Nonprofit treasurer duties: Where you should focus

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Does your organization get bogged down with nonprofit treasurer duties?

Nonprofits don’t exist for the purpose of earning profits. With that being said, money is central to a nonprofit’s success. Salary costs and other administrative expenses are unavoidable. Also, there can be a lot of cash inflow from fundraising and grants, and it’s important to know how to use it. 

How does a nonprofit manage its money? One of the most important board members for a nonprofit is the treasurer. The treasurer role encompasses a wide array of responsibilities, mainly concerning financial management and oversight. 

You may be wondering what a treasurer can do for your nonprofit, or you may be interested in becoming a treasurer yourself. Read on to learn about a nonprofit treasurer’s duties.

What does a nonprofit treasurer do?

First things first: Treasurers aren’t accountants. A position to oversee finances may sound a lot like an accountant, but there are important distinctions between the two. Many nonprofits do not have in-house accountants and choose to outsource instead. The tasks of nonprofit accountants include more of the day-to-day bookkeeping tasks, while treasurers are more concerned with the bigger picture. 

Tosha Anderson, CPA and CEO of The Charity CFO, discusses the do’s and don’ts of a treasurer in a recent episode of the “A Modern Nonprofit” Podcast. 

The major tasks of a treasurer can be summed up as follows:

  • Operations management
  • Oversight and compliance
  • Strategic decision-making

Operations management

The operational tasks of a treasurer concern financial management. These tasks include organizing financial data into helpful reports to be presented to the other board members. In addition to financial reporting and presentation, the day-to-day duties of a nonprofit treasurer may consist of signing checks, approving expenses, investing funds, paying bills, and so on. Some of the operational responsibilities of a nonprofit treasurer may overlap with that of the operations manager. However, the treasurer focuses more heavily on finance, while the operations manager has a broader scope of duties. 

Oversight and compliance

In order for a nonprofit to be financially healthy, the right policies and procedures need to exist to guide financial duties. Potential oversight tasks could include establishing processes for budget review and selecting an auditor. Other important policies that should be in place are proper internal controls. These are measures put into place to guard your nonprofit’s assets and provide protection against any potential wrongdoings. Examples could be requiring two signatures on checks and maintaining a paper trail. 

When discussing oversight responsibilities of a treasurer, Form 990 must be included. The IRS requires all nonprofits to submit this form each year. Form 990 is used to ensure that an organization meets the requirements for tax exemption by collecting a nonprofit’s financial data. The treasurer should make sure this form is submitted on time each year for compliance purposes. 

Strategic decision-making

Above oversight are the even bigger-picture strategic duties. Strategy involves using financial data and reports to make sound decisions. Long-term financial planning is critical to the success of your nonprofit. A treasurer needs to look at financial options for meeting future goals, and they should ensure that the nonprofit’s finances are in line with the overall mission. 

What are the qualifications for nonprofit treasurer duties?

As previously mentioned, a treasurer is not the same as an accountant. Treasurers may have a background in accounting, such as being a CPA or having education in nonprofit management, but this is not a requirement. A treasurer doesn’t need to have an accounting background, but they should be willing and capable of learning how to manage financial systems and reporting. 

Other qualities that a treasurer should have are great communication skills, and even creativity. Treasurers aren’t just numbers people. They need to be able to clearly present the nonprofit’s finances to the rest of the board, so they should be clear communicators. Creativity is also a necessary trait when it comes to strategic decision-making. A treasurer should be someone who is willing to look at a variety of options from different angles to make well-informed choices. 

A new treasurer can face a steep learning curve, especially if they do not have a background in accounting. Even for a treasurer who has worked in accounting or finance, there can be a lot to learn, since nonprofit finance is much different than that of for-profit companies. A nonprofit’s executive director and other board members should support the new treasurer as they get up to speed in their responsibilities. Without the support of others in leadership, a treasurer’s role can be very overwhelming at first.

Nonprofit Treasurer Duties: A Recap

The nonprofit treasurer is critical to the financial success of an organization. Duties include financial reporting, compliance, and financial strategy, although they are not involved in day-to-day bookkeeping tasks. Accounting tasks are either performed in-house or are outsourced.

It can be difficult at first for a treasurer to learn about all the duties that are part of their new role, but with support and guidance from other board members and leadership, a good treasurer can be the key to your nonprofit’s success. 

Support for your nonprofit treasurer duties

If you are looking to add support and bandwidth to your nonprofit organization’s support staff, The Charity CFO is here to help. Contact us today for a free consultation on how we can serve your mission.

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Nonprofit Budgeting Best Practices

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Nonprofit budgeting best practices are often the difference between success and failure for the organization.

Budgeting is a crucial element of understanding the financial health of your organization. Budgeting for nonprofits is very different from for profits, and a well-developed budgeting process can provide meaningful insight into the strength of your organization and your progress toward your mission. It also allows for better communication and transparency with employees who are striving for the same goals.

While nonprofit budgeting can seem daunting and complex, it doesn’t have to be. We’ve outlined some nonprofit budgeting best practices to enhance your budgeting skills and help you strategically and effectively plan your programming and reach your goals. 

Nonprofit Budgeting Best Practices

Understand the purpose 

Understanding the purpose of your organization and, by extension, your budget is the most important thing you can do when creating your annual budget. What is your mission and what goals and programs are going to help you get there?

As nonprofits must specifically account for the use of every dollar, keeping your purpose as your north star will help you tremendously when creating your budget. From there you can further determine how the budget will be used, who needs to be included, and how you can utilize the budget to make strategic decisions moving forward. Knowing the answers to these questions will help you focus and create an effective budget. 

Start early and plan often

Planning is key. It takes time to get a budget right. Starting your budgeting process early will save a lot of headaches. By thinking about your budget early on, you can identify key people in your organization to provide information regarding the data, activities, income and expenses necessary to create a nonprofit operating budget.

Put calendar invites in place to begin discussions, ensuring that when the time comes to compile the budget and present to the Board, proper thought and care has been put into the assumptions used. 

Involve the right people

Another benefit to planning early is that you have time to make sure the right people are properly included. In addition to the Board and leadership, it’s important to include other key employees in the process. These are usually the ones who have their hands on the pulse of the organization. They operate in the day to day and are able to provide insight into how specific programs and initiatives are going. 

By being transparent and including key employees in the process, you can identify areas of improvement and pain points, creating a more effective budget. This also provides opportunity to discuss with the Board strategic opportunities, making the most use of all the time you’ve spent creating your budget. 

Evaluate historical information 

If you’ve been operating for a while, then you should already have a great start in creating your nonprofit’s budget. Using historical information is the best starting point to begin your budgeting process. Take the information from prior year actuals and expand upon it, using the takeaways gathered from key employees. By combining historical data with real time assumptions you are in a great place to pull together a first draft of your budget. 

If you’re starting from scratch, check out our Beginner’s Guide to Nonprofit Budgeting.

Make note of your assumptions

Using historical information is a great place to start, but it’s important to keep track of what assumptions you are using to calculate the actual number you are presenting. Tracking these assumptions makes it easier to identify what happened when actual numbers don’t match your estimates. Understanding these assumptions makes budget analysis and strategic decision-making much easier.

Track, analyze and adjust regularly

Once you’ve created a budget, it’s important that you don’t just sit on it until next year. Take the time to track your budget to actuals and analyze the variances monthly. Looking at your assumptions can be helpful in explaining any discrepancies, as you now have more information regarding how the year is progressing. Variances should be expected. It’s wise to adjust your budget based on actuals and create an updated projection for the remainder of the year. Budgets are only as good as the information available and, as the year goes on, you gain more insight into operations.

Be realistic 

While the last few years have seen huge upticks in donor giving, it’s still important to remain realistic. With over 1.5 million nonprofits in the US alone, there’s still steep competition. Understanding your organization’s place in the current environment, knowing your donor profile, and setting realistic goals, both financially and programmatically, puts you on more solid ground, ensuring that your organization can continue doing good now and in the future. 

These nonprofit budgeting best practices are high level and we know there’s a lot that goes into nonprofit budgeting. If you’re looking for help in creating an efficient and effective budget, The Charity CFO has resources and professionals to support you, so you can focus on your mission. 

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Understanding the Nonprofit Statement of Cash Flows

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Does your organization pay close attention to your nonprofit statement of cash flows?

When you think of financial statements, the balance sheet or income statement typically come to mind. While these are important components of a nonprofit’s success, the statement of cash flows is critical to understanding the timing and sources of cash moving in and out of your organization. 

What is the nonprofit statement of cash flows?

Simply stated, the cash flow statement summarizes an organization’s cash management. It measures cash inflows and cash outflows, and it helps with determining a company’s financial health and making sure there is enough cash available to pay off expenses. 

Cash flows are sorted into the below categories:

  1. Operating activities
  2. Investing activities
  3. Financing activities

Operating activities include anything that occurs during the normal course of business. These could include paying employee salaries and receiving donations or grants.

Investing activities include buying or selling long-term assets, such as purchasing new equipment or selling property. 

Financing activities concern how your nonprofit is funded. Loans would fall under this category. 

How to prepare the nonprofit statement of cash flows

Here are the main steps in preparing the statement of cash flows:

  1. Begin with net income or net loss
  2. Additions to cash
  3. Subtractions from cash
  4. Calculate cash flows from investing activities
  5. Calculate cash flows from financing activities
  6. Ending balance

Let’s dive in to see how this works.

