Navigating unique landscape of not-for-profit accounting
Posted by: V.Weber
Stepping into the world of mission driven organizations presents some challenges as well as unique opportunities when it comes to financial accounting and decision making. As a fractional CFO serving not-for-profit industry, I have a deep insight into the intricacies of not-for-profit accounting that are very distinct to the industry. In this article, we will delve into the specific areas of not-for-profit accounting an explore how financial leaders can successfully navigate these challenging ensuring organizational sustainability and health of the mission-driven establishments.
1. Fund Accounting:
One of the primary unique aspects of not-for-profit accounting is fund accounting. Fund accounting is an accounting method used to segregate accounting for financial resources within a nonprofit organization. This method segregates financial resources into separate “funds” designated for specific purposes. As such, the funds are typically broken out into revenue with donor restrictions and revenue without donor restrictions.
2. Types of Funds:
As briefly mentioned in #1 above, the funds are broken out into unrestricted, restricted and endowment funds. The unrestricted funds are exactly what the name implies – donations that are not restricted to any specific purpose and can be spent on any organizational needs like various program, administrative and management expenses as well as other organizational expenses. Restricted funds, as the name implies, contain some sort of donor restrictions, assessing certain limitations as to where the moneys may be spent. For example, a large individual donation may be restricted to only mental health healing programs. This way, the money can not be spent on any other programs outside of this specific requirement. Many of the federal, state and local grants very often are considered to be restricted revenue for nonprofits depending on the grant agreement language used and the purposes for which the money was provided. And finally, endowment funds, this type of donation typically occurs when a donor contributes a substantial amount of funds that are then invested to generate income with principal being restricted. Then, specific conditions are typically indicated within the endowment agreement on how the investment proceeds are to be spent. The importance of correct accounting and tracking is paramount to any nonprofit organization, as incorrect classification can eventually lead to loss of funding, audit findings and eventually loss of not-for-profit exempt status with the Internal Revenue Service (IRS).
3. Financial Reporting:
Financial reporting has numerous very specific to not-for-profit organizations requirements. One of them is statement of functional expenses. This is a schedule that is typically included within the financial report splitting out all the expenditures that a not-for-profit organization incurred during the year into separate “buckets” by specific program (program specific expenditures) and supporting expenditures like management expenditures and development. Example of program specific expenditures could be all the expenditures that were incurred in running you mental health counseling program, or foster parent program etc. Completing this schedule correctly ensuring accurate classification is very important to nonprofit organization’s financial health. In addition, it provides valuable information about each major program that helps in decision making as well as adds transparency and ensures accountability.
4. Compliance and Accountability:
Another important criteria of not-for-profit accounting is compliance and accountability – this entails all the internal tools and metrics that help tracking all restrictions, legal requirements as well as grant imposed requirements and reporting deadlines. For example, in order to be in compliance with grant agreement requirements it is very important to establish sound policies and procedures over grant management. Some of the procedures may include as specific documented procedures over document flow. Step by step instruction for accounting and bookkeeping staff for internal documentation of flow of resources (both financial and human). When I talk about human resources document tracking I am referring to keeping track of time spent on a specific program or project. Very often government granting funds to nonprofits want to see how staff is spending their time managing the grant program to ensure effective allocation of resources. This is only one of the example, please stay tuned for a new article about grant compliance tips and tricks for not-for-profits.
5. Budgeting and Planning:
Fund accounting facilitates for more precise budgeting process that helps not-for-profit organizations to allocate resources for specific program or need. This allows for strategic planning and helps nonprofit organization to align financial resources to its mission objectives. Establishing a sound budget is the first step in strategic planning of a healthy nonprofit organization. From identifying goals and key revenue sources, to income projections and expense evaluation: establishing all these metrics upfront is paramount for the success of the mission. Appropriate planning and monitoring is throughout the year can be achieved by monthly accounting and analysis. Performing budget to actual analysis is one of the best ways to assess if the organization is still on track to achieve its overall mission. Very often, making certain adjustments during the year is necessary to achieve the overall mission.
In conclusion, fund accounting provides a systematic way for achieving its overall mission. As such, having a fund accounting expert on your side that specializes in nonprofit accounting will help setting internal policies and procedures for establishing sound budgeting plans to month-to-month progress monitoring to overall annual compliance. Having a transparent process over nonprofit accounting is of paramount importance for any nonprofit organization.