” is given to support specific programs or initiatives within the organization and can only be used for that purpose.
In standard business accounting, all expenses are basically “unrestricted”; the business can spend their money however they want to. Customers have exchanged dollars for a product or service, and rarely care what the business does with their money after that.
Nonprofits, however, receive money from people who are interested in how that money will be spent. They give because they believe in the stated mission of the organization on some level. As a result, they often donate with specific instructions which the nonprofit is expected to honor. The benefit to the giver is that they know exactly how their money is being used, and the benefit to the charity is that people are much more likely to give in the first place because of restricted fund accounting.
For example, if a donor specifically gives money to their church to help pay for the student ministry’s summer camp, the church cannot use it instead to restock the food pantry. That money is restricted. If, however, a donor gives money to that church without any instructions, the church is free to use it to help pay for any of its expenses because that donation is unrestricted.
Nonprofit Program Revenue
Revenue for a nonprofit refers to all of the money it generates, whether through direct donations, membership fees, grants, or sales of products.
(Wondering if your organization is allowed to raise money by selling things? Be sure to read “Can My Nonprofit Charge For Services Or Products?” by Charitable Allies.)
Financial Reports For A Nonprofit Organization
Nonprofit organizations need to be able to generate 4 financial statements:
- Income Statement (“Statement of Activities”) – a record of all revenue and expenses during a given period
- Statement of Functional Expenses – a more detailed breakdown of how money is being spent by the organization
- Cash Flow Statement – much like what any business would use
- Balance Sheet (“Statement of Financial Position”) – where “Net Assets”, broken down into unrestricted/restricted categories, are found
We did a deeper dive into these reports in an earlier post titled “Unraveling Nonprofit Financial Statements To Help Your Organization Do Even More Good.”
Nonprofit Investment Policy
Many nonprofits operate on a shoestring budget and depend on donations to simply survive month-to-month. However, for those who grow to the point where they not only have a healthy operational budget (and even a rainy day fund…a.k.a. “operating reserve”…set aside), they can begin to make longer-term plans and invest some money in order to grow funds that are not going to be used for a while.
This is a financial step that requires a lot of oversight because of how quickly things can go wrong if money is mismanaged or invested poorly. That’s why nonprofits need to have a clear investment policy in place.
A nonprofit investment policy statement is a document that defines the purpose of the organization’s investments, the duties of all involved parties (board, trustees, staff), goals and objectives, how assets will be allocated, and the process for spending the funds in the future.
Read more: Russell Investment Research PDF on the elements of a clearly defined IPS for non-profits.
Nonprofit Bookkeeping Services Make It Easier
Accounting for nonprofits isn’t simple. Because you are stewarding other people’s money, you are held to much higher standards of accuracy and accountability. It can quickly get overwhelming to manage all of the reports and information that you need to keep up with.
That’s where a good CPA with lots of experience helping nonprofits can make all the difference. The bookkeeping services and expert advice they provide can help you navigate your finances easily so you can get back to your mission of making the world a better place.To learn more about the topics we’ve introduced here and how our team of nonprofit accounting pros can help, schedule a call today.