  • Begin with net income or net loss

The first section of the statement of cash flows consists of operating activities. To prepare this section, you need to start with net income or net loss, which comes from your income statement (statement of activities). Next, you make adjustments to this number to undo accruals. Typically, nonprofits use accrual accounting, which recognizes revenue when it is earned instead of when the cash is received, and vice versa for expenses. While this method is very helpful to understanding some aspects of your organization’s financial position, it is not relevant to the statement of cash flows.

With the cash flow statement, you are not looking at when revenue was earned. You are looking at when the cash is coming in and coming out of the organization. The next 2 steps help with adjusting net income back into the cash basis. 

  • Additions to cash

Next, you add back the values of the following:

  • Depreciation expense
  • Loss on the sale of an asset
  • Decreases in current assets
  • Increases in current liabilities

This may seem confusing at first, but the reason these values are added back to net income is because cash did not actually leave your nonprofit with the changes in these accounts. Remember that the income statement is calculated with the accrual method in mind, and the cash flow statement only looks at cash inflows and outflows. Let’s explain how this works. 

Depreciation is when the cost of a physical asset is allocated over the course of its useful life. It recognizes how the value of the asset, such as a company car, decreases over time. Since depreciation expense is not an actual cash outflow, it needs to be added back to net income. 

If your nonprofit sells an asset at a price that is lower than the asset’s book value, there was a loss on the sale of the asset. For instance, if you sold a lawn mower for $75 and its value was $100, there was a loss of $25, which is listed on the income statement. However, this is not a cash outflow, so the value of the loss will be added back to net income. 

A decrease in a current asset, such as accounts receivable, means that customers paid their bills to you, and you have earned cash. Simply stated, a decrease in accounts receivable means there was an increase in cash, so you add this value back in. 

Lastly, increases in current liabilities are added to cash. If there was an increase in accounts payable, there is more cash that your organization owes, but the cash has not yet left. Since this is not a cash outflow, this value is added back in. 

  • Subtractions from cash

By now, you understand the logic behind the additions and subtractions from net income. When we subtract values from net income, it is the opposite of what we added in. 

You will subtract:

  • Gain on the sale of an asset
  • Increase in current assets
  • Decrease in current liabilities

This is because these changes do not represent cash inflows. 

  • Calculate cash flows from investing activities

The investing activities and financing activities sections of the statement of cash flows are a lot easier to prepare than the operating activities section. You simply add or subtract cash inflows and outflows that result from these activities. For example, purchasing new equipment is a cash outflow, while selling property is a cash inflow. 

  • Calculate cash flows from financing activities

Next, the cash flows for financing activities are calculated. Add or subtract cash inflows and outflows from these activities. For instance, receipt of cash from a loan would be added, while loan repayment would be subtracted. 

  • Ending balance

The final step is to add together the total cash flows from operating activities, investing activities, and financing activities. The ending balance shows you the change in net cash for the period. 

Interpreting the nonprofit statement of cash flows

Now that you understand all that goes into the nonprofit statement of cash flows, it’s time to explore how to use it! The nonprofit statement of cash flows is crucial to understanding your organization’s financial health and decision-making. Typically, you will want to have a positive cash flow because this means your organization has enough cash to both fund its operations and pay off short-term debts. However, negative cash flow may not be a bad thing if your organization spent cash to make major investments for the future. 

Cash flow can be tricky for nonprofits because of the timing of donations. Nonprofit Quarterly discusses how cash inflow can be heavily concentrated during certain times of the year, such as during an annual fundraiser. Because of this, it can be difficult to manage cash over a period of time. Thankfully, using the nonprofit statement of cash flows can help you with sound decision-making. 

Need help with the statement of cash flows?

The Charity CFO can help you with preparing and understanding monthly financial reports, including the statement of cash flows. Trusted by over 150 nonprofits and with a 99.5% client retention rate, we can be your go-to experts for outsourced accounting services and financial guidance. 

To find out if The Charity CFO is right for your organization, request a free consultation today. 

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Nonprofit Tax Filing: 7 Steps to Peace of Mind

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Most people dread filing taxes. The piles of paperwork, long hours, and complicated tax codes can be truly overwhelming. Nonprofit leaders have an especially hard time understanding, preparing and filing their returns. They’re ever busy trying to make a positive difference in their communities, which is why tax filing often comes as an afterthought.

You see, a 501 nonprofit corporation is recognized as tax-exempt by the IRS but this doesn’t mean they are exempt from filing taxes. Most still need to file a tax return to maintain their nonprofit status and keep their organization tax compliant.

Fortunately, filing taxes for a nonprofit doesn’t need to be stressful. By following these 7 steps to nonprofit tax filing, you can sail through the process and get your taxes done quickly and easily.

Start With the Fundamentals of Nonprofit Tax Filing

Non-profit organizations operate in many areas of society, including education, healthcare, sports, and social services. While dozens of nonprofit exempt statuses exist, they generally fall under 5 types of nonprofits, including;

  • Religious and church
  • Charitable
  • Private foundations
  • Political organizations
  • Miscellaneous nonprofits such as charitable risk pools,  Federal Credit Unions, hospital service organizations, and retirement funds

These nonprofit categories fall under the following tax-exempt status:

  • 501(c)(3): Charitable, Religious, or Educational Organizations
  • 501(c)(4): Community social welfare organizations
  • 501(c)(6): Business leagues, professional associations, real estate boards, and board-of-trade organizations.

Each has its own set of tax laws, regulations, and forms to fill out. As you prepare to file taxes, make sure your organization falls into the correct classification.

But why is this really important?

  • To ensure that you don’t lose your tax-exempt status, which allows your organization to have an exemption from paying taxes.
  • To avoid late filing penalties that can quickly add up depending on the amount the organization has received during the calendar year.
  • To stay compliant with various state and federal regulations.
  • To maintain good governance practices and requirements
  • To demonstrate financial transparency to your donors, members, and the public

To make sure that your organization complies with the taxman, you should file IRS Form 990 by May 15 each year. This form allows the IRS and the general public to track a nonprofit’s finances, management practices, and governance structure.

The type of Form 990 to be filed depends on the gross receipts of the organization within that filing year. These forms include:

  • Form 990 or 990-EZ: Filed by large organizations with gross receipts of more than $50,000
  • Form 990-N (e-Postcard): Filed by small organizations with gross receipts of $50,000 or less
  • 990-PF: Filed by private foundations

Take a Year-Round approach

Many nonprofits make the mistake of waiting till the last minute to prepare and file their taxes. Unfortunately, if you wait until the last minute you are more likely to make mistakes, overlook important information, and experience unnecessary stress and anxiety.

Instead, develop a year-round strategy for filing taxes that keeps your organization on track throughout the entire tax filing process. This includes:

  • Tracking all income and expenses
  • Making sure your accounting matches your bank statements
  • Keeping up with deadlines
  • Reviewing your past tax returns to identify any mistakes
  • Staying up-to-date on the latest changes in tax regulations
  • Preparing an accurate budget and financial statements

Tracking expenses

Tracking expenses help nonprofits to maximize their resources and solve more challenges for the communities they serve. Careful tracking also makes tax filing easier by allowing organizations to quickly find the information they need when filling out their forms.

Invest in the correct processes, policies, and technologies to ensure all expenses are tracked and recorded accurately, including:

  • Reconciling all bank account and credit card statements
  • Ensuring that receipts are collected for all expenses
  • Run policy checks on specific project expenses
  • Categorizing each expense correctly

Tracking Revenue

Another measure to avoid stressful filing is by keeping up with the organization’s revenue streams. NPOs should track all donations, grants, and investments made to their organization to make sure they are properly accounted for.

Nonprofits should also keep records of when these donations are made and what type of payment was accepted (cash, check, or credit card). This will help when preparing the tax returns, as well as ensure that donations are properly recognized and acknowledged.

You’ll also need to understand how and when to recognize different revenue streams. Proper revenue recognition is a core accounting principle that ensures proper financial reporting, ensuring that you remain compliant and maintain donor confidence.

Monthly Financial Reporting

Maintaining accurate and timely financial reporting is one of the most effective ways to keep your organization in compliance and ready for tax filing.

Monthly financial statements can have a clear view of your financials and stay on top of your organization’s future expenses. This complete visibility of financial information at all times is necessary to maintain a strong cash inflow and help make informed economic decisions.

According to GAPP, some of the most recommended financial reports that you should generate monthly include:

  • Statement of activities
  • Statement of cash flows
  • Statements of financial position
  • Statement of functional expenses
  • Donor reports
  • Marketing reports

Pay Quarterly Estimates

Most nonprofits do not have to pay federal or state income taxes, but they may still have to pay quarterly estimates if they engage in activities that generate unrelated business income.

According to the IRS, a nonprofit organization must pay quarterly estimated tax on unrelated business income if it expects its annual tax to be more than $500. This Unrelated Business Income Tax, or “UBIT”, is calculated on the organization’s net income from unrelated activities and is due each quarter.

Use Form 990W to determine your estimated tax payments. It’s important to ensure that your organization is paying the correct amount of taxes each quarter. Failing to pay estimated taxes on time can result in huge interest and penalties that could jeopardize your nonprofit’s financial health.

Work with a Trusted Expert for Peace of Mind

Filing taxes for a nonprofit organization can be challenging, time-consuming, and worst of all, stressful. You don’t want to make any mistakes that could trigger an audit or even the loss of your 501(c)(3) status.

That’s why it’s important to work with an experienced tax professional who understands the specific needs of nonprofit organizations. A trusted expert can help guide you through the filing process and make sure all of your documents are accurate and complete.

At TheCharityCFO, we have experienced professionals that help nonprofits just like yours stay on top of their taxes and meet filing deadlines. Our team can provide comprehensive tax and financial guidance to help your organization remain in compliance with all state and federal regulations.

