Nonprofit Bookkeeping: What to Look For
If you’re starting a nonprofit organization one person you’ll need in your group of co-founders is someone who can handle the financial aspects of your organization. Now, keeping track of expenses and income sources is almost not certainly what brought you together. You came together to feed the puppies, or shelter the hungry, or cure that disease, or whatever. Nobody starts a nonprofit to keep track of money. But it’s needed, and figuring out who can do it can be frustrating, so many founders look around at their initial group and pick whoever can balance a checkbook to handle all the money matters.
Bad idea!
Try finding a volunteer who actually understands the issues involved. Ideally, you have a volunteer CPA who is well-versed in the principles of Nonprofit Accounting. (In your dreams!) A more realistic scenario is that there is someone who’s good at balancing their checkbook and also took an accounting class at some point and maybe has a slightly unnatural interest in this sort of thing. (There are a few of us out there.) In this kind of situation you could be presented with a particular problem.
How do you know your bookkeeper knows what they need to know when you don’t know what that is? Click To TweetI asked my colleague, Erin Zollenkopf about this. Erin works at a local company that specializes in nonprofit bookkeeping, and she knows her stuff. She immediately brought up a slightly awkward memory.
Back when I had learned a lot about accounting but not enough about nonprofit accounting principles, I applied for a job and was given this test. The truth is I didn’t distinguish myself, mostly because I lacked some of the terminology. That led me to study up on the principles of nonprofit accounting, and I did get better (but not in time to land that job). But I did learn about that test, and that’s a good thing. I suggest you ask any bookkeeping or accounting volunteer to take that same test. If they pass the test, you’re solid. If they know accounting but fall short on the test, that may mean you can take them on the condition they bone up a little about nonprofit accounting concepts. Otherwise, keep looking.
If they do know accounting but are weak in the nonprofit-specific concepts, there are only a few crucial things they’ll need to get into the groove of things.
- The terminology is different. Frankly this is the least important difference, because a lot of software won’t use the nonprofit terms anyway, but nonprofit accountants do call certain reports by different names, so it’s good to know what those differences are.
- It’s important to track restricted funds. In nonprofit accounting donors sometimes attach strings to their donations and this is rare in for-profit accounting, so for-profit accountants may be unfamiliar with this concept.
- They need to know about functional accounting as it applies to nonprofit organizations. They will need to track program expenses separate from fundraising expenses and both separate from other overhead (a.k.a. management and general) expenses. Here a good for-profit accountant has probably been exposed to something similar, so learning the nonprofit specifics shouldn’t be too hard for them.
That’s it. Three things that are simple enough for a good beancounting volunteer to learn. Aim for this level when you get a volunteer to help with your accounting or bookkeeping.
When you get that lined up there are three important things that you should understand (and your beancounting volunteer should be able to help educate you about these). Erin’s top three items are as follows (paraphrased, so blame me for any confusing words). I think of these as the “Three Bs” of financial oversight.
- You need to understand all the numbers on the balance sheet (a.k.a. statement of financial position). Most nonprofiteers seem to grasp the importance of an income statement (a.k.a. profit and loss report/statement of activities), but far fewer seem to get the importance of this report.
- You should develop and follow a budget. By “follow” I don’t mean constrain every last dime you spend based on what’s in the budget, but when you do overspend, under-earn, etc., understand why and be able to explain it to anyone.
Learn how to read the bank statement. Someone who doesn’t handle the money day to day should be to reconciling this each month. Specifically this person needs to ensure that the only uncleared items are checks you’ve written that haven’t been cashed (and an occasional end of the month deposit). This is a simple enough job (and is a lot like reconciling your own checkbook). But the failure to do this one task allowed financial mismanagement to continue in one organization I’ve worked with. Five years in, the organization is under investigation and audit, and the group is spiraling downward.
Nonprofits will often start a bit haphazardly, but keeping an eye on these few financial things can lay the groundwork for some sound fiduciary practices. Eventually you can grow and outsource some of your bookkeeping and accounting functions, or you can bring a paid person onto your staff. But don’t wait until then in order to get things started off on the right foot.
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