07/07/2021 | by Karis Call
Charities and nonprofit groups sometimes struggle with accounting. Perhaps there is a knowledge gap, and nobody in the organization has the financial acumen to run a nonprofit. Sometimes there aren’t established financial procedures, and nobody has the expertise to properly document them. But one of the biggest factors is that financial records are seen as secondary to furthering the mission of the organization.
As you start your mission, keep in mind that a charitable organization that accepts money and resources through donations has a responsibility to its donors to justify how those resources are used. People don’t want to see donated money wasted on frivolous purchases or through mismanagement. A successful organization, whether they seek profit or not, needs proper accounting if they are to survive. Here is a quick overview of the absolute accounting basics you will need.
Designate a treasurer or business manager – Most organizations have a dedicated officer to handle financial matters. It’s best if this person is separate from the operations of the group, but due to size, this may not be possible.
Give the treasurer the tools they need – This means a dedicated accounting system, a dedicated bank account, and a way to produce budgets and financial statements. This can be done by hand if there aren’t many transactions, but there are plenty of simple digital tools that organizations can also use.
Separate your funds – Nonprofits receive donations from many different sources, and some of them place restrictions on how their funds should be used. These funds should be tracked separately by recording them in different accounts, or in separate project ledgers. Each use of restricted funds should be separately identified or tracked in separate project ledgers. This is necessary in case the donors need proof you are following their restrictions but it is good business practice even if proof is not required.
Learn how to record in-kind donations – An in-kind donation is the value of services donated to your group. For example, if a hardware store donates inventory items to help you improve your facility, you need to record their gift according to its “fair market value.” This is what the company would charge customers for the donated inventory items. There are slightly more complicated rules for donated services. If you receive donated services give us a quick call and we can talk you through the accounting rules.
Budget your money – A budget is a financial plan over a period of time that matches expected income with expected expenses. This might be hard to estimate with donations and fundraising being a huge variable, but over time you will get a handle on the nature of your organization and how you can expect your finances to play out over the year, which makes budgeting much easier.
This overview has only scratched the surface of the accounting requirements that nonprofits have to address. There are many other important accounting functions that need to be done throughout the year. Your organization has to prepare financial statements, file taxes, and apply for and maintain tax-exempt status.
Fortunately, there are professional accounting firms that are dedicated to nonprofits and understand the challenges they face. If you are just starting a nonprofit organization or if you are newly in charge of one that has been poorly managed for years, give Rubino a call. We will help you make sense of it all.