Contact us today to learn more about our services and how we can help you achieve peace of mind with your nonprofit’s tax filing. 

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How to Comply with Accounting Standards for Nonprofits

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Accounting standards for nonprofits are probably not the first thing you think about, but are crucial for your organization to succeed.

Nonprofit organizations distinguish themselves from for-profit entities through their purpose and mission. Their mission is usually anchored on a cause or social purpose, not on the generation of profits.

Because of their unique structure and operational model, nonprofits must comply with various accounting standards that are, in many ways, different from for-profit organizations.

In the United States, these Generally Accepted Accounting Principles (or GAAP) are set by the Financial Accounting Standards Board (FASB). NPOs must adhere to these accounting policies to remain compliant with the law and maintain their tax-exempt status.

The consequences of not adhering to accounting standards can be severe, leading to:

  • Inaccurate financial reporting
  • Hefty fines and penalties
  • Reputation damage
  • Loss of confidence from donors and stakeholders
  • Funds being frozen or withheld
  • Highest risk of failure and even closure
  • IRS audits
  • And in some cases, the revocation of the organization’s tax-exempt status

Here’s what you need to do to remain compliant:

Understand the Basics of Nonprofit Accounting

Nonprofit accounting is a unique process of planning, recording, and reporting the financial activities of a nonprofit organization. The goal is to create an accurate and comprehensive record of all transactions that can be used for both internal and external reporting, including audits and tax returns.

In the FASB 117, the IRS establishes the core accounting standards for nonprofits, which include:

  • Unrestricted, temporarily restricted, and permanently restricted funds
  • Fund accounting
  • Cash-basis and accrual-basis accounting
  • Presentation of financial statements such as statements of functional expenses, cash flow statements & statements of cash flows
  • Accounting for donated assets

Ideally, these standards should help your nonprofit maintain transparency and accountability with donors, grant funders, and the public. They also help the nonprofit to allocate their resources properly, keep them organized and only spend on expenses that are essential to the organization’s mission.

This is fundamentally different from for-profit accounting, which is geared towards generating profits and returns for its owners (stockholders). Another difference is in fund accounting. Whereby nonprofits must track their funds separately according to unrestricted, temporarily restricted, and permanently restricted categories.

Section 501 (c)(3) organizations must also adhere to specific tax-filing requirements that are uniquely different from for-profit entities, as outlined in the Internal Revenue Code.

Some of these include:

  • File Form 1023 with the IRS to apply for recognition of the organization’s 501 (c)(3) tax-exempt status after incorporation by the state
  • File form 990 (990-N for nonprofits with less than $50,000 in annual revenue and form 990-EZ for those with between $50,000 and $200,000) that discloses your revenue, expenses, and changes to net assets
  • File Form 8868 to request an extension for filing form 990
  • Pay federal tax Unrelated Business Taxable Income (UBTI) that’s more than $1,000

Identify Relevant Accounting Standards 

The truth is, you can’t truly comply with accounting standards without first identifying which ones are applicable to your organization.

First, nonprofits must follow GAAP, the Generally Accepted Accounting Principles. GAAP’s main objective is to ensure that all financial information is reported accurately, consistently, and transparently. This includes financial statements such as:

  • Income statements
  • Balance sheets
  • Statements of cash flows
  • Statements of functional expenses.

In addition to GAAP, nonprofits must also comply with FASB 117, the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 117 (FASB 117). FASB aims to develop and issue accounting standards through an inclusive and transparent process intended to promote useful information and decision-making by the NPO board, donors, grant funders, and other stakeholders.

There are ongoing efforts to establish International Financial Reporting Standards (IFRS) for nonprofits, which, if successful, could result in greater consistency and comparability of financial information across countries.

The Chartered Institute of Public Finance and Accountancy (CIPFA), together with Humentum, are working to develop these standards under a project titled  “International Financial Reporting for Nonprofit Organizations (IFR4NPO)” and has already released an Exposure Draft to establish a framework for their use.

Implement Internal Controls 

To ensure compliance with accounting standards, you must have proper internal controls in place. Internal controls are a set of written policies, processes, procedures, and systems of authorization, reconciliation, documentation, security, and separation of duties.

These financial practices:

  • Promote accountability
  • Ensure the integrity of financial and accounting information
  • Help improve operational efficiency by improving the accuracy and timeliness of financial reporting.
  • Help protect against fraud, embezzlement, and mismanagement of assets and resources.

Internal controls also provide reasonable assurance that things won’t go sideways and mitigates human error or malicious activities. For example, having one person responsible for recording expenditures and another approving the payments ensures that someone continually monitors all financial transactions.

Other common nonprofit internal controls include:

  • Establishing financial policies and procedures
  • Implementing an audit process
  • Creating a risk assessment process
  • Setting up a system for tracking expenses.
  • Generating and storing critical supporting documentation
  • Segregation of duties (SOD)
  • Access rights and roles to critical financial applications
  • Multilevel review of financial statements and other reports
  • Monthly bank and credit card reconciliations
  • Periodic review of vendors receiving fees/checks from the nonprofit
  • Background checks for employees and board members

Monitor Compliance 

Compliance monitoring is a continuous process of tracking and evaluating data to ensure that your nonprofit complies with accounting standards. This can be achieved by:

  • Keeping up with new regulatory developments
  • Regularly reviewing financial statements
  • Conducting internal audits
  • Setting up a process for monitoring compliance
  • Evaluating the effectiveness of internal controls, financial policies, and procedures
  • Regularly assessing risks and making necessary changes to mitigate them.
  • Creating procedures for taking corrective action when necessary.

Depending on the organization’s size, you can have a single person (such as a CFO) or an audit committee to monitor compliance.

Work with Compliance Experts

Complying with accounting standards is critical to ensure your nonprofit’s credibility, sustainability, and stability. But this can be hard, especially if you don’t have requisite accounting experience.

To ensure that your organization is properly complying with accounting standards, it’s important to work with experienced compliance experts, such as The Charity CFO.

Our experts give you an independent, third eye visibility, and objective review of your financial practices to ensure you remain compliant. Our qualified compliance experts can advise you on best practices and provide support to ensure your nonprofit organization follows industry-specific accounting.

Contact us today to learn more about our services and how we can help your nonprofit organization stay compliant for years to come. 

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Revenue Recognition for Nonprofits: 4 Mistakes to Avoid

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Revenue recognition for nonprofits may seem fairly straightforward, but has unique complexities with important compliance consequences.

Nonprofits rely on a mix of sources for their income, from fundraising, grants, and investments to earned income and individual contributions. All these sources must be carefully managed to ensure compliance with Generally Accepted Accounting Principles (GAAP) and guidelines.

Understanding how and when to recognize different revenue is perhaps one of the most important but difficult aspects of managing a nonprofit’s finances.

Revenue recognition is an accounting process of properly identifying when income has been earned. This accounting principle outlines specific criteria that must be met before revenue can be recorded in financial statements. Failing to recognize revenue properly may lead to inaccurate financial reporting, which could result in penalties,  restrictions, and audits.

Here are four common mistakes to avoid with revenue recognition for nonprofits:

4 Revenue Recognition for Nonprofits Mistakes

Not Recognizing Revenue at the Right Time

When it comes to nonprofit revenue recognition, timing is everything. It’s important to recognize revenue when it’s earned and not before or after. If you recognize revenue too early, you could be in violation of Generally Accepted Accounting Principles (GAAP).

Your organization’s accounting method really impacts the timing of recognizing transactions. For example, if your organization uses the accrual method of accounting, you must recognize revenue when it is earned, and the obligation has been fulfilled.

When using the cash basis method,  revenue is only recognized when cash or its equivalent is received.

This means that if you receive a pledge from an individual or organization but haven’t received the money yet, you won’t be able to recognize revenue until the cash is received. This makes it easy to handle multi-year pledges, where you can recognize the revenue for each year as cash is collected.

Not Understanding the Difference Between Cash and Accrual Accounting

Cash accounting is a method of recording income and expenses when they are actually received or paid out, while accrual accounting records income and expenses when they are earned or incurred. Nonprofits must understand the difference between these two methods in order to record their revenue properly.

When using the cash method of accounting, financial information is presented solely based on the cash received. As a result, it is important to accurately track all sources of income and not assume that just because an individual or organization has promised to donate, the money has been received.

This is a more straightforward option since it only follows money actually going in and out of your accounts. It is mostly recommended for small organizations with simple transactions that don’t require a detailed understanding of revenue recognition.

The cash method of accounting is generally preferred for:

  • Small nonprofits with under $100,000 in revenue
  • Nonprofits that do not have set programs
  • Nonprofits that do not have paid staff
  • Nonprofits that don’t have accounting professionals

Conversely, the accrual accounting method records transactions when they are incurred, not just when cash is received. This method allows you to recognize revenue that has been pledged or earned but not yet collected. You also recognize expenses when they’re incurred, not just when the money is paid. This method of accounting provides a more complete picture of your finances and is required by most states for organizations over certain income thresholds.

Accrual accounting allows you to match your expenses to the revenue they generate, so you can make more informed decisions and better projections. This explains why it is the most recommended option required by Generally Accepted Accounting Principles (GAAP) for nonprofits.

This method is an excellent option for nonprofits that:

  • Have significant amounts of funding and funding sources
  • Receive grants
  • Employ paid staff
  • Undergo annual financial audits
  • Want to ensure accuracy and full transparency

Not Documenting Donations Properly

Donations are a major source of revenue for nonprofits. This is why it’s important to understand how to properly record each donation to remain in compliance with GAAP. You must include the donor’s name, date of the donation, donation amounts, and any restrictions on how the money can be used.

In particular, restrictions by a donor can affect the timing of your revenue recognition. For example, if a donor restricts their donation to be used for a specific purpose and the money has not been spent yet, the revenue cannot yet be recognized.

It is important to document these restrictions and create a plan for how the money will be used in order to properly recognize the revenue. You should also keep records of all donor acknowledgments and correspondence as required by the IRS for tax purposes.

Ideally, have a dedicated person or team to manage donation tracking, acknowledgments, and compliance. This will help ensure that your revenue recognition is accurate and you remain compliant with the IRS. A  donation management system can make this process a lot easier and can help you keep track of donations more efficiently.

Not Tracking Unrestricted Funds Separately

Unrestricted funds are those that can be used for any purpose by the nonprofit organization, while restricted funds must be used for specific purposes as designated by the donor.

Unrestricted funds can be used for overhead costs like expanding staff, training and professional development, equipment, emergency expenses, technology acquisition, etc.

It’s important to track unrestricted funds separately from restricted funds so that you don’t accidentally use them for something other than what was intended by the donor.

But how do you track these funds? The best way is to use an accounting system that segregates your accounts and allows you to easily categorize donations as either unrestricted or restricted. This will help you keep track of donations and ensure that revenue is allocated correctly.

Trust The Charity CFO Revenue Recognition for Nonprofits

Revenue recognition can be tricky, which is why it’s important to have an experienced finance professional handle the accounting for your nonprofit.

The Charity CFO offers a team of experienced CFOs and accountants who specialize in helping nonprofits manage their finances. Our experts have extensive knowledge of GAAP and can help you ensure that your revenue recognition is accurate and compliant.

We understand the complexities of revenue recognition for nonprofits and can help you manage your finances more efficiently. Contact us today to learn how our services can help your nonprofit organization.

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7 Essentials Of Nonprofit Financial Management

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Many nonprofit organizations tend to let their financial management slip on the backburner as they get busy fulfilling their mission. Sure, your mission should be a priority, but managing finances can’t be neglected either.

Maintaining healthy financial management is critical for the organization’s sustainability, stability, and flexibility, now and in the future. Without a good grasp of your finances, your nonprofit risks:

  • Exposure to fraud
  • Collaboration issues
  • Misuse of funds and poor investments
  • Poor financial reporting
  • Destruction of physical assets
  • Tax issues and non-compliance with regulatory requirements

So, how can you guarantee that your organization is not exposed to any of these risks? Well, the answer lies in understanding and implementing these 7 essentials of nonprofit financial management.

1. Policies for Good Financial Management

Your nonprofit needs to have clearly defined policies and procedures to ensure everyone is on the same page. These rules or principles should reflect your organization’s values and culture. They should clarify the roles, authority, and responsibilities for essential financial management activities and decisions. 

Consistent policies will ensure:

  • Clear assignment of authority
  • Better information dissemination
  • Accountability for everyone involved
  • Unbiased decision-making
  • Streamlined administrative and operational procedures
  • Improved transparency for stakeholders
  • Timely reporting
  • Viability of various projects

When creating these policies, make sure they’re regularly reviewed and updated to keep up with changing circumstances, technological advances, and regulations.

Here are some policies that your nonprofit should implement to maintain proper financial management practices:

Gift acceptance policy

A written gift acceptance policy will guide you on the type of gifts you can accept. The point of creating a nonprofit acceptance policy is to:

  • Offer guidelines to staff and board
  • Educate the staff and board on critical issues triggered by certain gifts
  • Help manage donors’ expectations respectfully.
  • Maintain discipline in gift acceptance and administration
  • Avoid unnecessary risk, expense, and liability
  • Comply with IRS regulations

Asset management policies

Your organization has physical assets, including cash, investments, and other tangible property. You must have a policy that outlines who is responsible for the management of these assets.

Conflict of interest policy

You must strike a balance between the organization’s interests and those of its staff, board, volunteers, donors, and supporters. A conflict of interest policy can help you avoid any misunderstandings or disputes by laying down rules and guidelines for self-dealing, nepotism, kickbacks, bribery, and other related activities.

Nonprofit fiscal policy

These policies outline all internal controls necessary for the management of financial resources. They provide a framework for the oversight and governance of financial operations and activities. When creating your fiscal policy, ensure that it complies with the Generally Accepted Accounting Principles (GAAP).

2. A Nonprofit Budget

A nonprofit budget is a planning document that helps predict expenses, allocate resources, and monitor ongoing operations throughout the year. It documents goals, priorities, and expectations for the financial year and serves as a reference guide to evaluate performance.

A well-formulated budget should focus on the goals and objectives of your organization. It should make a strong statement about your organization’s intentions and aspirations. This will help you make informed decisions and achieve your desired outcome.

This financial planning tool will:

  • Help you focus on short and long-term strategic goals
  • Keep your donors informed
  • Make board members accountable
  • Act as your roadmap throughout the year
  • Increase transparency in your financial dealings
  • Allow you to make more informed decisions

Your nonprofit budget should include the following parts:

  • Estimated Revenue: Revenue sources include member dues and fees, events, merchandise, donations, grants, sponsorships, corporate giving, crowdfunding, fundraising, program income, loans, and program-related investments.
  • Expenses: Typical expenses include salaries & benefits, insurance, consultant fees, office fees, travel, professional development, utilities, marketing and advertising, program expenses, and fundraising expenses.

3. Nonprofit Financial Management Statements and Reports

Financial statements are a set of reports that summarize the financial position and activity of a nonprofit. These include:

  • Statement of financial position
  • Statement of activities
  • Statement of functional expenses
  • Statement of cash flow 

Statement of financial position (Nonprofit balance sheet)

A statement of financial position provides a snapshot of the financial health of your nonprofit. It measures the nonprofit’s assets, liabilities, and net assets at a particular point in time.

This tool provides several insights:

  • The overall financial situation of your organization
  • The level and composition of assets
  • Your organization’s ability to pay its debts
  • Sources of your organization’s income and expenses
  • Your capacity to launch new initiatives and programs
  • Any potential risks related to financial stability
  • Changes in the financial position of the nonprofit over time

Statement of activities (Income statement)

This statement provides a birds-eye view of your organization’s financial activities. It tracks the flow of money coming in and out of your organization during a particular reporting period. It also reflects the changes in your organization’s net assets resulting from income and expenses during that period.

It is split into 3 sections:

  • Revenue
  • Expenses
  • Net assets (difference between revenue and expenses)

SOA helps to:

  • Identify programs that need tweaking if they’re not working optimally
  • Ease the tax reporting
  • Bring GAAP compliance
  • Create transparency and accountability required by the board and IRS
  • Distribute funds appropriately between departments, initiatives, and programs
  • Gauge the effectiveness of fundraising efforts

Statement of functional expenses (SOFE)

This statement shows how much money is being spent on each function or program within the organization. Your donors, funders, and the IRS are particularly interested in this statement as it provides insight into how funds are being spent.

SOFE helps answer questions related to:

  • How much money are you spending on fundraising efforts?
  • What percentage of your budget is going towards administration costs?
  • How effective are your programs at achieving intended outcomes?
  • Are funds being allocated appropriately and efficiently?
  • Is there a need to invest more in particular projects or initiatives?

Cash flow statement (CFS)

This is a document that outlines all of your organization’s cash inflows and outflows over a period of time. It reports the total amount of cash available to your organization at the end of the reporting period.

4. Annual Report and Form 990 

While you can simply use form 990 as your annual report, creating a more comprehensive annual report that includes financial information as well as programmatic and other activities is highly recommended. It helps to:

  • Market your mission
  • Tell your organization’s story
  • Highlight the impact on your community
  • Thank your donors
  • Appreciate volunteers
  • Summarize last year’s initiatives
  • Drum up support for upcoming programs and initiatives

The annual report should include the following:

  • Executive summary
  • Financial statements
  • Program reports
  • Donors and sponsors list
  • Management and board report
  • Photos and messages from beneficiaries
  • Links to your social media channels

5. Proper Organizational Structure

It is important to have a robust organizational structure and policies in place to ensure your nonprofit runs efficiently. These include:

  • Organizational charts
  • Policies for financial management, human resources, and privacy
  • Roles and responsibilities of board members and staff
  • Processes for approving new programs, initiatives, and expenses
  • Risk management strategies

6. Financial Responsibility

As a nonprofit leader, you have the responsibility to ensure that your organization’s assets are appropriately managed and used for their intended purpose.

This involves ensuring compliance with all accounting, reporting, and disclosure requirements. It also involves staying up to date on the latest auditing standards, tax regulations, and IRS filing requirements.

This can be achieved by conducting periodic internal audits, appointing a CFO or finance officer to oversee the financial health of your organization, and adhering to GAAP best practices in nonprofit accounting.

7. Interdependence

Financial management is an organization-wide effort. It is not just about the money–it’s about strategy, governance, and leadership. Keeping everything connected should be at the heart of your approach to financial management. Communicate regularly with key stakeholders to ensure that everyone is on the same page.

Always Be Report-Ready With Accounting Solutions Built for Nonprofits

Accounting for nonprofits does not have to put an excessive strain on your resources. You can access high-end accounting solutions specifically built for nonprofits to help you streamline your financial management processes. This can help save time, money, and resources in the long run and ensure accuracy and transparency.

At TheCharityCFO, we provide bookkeeping services, budgetary reconciliation, real-time tracking of your financial health, and specialized data analytics to help you make informed decisions. Our expert team of CFOs can provide guidance on best practices and help you stay compliant with IRS regulations.

Contact us today to learn more about our customized accounting solutions that have helped hundreds of nonprofits just like yours.

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Financial Statements Nonprofit: What You Really Need

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As a nonprofit leader, your financial stewardship is important to remain compliant with the IRS. One way to ensure you remain within the confines of your tax-exempt status is to file and share a number of financial statements.

You have a primary responsibility to your donors, grantmakers, and other stakeholders to find ways to share these statements while still following the highest accounting standards.

Not only that, these statements need to be sound and easy to understand so as to provide a window into the financial health of your nonprofit.

This helps build trust and transparency-the two single most important assets for your organization.

But what are the financial statements?

Financial statements are a set of reports that demonstrate how your nonprofit is doing financially. They include:

  • Statement of financial position
  • Statement of activities
  • Statement of functional expenses
  • Statement of cash flow. 

Interestingly, these statements mirror for-profit financial statements but offer different insights specific to the roles and responsibilities of a nonprofit.

Let’s discuss them in detail so you can know what you need to do to stay compliant and accountable.

Statement of Financial Position

A statement of financial position is a balance sheet for nonprofits, except that the net assets section takes the place of the equity section in a for-profit organization. It gives you a birds-eye view of what your organization owns (assets), its debt and liabilities, and its overall worth (net assets).

Knowing how to record these entries will help you create a sound and well-organized report that gives a true picture of your organization’s financial health, current cash flow, and stability.

1. Assets

This is anything that belongs to the nonprofit, including property, cash, equipment, investments, receivables, prepaid expenses, and pledged donations.

Assets can be broken down as follows:

  • Current assets (Investments, pledged donations, bank balances, etc.)
  • Fixed assets (Land, vehicles, fixtures, large equipment, etc.)
  • Non-current assets (Trademarks, patents, endowments, long term investments, etc.)

2. Liabilities

This includes anything that is owed or due to others.

They are categorized as either:

  • Current liabilities (payable within a year, such as short-term loans, lines of credit, outstanding bills, accrued expenses, and payroll tax liabilities)
  • Non-current liabilities (long-term liabilities, such as long-term loans and mortgages)

3. Net assets

Ideally, this is the true value of your organization. It’s everything belonging to you after deducting all liabilities.

For clarity:

Total Assets- Total Liabilities = Net assets

Let’s assume:

  • Money raised= $10,000 in a given month
  • Property = $350,000
  • Accounts = $100,000
  • Liabilities=$20,000

What’s the net asset?

Net assets = ($350,000+$100,000 + $10,000 – $20,000) = $440,000

This means that your nonprofit has $440,000 that can be deployed to further its goal and mission.

Your nonprofit’s statement of financial position provides several insights:

  1.   The overall financial health of your organization
  2.   Your organization’s liquidity to take on additional risks, such as expansion and hiring staff
  3.   Your ability to pay back existing debts
  4.   Your capacity to launch new programs and initiatives
  5.   The statement of financial position also helps your stakeholders understand how your organization is funded, how it uses its resources, and what its future financial position may look like. 

Statement of Activities

A statement of activities is similar to a for-profit income statement and is used to show the revenue and expenses between two different reporting periods. It shows how you’ve spent your donations and what you’ve achieved with the available resources.

It provides accountability and transparency to your board and donors. This financial report contains three segments:

1. Revenue

How much money did you bring in? What were the earned revenue, donations, grants, government funding, and money received through fundraisings and special events?

GAAP requires that you separate revenue as either:

  • Restricted: This includes all donations that the donor has given directions on how and when you can spend the funds.
  • Unrestricted revenue: these are funds that you are free to use for any mission-oriented purposes, including paying salaries and expenses. 

2. Expenses

These are all liabilities necessary to achieve your goals and mission. Proper accounting practices dictate that you split your expenses as either administrative/operation, program-based, or fundraising.

To achieve your mission, it is important that you keep your administrative expenses as low as possible and only increase the cap as you grow and expand.

3. Change in net assets

This gives a snapshot of how much money you’ve made between the reporting periods. Did you make more than you gave out? This is your bottom line and acts as a buffer during a slow fundraising quarter. It is calculated by subtracting your expenses from the net revenue.

You should monitor the change in net assets constantly to identify trends and changes in revenue and expenses. This will help you recalibrate your approach to cover any deficits and find solutions to fix the shortfalls.

Why is a statement of activities important?

  • It helps you comply with GAAP standards and IRS regulations
  • It helps you maintain the transparency and accountability required by the board donors and the taxman
  • Helps you identify the need to tweak an ongoing program or project that’s not running optimally
  • Help financial leaders show where funding is going and determine the long-term viability of various programs.
  • Helps you make informed decisions on the organization’s critical areas, such as whether to cut expenses, secure additional funding or provide membership discounts
  • Makes it easy to file Form 990 by providing well-organized financial records 

Statement of Functional Expenses (SOFE)

A statement of functional expenses is a financial report used to show how expenses are incurred in your organization’s functional areas. It is also described as a matrix as it shows expenses across the three functional areas of your nonprofit – management and administration, fundraising, and programs.

Your donors, board members, and stakeholders want to be sure that their money is being spent wisely in achieving your organization’s mission.

This ancillary report provides a breakdown of how much money is spent in each area and makes sure that the funds are used only where necessary.

  • The SOFE helps you answer questions like:
  • Are we spending more than we allocated for fundraising? 
  • Are our programs running at optimal cost? 
  • Is there room to cut administrative and operational expenses without compromising our mission? 
  • Is there a need to invest more in programs or fundraising? 

 Cash Flow Statement

The Cash Flow Statement (CFS) keeps track of and records cash inflows and outflows in a given period. It reports the change in an organization’s cash and cash equivalents during an accounting period.

A CFS report has three sections:

  • Cash flows from operating activities: Shows change in cash other than those reported in the financing and investing sections.
  • Cash flow from investing activities: Shows amounts spent and received from long-term assets such as vehicles and equipment.
  • Cash flow from financing activities: This section shows amounts received from borrowing and repayments.

Work with Financial Statements Nonprofit Expert

As a nonprofit leader, making sense of all these financial reports can be difficult, especially if you don’t have a rich background in finance. Working with an experienced and qualified partner can provide credibility to your financial statements, deliver consistent reporting practices over time, and protect your 501(c)(3) or 501(c)(4) tax-exempt status.

At The Charity CFO, we help you understand the ups and downs of your organization’s financials, help you stay on top of IRS regulations, and provide detailed financial statements that can be filed and shared with confidence.

Contact us today to learn more about our services and start getting the personalized nonprofit CPA support you need. 

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How to Set Up Your Nonprofit Organizational Chart

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A nonprofit organizational chart is essential for the company’s success and growth. The internal structure or hierarchy of the organization must be organized and efficient to ensure that there are adequate resources and personnel in place to achieve its goals and mission.

A nonprofit organization chart, also known as an org chart or organogram chart, is a useful tool that is used to create a graphical representation of the structure of the organization and its various departments. It provides an effective way to organize, plan, and manage resources within the nonprofit structure.

Org charts are also used as a management tool to improve team performance, streamline processes, and reduce friction between departments. This can help with internal communication, problem-solving, conflict resolution, and growth acceleration.

With its organization-wide uses and benefits, it only makes sense to have a well-thought-out organogram for your nonprofit organization. So, what do you need to know and consider when setting up a nonprofit organizational chart?

Let’s find out.

What are Nonprofit Organizational Charts?

An organizational chart is a diagram that displays the internal structure of a nonprofit organization. It shows the relationships between different levels and positions in the nonprofit organization. These diagrams can include information about job titles, responsibilities, job roles, reporting relationships, and communication channels between different departments or divisions

Organizational charts can be used to illustrate various touchpoints in your nonprofit organization’s structure. They are usually used to make a statement, through design, on the organization’s culture, beliefs, values, and philosophies.

A well-designed org chart acts as a lifeline for new employees, helping them understand where they fit into the overall structure during onboarding. They can help to create a shared understanding of roles and responsibilities among teams, which in turn improves communication and collaboration between departments.

Organizational charts are also useful tools when it comes to developing strategies, setting goals, establishing policies, and making decisions. Every stakeholder should understand the structure of the organization and the goals it seeks to achieve. You don’t want any team member just skating by. 

Why do you need an organizational chart?

An up-to-date org chart serves several important functions for your nonprofit:

  • Helps the entire organization understand the chain of command
  • Helps potential donors, grantors and volunteers understand who is steering the ship
  • Helps new hires to know their colleagues and managers
  • Provides an overview of how tasks and projects are distributed throughout the organization
  • Ensures that each department understands its mission, roles, and responsibilities, hence strengthening and optimizing collaboration 
  • Helps the management or HR to anticipate skill and talent gaps, leadership needs, training needs, and future staffing needs
  • Helps increase organization-wide productivity and performance
  • Org charts give an eagle-eye view of the whole organization and juxtapose functions against each other, giving the management a clear picture of the expenses, overhead costs, and other operational issues.

We recommend building your nonprofit org chart based on functional areas such as administration, operations, programs, strategy, governance, fundraising, and development. Then further subdivide within each area, depending on the purpose and goals of your nonprofit. This will create a structure for your nonprofit that is flexible and allows for changes to be made as, and when needed.

Types of Organizational Charts

Most people are only aware of the classic hierarchical box-style org chart that shows a clear chain of command, with each position directly reporting to the one above it. But there are actually several different types of organizational charts. Depending on your nonprofit’s location, structure, and needs, you can choose among the following types:

  • The top-down chart

This is perhaps the easiest to understand, as it follows a traditional business model with an executive team at the top and all other positions directly reporting to them.

  • Flat chart

This chart structure has fewer layers and a limited hierarchy. It’s useful for small organizations that need to be agile and make decisions quickly. The day-to-day decision-making is made by individual staff members running their own functions and reporting to the board of directors. This type of organizational chart can be useful in terms of accountability, cost savings, and internal communication.

  • Functional org chart

A functional chart shows the relationship between the departments and their managers and organizes them according to their duties and responsibilities. It starts with the management, followed by department/team leaders, followed by other staff members.

  • Cross-functional org chart

If you have small teams spread through various departments, you can use a cross-functional org chart. This structure focuses on how various roles and tasks are related, instead of showing who reports to whom. It’s useful for collaborative projects, as it makes it easier to understand how teams are organized and who is responsible for what.

  • The matrix chart

The matrix organizational structure is a cross-functional structure that allows you to create two or more reporting relationships for each employee. The matrix chart is created by linking the different departments of your organization on a chart. It’s often used when an organization has multiple products, services, or projects that need to be managed. By linking these departments on a chart, you can easily see how each department interacts with the others. This helps to create an efficient and effective workflow for your nonprofit organization.

How to Set Up Your Nonprofit Organizational Chart

Once you’ve chosen the type of organizational chart that best suits your nonprofit, it’s time to set it up.

1.    Understand your structure

The first step is to gain a clear understanding of how your nonprofit operates and the roles and responsibilities of each team. This will help you create an organizational chart that reflects your current structure and makes it easier to identify areas for improvement.

Here are several things you’ll need:

  • A comprehensive list of the executive, employees, and volunteers
  • Recent pictures of each individual
  • A detailed rundown of the roles and responsibilities of each position
  • A solid understanding of the organizational structure and chain of command

2.    Design the chart

Use tools such as Photoshop, Indesign, Canva, Airtable, or Microsoft Office to idealize and create your chart. Or you could use an online template from websites like Lucidchart, Creately, or Gliffy to drag and drop elements and create a professional org chart.

3.    Add employees and volunteers

Once you’ve created the chart, it’s time to add all your employees, volunteers, and executive members. Include their name, position, department, and recent pictures to make the chart more engaging and easier to read. Some must-have roles to include are CEO, board of directors, executive team members, departmental heads such as Chief Finance Officer (CFO), and administrative staff.

After you’ve added all the members, double-check to make sure that everyone is in the right place and their roles are accurately represented.

4.    Make it visible and accessible

Once the organizational chart is complete, make sure to display it in the work area or the lobby of your organization. This will help everyone quickly grasp the structure, roles, and responsibilities of each department, and who reports to whom. It’s also a great way to introduce new members and volunteers to the organizational structure.

Need a CFO for Your Organization?

Organizational charts are an essential tool for nonprofits. They can help create a clear understanding of the roles and responsibilities within an organization, and give stakeholders a better idea of how decisions are made.

Obviously, most nonprofits will have the executive team all set up and forget or struggle to fill important positions such as the program officer, director of events and projects, grant writer, and chief financial officer (CFO). This complicates the organization chart and makes it harder to visualize the chain of command.

Finding a qualified and experienced CFO can be particularly difficult, expensive and out of reach for small nonprofits with limited resources. Fortunately, there are organizations such as The Charity CFO which specializes in providing industry-leading accounting and bookkeeping solutions, specifically for nonprofits.

If you’re looking for a CFO to help manage financial operations and fill the vital role of Chief Financial Officer on your org chart, we are the perfect choice for your organization.

We provide a comprehensive, affordable, and audit-ready financial management system to nonprofit organizations just like yours. Our team consists of experienced CFOs, CPAs, bookkeepers, and financial advisors who understand the complexities of running a nonprofit— so you won’t need to hire a full-time CFO for your organization. Contact us today to learn how our services can help you achieve your financial goal and deliver impactful results. 

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Best Practices when Accounting for Grants

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Grants are the lifeblood of nonprofits, giving them the much-needed cash injection to market the organization, fund a project, or get an initiative off the ground. Having a full grant pipeline increases your nonprofit’s chances of success and improves your visibility and credibility. But in order to get the most out of these grants, you need to understand how to properly manage and account for them.

The IRS has strict regulations on how to handle grants and charitable contributions, so it is essential that you understand the best practices when accounting for them.

Why?

Because accurate nonprofit accounting can help with reporting and auditing requirements, and ensure that the funds are being used in accordance with the grantor’s wishes. Besides, proper accounting gives you a clear picture of your organization’s fiscal health and helps you to make informed decisions on how to allocate resources.

Nonprofit leaders can use the for-profit world’s valuable practice of engaging in succinct and clear grant reporting. You really don’t want to be red-flagged by the government because of incomplete, unorganized, or inaccurately recorded grant information.

What is a Grant?

A nonprofit grant is a type of financial assistance that your organization receives from government agencies, foundations, corporations, businesses, individuals, or educational institutes for a nominated project, program, or initiative. It is usually given in exchange for specific deliverables and outcomes.

It encourages collaboration between your nonprofit and the funder, and gives the funder some control over how the funds are utilized and sets the ground for future funding. Responsible stewardship of grant funds will usually lead to raising more grant money from the same or other funders.

Grants may include:

  • Investments relation to programs
  • Prizes
  • Awards
  • Scholarships
  • Fellowships
  • Research
  • Training
  • Mentoring programs
  • Outreach initiatives
  • Loans for charitable purposes

A grant will not include donations or contributions for unrestricted use or general operating support as these are not exchanged for any specific deliverables. Since they are project specific, they cannot be used to pay employees, compensate your board, or cover your organization’s operating costs.

According to the Financial Accounting Standards Board (FASB) guidelines, a grant should be recognized as revenue when all eligibility requirements have been met by the recipient and there is reasonable assurance that the revenue will be collected.

Major Types Of Grants

The three major types of grants are unconditional grants, conditional grants, and reimbursable grants.

  • Unconditional grants are those which do not require the recipient to provide a specific deliverable or outcome in exchange for the funds. The recipient is under no obligation to fulfill any conditions or submit any reports.
  • Conditional grants have designated deliverables or outcomes that must be met in order to receive the funds. Recipients are usually required to submit periodic reports on their progress and results.
  • Reimbursable grants are those which require the recipient to provide evidence that it has already incurred costs before receiving reimbursement. Reimbursement is usually provided after the recipient has provided evidence that it has met all conditions, or completed the deliverable.

8 Best Practices When Accounting For Grants

The following are some best practices that all nonprofit leaders should follow when accounting for grant funds:

1. Make sure your team is on the same page

Set clear and consistent expectations with your team when it comes to accounting for grant funds. This means that everyone should understand the procedures, deadlines, and any other expectations related to accounting for grants. Establishing clear roles and communication protocols can help ensure that all team members are in alignment when it comes to grant accounting.

2. Put the necessary controls in place

Accounting for grants should be approached with an abundance of caution. Establishing sound internal controls is essential for ensuring the financial security, accuracy, and completeness of your records related to grants. This includes having a separate bank account for grant funds, segregating duties among different team members, and having adequate documentation of all grant-related transactions.

3. Track expenses diligently

When accounting for grants, it is important to track expenses diligently. This means having effective systems and processes in place for tracking grant expenditures, documenting grant-related activities, and making sure all expenses are properly classified. Doing this ensures that you can demonstrate compliance with grant requirements and provides a clear audit trail for any future reviews.

4. Develop strong financial reporting procedures

An efficient tracking and reporting system is a must-have in order to ensure accuracy and compliance when accounting for grants. Think routine summary reports, budget vs. actual reports, and variance analysis—all of these can help your team identify any discrepancies or issues related to grant accounting.

5. Keep up with changing compliance rules

Grant accounting can be complicated, and regulations are always changing. It is important to stay on top of any new compliance regulations by regularly reviewing the grant agreement, monitoring any developments in the industry, and proactively addressing potential issues. If you don’t have sufficient internal capacity and resources, you may want to consider hiring a nonprofit accounting professional to help manage your grant accounting.

6. Use the grant in a manner that complies with all applicable laws and regulations

It is important to keep in mind that grant funds must be used for their intended purpose and in accordance with all applicable laws and regulations. Grants should not be used in any way that could be perceived as fraudulent or unethical. As the grant recipient, you are responsible for understanding and following all applicable laws and regulations.

7. Be transparent in all financial matters related to the grant

Transparency is key when it comes to grant accounting. Make sure that your team is open and responsive to questions related to the grant account. Provide regular updates to the grantor, and be sure to document all decisions related to the use of grant funds.

8. Conduct regular audits

Regular financial audits can help ensure the accuracy of your financials, determine your fiscal health and compliance, and identify any potential issues. Having an independent audit team review your records related to the grant can help protect your organization from any unforeseen problems. These audits can also help identify opportunities, such as potential areas of cost savings.

What Are The Main Challenges Of Grant Accounting?

Grant accounting can be challenging, especially for smaller organizations with limited resources. Some of the main challenges that organizations may face include:

  • Keeping up with changing grant regulations and compliance requirements
  • Staying organized when dealing with multiple grants from different sources
  • Meeting reporting deadlines and ensuring the accuracy of reports
  • Differentiating between grants and other sources of income
  • Tracking expenditures against budgeted amounts
  • Understanding accounting rules, such as those related to matching funds, split funding, and indirect costs
  • Knowing which expenses are allowable under the grant
  • Managing cash flow during long grant cycles 

These challenges can be daunting, but proper grant accounting practices can help organizations overcome them and ensure successful grant management. With the right processes in place, your organization can benefit from increased accountability and transparency, improved grant performance, and more efficient use of funds.

Feeling Stuck? Outsource Your Grant Accounting Needs To A Professional

Rolling all the responsibilities to an inexperienced person not only jeopardizes the organization’s fiduciary responsibility but also the sustainability of the organization.

If your team lacks the resources to effectively manage grant accounting, you may want to consider outsourcing these responsibilities. Experienced nonprofit accounting experts can help you develop and manage an effective grant accounting system and processes and provide guidance on best practices to ensure compliance and properly handle grant accounting responsibilities.

At The Charity CFO, we understand the complexities of grant accounting and bring our expertise to help your organization manage its grants in a way that complies with all regulations and provides maximum benefit for the organization.

By partnering with us, your organization can be assured that its grant accounting and financial management are in safe hands. We provide timely, accurate, and reliable services with high fidelity to your organization’s mission and values. Our team is dedicated to helping you achieve greater fiscal health, greater transparency, and improved service delivery for your organization.

Contact us today to learn more about how we can help with your grant accounting needs so you can focus on driving your mission and making an impact!

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Why Your Church Shouldn’t Take Pass-Through Gifts

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Churches often want to help those in need, especially among their congregation. But if you’re not careful, you could be accepting pass-through gifts that could cost the entity’s 501(c)(3) tax-exempt status.

Pass-through gifts are donations given with the expectation that they will be used to benefit a specific individual or organization. 

These types of gifts can come from individuals or organizations and often are made with the intent to support a specific person or group. This type of gift is not tax deductible for the original donor and it does not count as a charitable donation to the church.

When pass-through gifts come into play, churches often have little control over the funds and how they are used. That’s why it’s important for religious organizations to make sure they understand what these donations mean and that they don’t accept them without proper safeguards in place.

Let’s look at a few reasons why your church should step back from pass-through gifts.

Reasons Why Your Church Shouldn’t Take Pass-Through Gifts

1. Pass-through gifts can lead to tax implications.

Pass-through gifts are one of the most common ways for churches to lose their 501(c)(3) exemption. The IRS is always looking for any signs of non-conforming activity, and pass-through gifts are a red flag.

The reason? By giving funds to an individual or organization directly, the church is essentially sidestepping the normal process of applying for and receiving 501(c)(3) status. This can lead to serious repercussions, including the revocation of the church’s tax-exempt status and hefty fines.

2. Pass-through gifts can be misused.

Even if pass-through gifts are given with the best of intentions, there’s no guarantee that the funds will be used properly. If a church accepts a pass-through gift, they are essentially handing over the funds without any control or oversight.

This can open up the possibility of misappropriation and open the church up to legal liability. Donors can sue if they feel that their gift has not been used as intended.

3. Pass-through gifts can become a distraction.

When pass-through gifts are accepted, it can create a disconnect between the church and its mission. Instead of focusing on their core values and purpose, churches can be pulled into a situation in which they are responsible for funds that should be managed by others.

This can lead to a decrease in the overall effectiveness of the church and a lack of focus on its core mission.

4. Pass-through gifts can lead to other ethical issues.

Churches that accept pass-through gifts can also find themselves enveloped in ethical dilemmas. For example, if the funds are given to help a certain individual, what happens if the funds are not used as intended?

This can lead to debates over how and when to use the funds, let alone questions about transparency. These ethical considerations can be difficult to navigate and often create a divided church.

5. Pass-through gifts can be difficult to manage.

Pass-through gifts can require a lot of oversight, paperwork, and tracking to ensure the funds are used properly. This can be an overwhelming task for churches that don’t have the staff or resources needed to handle it.

Even if your church does have the resources to manage pass-through gifts, there’s no guarantee that the money will be used as intended. Without proper oversight and controls, donors may not be assured that their funds are being used for their intended purpose.

Case in Point Example

John and Mary are congregants at your church. Their house was razed in a fire, and they had nowhere to turn. In response, you ask other members of your church to donate so that John and Mary can rebuild a new home.

You advise the members to donate to the church’s benevolence fund but with explicit instructions: all donations will be given to John and Mary, and so the checks should be made out directly to them and not the church.

Unfortunately, the donations made out to John and Mary are considered pass-through gifts, which the IRS will tax. This means that John and Mary will have to claim the donations as taxable income when filing taxes.

So what should you do next? Well, while your intentions were good, it is important to know that taking pass-through gifts can be a costly mistake for your church and John and Mary as well.

Instead, you should consider setting up a special fund to help those in need.

Creating a special fund

By creating a special fund and collecting donations into it, your church can provide tangible help to those in need without worrying about tax implications. This is because donations made into the special fund are not considered pass-through gifts, so the donations are tax-exempt.

Additionally, setting up a special fund can help your church gain recognition from the IRS. As long as the money collected is used solely for charitable purposes, your church will be eligible to receive tax exemptions on all donations made to the fund.

By setting up a special fund, you are able to meet the needs of those in need while protecting your church from tax liabilities.

A gift is considered charitable if it’s:

  • A donation or contribution to, or for the use of a church
  • Made “without any condition or restriction
  • Claimed as a  charitable deduction on the donor’s tax return
  • Within the limits specified by the IRS
  • Substantiated by a receipt or other reliable written record

Certainly, taking pass-through gifts can be tempting. After all, what could be easier than having congregants make donations directly to those in need? But when it comes to tax liability, the risks outweigh the rewards. Setting up a special fund is the best way for your church to help those in need without having to worry about pass-through gifting.

By providing a safe and tax-exempt way for congregants to provide charitable donations, your church can ensure that the money goes towards helping those in need without any tax liability.

Protect Your Tax Exempt Status with The Charity CFO

Churches and other nonprofits are subject to strict state and federal tax laws. As a church, understanding the rules can help you protect your tax-exempt status while helping those in need.

At The Charity CFO, we understand that your church’s tax-exempt status is important to you. We can help you navigate the complexities of tax law on pass-through gifts and provide you with the necessary guidance to ensure that your church is compliant and protected.

With our team of experienced and knowledgeable tax professionals, you can feel confident that your church’s status as a nonprofit is secure. We are committed to helping your church maximize its charitable impact and stay compliant with state and federal tax laws.

Don’t let pass-through gifts put your church at risk. Contact The Charity CFO today and let us help you find the right solution for your church. We look forward to helping you protect your tax-exempt status and reach more people in need.

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Budgets for Nonprofits: Get ready for 2023

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Financial planning and budgeting are vital for the success and sustainability of any nonprofit organization. 

Without a clear understanding of income and expenses — it’s impossible to deliver on your organization’s mission, vision, and goals effectively.

That’s why it’s important to start thinking about your budget for 2023 now. By taking the time to assess your current financial situation and map out your anticipated income and expenses for the year ahead, you can make sure that your nonprofit is on track to meet its goals.

Budgeting should go beyond simply tracking money in and money out. 

A well-crafted budget can be a powerful tool for decision-making, helping you to prioritize spending in line with your strategic goals. It can also be a valuable communication tool, providing clarity for staff, volunteers, and donors about where their money is going and how it’s making an impact.

A nonprofit budget helps your organization:

  • Stay fiscally healthy
  • Allocate resources
  • Set spending priorities 

However, if you’re not careful, it’s only a document. 

Only through regularly reviewing and updating a budget does it accurately reflect your nonprofit’s current financial situation. Using the budget, not only creating it, gives you a clear roadmap to follow and ensures your organization stays within the precincts of its tax-exempt status.

Intro to Budgets for Nonprofits

Budgets differ greatly between nonprofits and for-profits. The biggest distinction is that nonprofits don’t exist to make a profit; they exist to further their missions. Therefore, their budgeting process must be geared towards achieving mission-related goals, rather than maximizing financial gain.

A nonprofit budget is typically a planning document that shows how the organization plans to raise and allocate its money to support its programs and operations. The budget will include both income and expenses and will be based on the organization’s strategic plan.

The budgeting process should involve all members of the organization, from the Board of Directors and committees, to the staff and volunteers. Everyone should have a clear understanding of the organization’s financial situation and be able to provide input on where money should be spent.

The budget should be reviewed and updated regularly, at least on an annual basis. As your organization’s financial situation changes, so too should your budget.

There are two main types of nonprofit budgets: static and dynamic.

  • A static budget is a detailed plan that uses predicted amounts for a given period. It does not change regardless of deviations in revenue and expenses and is typically used for short-term planning. A static budget is ideal for small nonprofits with simple financial structures.
  • A dynamic budget is more flexible and can be adjusted to reflect changes in income and expenses. It allows nonprofits to respond quickly to fluctuations in their funding and better manage their resources. A dynamic budget is a good choice for larger nonprofits with more complex financial structures.

There is no rule that a budget must be one type or the other; it can be a mix of both. The important thing is to use the type of budget that makes the most sense for your organization and its specific needs.

During your budgeting process, you should constantly monitor your situation and make adjustments as needed. The goal is to have a budget that is realistic and achievable so that you can stay on track and deliver on your mission.

7 Steps to Your Budget

1.    Determine a timeline

We are approaching the end of the year, so you may want to start thinking about your budget for 2023 now. By taking the time to assess your current financial situation and map out your goals, you can ensure that your budget is well-crafted and accurate. Allow time for review and discussion, set a target date for board approval, and ensure that everyone understands the budget and their role in it.

2.    Clarify context and articulate goals 

Assess the current alignment of organizational values, reflect on successes and failures, identify opportunities and challenges, and set goals for the upcoming budget year. These goals should be specific, measurable, achievable, relevant, and time-bound (SMART). Input from various stakeholders will be critical at this stage. The budget should reflect the collective vision of the organization, and everyone should have a chance to provide input.

3.    Decide on the budget structure

What is the primary purpose of your budget? Is it a monitoring tool, a funder compliance roadmap, or a blueprint for change? Your answer will determine the structure of your budget. A results-based budget, for example, focuses on outcomes rather than inputs and is often used to demonstrate impact to funders.

On the other hand, an activity/program-based budget is more commonly used to track expenses and income related to specific programs. Other budget structures you can adopt include time-based, source-based, impact-based, and cash-flow budgets.

4.    Develop a draft income budget

This is where the rubber meets the road. Once you have decided on the structure of your budget, you can begin to fill in the details. Begin with a list of all income, including both one-time and recurring items. Project income for the upcoming year based on past performance, current trends, and any known changes. If your organization is expecting any grant funding, make sure to include the conditions of the grant in your budget.

5.    Create a draft expense budget

Articulate the direct and indirect costs associated with each goal. Indirect costs, also known as overhead costs, are those that cannot be assigned to a specific program or activity. They include items such as rent, utilities, and administrative salaries and should be allocated in a fair and reasonable manner. Once all expenses have been accounted for, compare your total income to your total expenses to ensure that you are not overspending.

6.    Review and revise the budget

Discuss potential risk areas, including any potential changes in funding, unanticipated expenses, or unrealistic income projections. Make any necessary changes to the budget and get feedback from key stakeholders. Create a consolidated budget spreadsheet that addresses values, goals, and named priorities. Revise the budget to make sure that it is achievable and realistic.

7.    Finalize the budget

Present the budget to the board for approval, get sign-off from the executive director, and distribute the budget to staff. Make sure that everyone understands the budget and their role in achieving the organization’s goals.

Ensure that all decision-making processes and rolling forecasts are documented for easier monitoring. Ensure that you review and update the budget regularly to account for any changes in funding, new programs, or unanticipated expenses.

Specialized Nonprofit Budgeting Help

Budgeting for a nonprofit organization can seem daunting, but it doesn’t have to be. The most important aspect is to identify all possible sources of income and expenses. Once you have a clear understanding of the organization’s finances, you can begin to develop a budget that meets the needs of the organization.

Having a well-thought-out strategic forecast and budget can help your nonprofit gain better visibility with donors and funders, manage expenses more effectively, and make sound financial decisions. These are all important factors in ensuring the long-term sustainability of your organization.

But with all the moving parts of a nonprofit organization, it can be difficult to know where to start. That’s where we come in. Our team at The Charity CFO has extensive experience in nonprofit budgeting and can help you develop a budget that meets the specific needs of your organization. Having worked with over 150 nonprofits, we understand the challenges you face and can offer tailored solutions to help you overcome them.

Contact us today to learn more about our nonprofit budgeting services. We’ll be happy to discuss your specific needs and provide a no-obligation proposal outlining how we can help you achieve your goals and mission.

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Nonprofit Accounting Services: The Right Solution

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What should you look for when evaluating nonprofit accounting services?

Nonprofit organizations exist to further a mission or goal. These entities rely on donations, grants, membership fees, and program revenue to stay operational. 

Whether you are an educational, charitable, religious, sports, or other public-benefit organization, you need to have a good handle on your finances in order to make the most impact.

The truth is, many nonprofits tend to fumble when it comes to their books. 

Yes, they might have a board member or volunteer who takes care of the finances, but they often lack specific expertise in nonprofit accounting. As a result, the organization might not adhere to Generally Accepted Accounting Principles (GAAP), which can trip them up come tax time or during an audit.

Governance issues, tight regulations, and high public accountability standards mean strong accounting practices are more important than ever. Sound financial management helps avoid jeopardizing tax-exempt status and the success of your operation. 

Benefits of Nonprofit Accounting Services

Nonprofits need to focus on generating enough funds to keep themselves going while adhering to principles of accountability and transparency. This can be a difficult balancing act, which is why working with an experienced nonprofit accounting service is essential.

Here are some of the key benefits that your organization can enjoy by outsourcing its accounting needs:

1. Saves time and money

A good accounting solution will automate a lot of the manual tasks (i.e. data entry, invoicing, and report generation). This frees up your time so for focus on more important tasks, such as fundraising and program delivery.

Saving time often saves money, too. For instance, saving on costs associated with hiring and training in-house accounting staff. Outsourcing financial record-keeping also improves efficiency, eliminates unnecessary expenses, and minimizes grave accounting mistakes.

2. Improves compliance

As a 501(c)(3) organization, you are subject to a number of rules and regulations. When you juggle multiple priorities, it’s easy to overlook some of these accounting and tax requirements. 

The right accounting partner ensures your organization’s books are in order — and that you adhere to all the relevant laws and regulations. This mitigates penalties, late filings, audits, and fraud (all too common in the nonprofit sector).

3. Boosts donor confidence

Donors want to know that their money is being put to good use and that the nonprofit organization they’re supporting is being managed responsibly. When you have a clear financial picture, it builds donor confidence and trust in your organization. 

4. Generates accurate financial reports

Most nonprofits lack accounting and bookkeeping systems that can generate results and insights that can help them make sound decisions. Nonprofit accounting services give you the tools and knowledge you need via accurate reporting. 

A solid picture of finances helps with strategic planning, identifying new fundraising opportunities, and evaluating program effectiveness.

Nonprofit Accounting Services: More than a Bookkeeper

Because of how they receive funding and the type of work they do, nonprofits have more unique accounting needs than a typical business. And while you might be able to find a bookkeeper who is familiar with the basics of nonprofit accounting, it’s important to partner with an organization that specializes in providing services to nonprofits.

They will be familiar with the unique rules and regulations that apply to your organization and will be able to tailor their services to meet your specific needs. In addition, they can provide valuable insights and advice on how to improve your organization’s financial health and efficiency.

You see, while for-profit businesses focus on generating profits, nonprofits focus on the appropriate utilization and allocation of resources to further their mission. This requires deliberate financial planning, budgeting, and bookkeeping that may be impossible for someone without experience in the nonprofit sector to understand.

That’s why it’s essential to partner with an experienced nonprofit accounting solution that can provide you with the support, resources, and guidance you need to navigate the complex world of nonprofit accounting.

As your organization grows, your accounting needs will become more complex. A certified accountant with experience in nonprofits will help you:

  • Maintain a detailed GAAP-compliant chart of accounts
  • Establish accounting policies and procedures in line with best practices
  • Implement an internal control system to safeguard your assets
  • Design a system to track and report on programmatic expenses
  • Prepare for and manage an annual audit
  • Restructure your business model or operations
  • Predict future financial health based on current trends
  • Advise on your 501 c3, 990, state, and local filings
  • Identifying proper nonprofit cash handling procedures

Considerations When Choosing Nonprofit Accounting Services

With so many options available, choosing the right nonprofit accounting solution can be daunting. But if you keep the following factors in mind, you’ll be well on your way to finding a partner that’s a perfect fit for your organization.

1. Experience working with nonprofits

Perhaps the most important factor to consider when choosing an accountant is experience. You want to partner with an organization that understands the challenges and opportunities specific to the nonprofit sector. They should deeply understand the laws and regulations that apply to your organization and be up-to-date on any changes that could impact your operations.

2. Offer a comprehensive suite of services

As your organization grows, your accounting needs will become more complex. You want to partner with an organization that can grow with you and offers a comprehensive suite of services to meet your evolving needs. Look for an accountant that offers bookkeeping, financial reporting, budgeting, strategic planning, and audits.

3. Utilize cutting-edge technology

Technology can be a powerful tool and a game-changer in the nonprofit sector. It can help you increase efficiency, improve transparency, and better manage your finances. Look for a nonprofit accounting provider that utilizes cutting-edge technology, such as cloud-based accounting software, to help you streamline your operations. They should be able to provide monthly or quarterly updates to your financial reports and offer real-time visibility into your organization’s finances.

4. Provide personalized service

Nonprofits are not one-size-fits-all. Your organization has unique needs and goals that should be reflected in your accounting solution. Look for a company that offers personalized service and can tailor its services to meet your specific needs. In addition, they should provide sector-specific insights and advice on how to improve your organization’s financial health.

5. Transparent and communicative nonprofit accounting services

Transparency and timely communication are critical in the nonprofit sector. Donors, members, and the general public expect nonprofits to operate with the highest level of integrity, which is why up-to-date communication cannot be understated. When choosing an accounting service, be sure to ask about their transparency policies. How often do they communicate with clients? What type of information do they share? Can they break down the numbers in an easily understandable way?

A reputable and trustworthy accounting service will have no problem being open and communicative with you. They should be able to deliver all requisite reports and documentation in a timely manner so you’re never left speechless in front of your finance committee.

6. Go beyond the numbers and offer strategic advice

IRS 501(c)(3) status allows nonprofits to make tax-exempt money from revenue-generating sources. 

Examples include: 

  • Providing services
  • Selling goods
  • Renting out assets
  • Or receiving interest and royalties 

These “excess revenues,” or “net earnings,” further the organization’s mission, reinvesting back into the organization to fuel its growth (or held in reserve to cover unexpected expenses).

However, nonprofits are not allowed to distribute their earnings to private individuals. These funds must be carefully managed. This is where an experienced accounting service can really add value. They should be able to handle the day-to-day bookkeeping and financial reporting and offer strategic advice on how to best utilize these funds to further the organization’s mission.

Nonprofit Accounting Services for Your Cause

Running a successful nonprofit is hard, but keeping up with the financial side of things doesn’t have to be. With the right nonprofit accounting service in your corner, you can focus on what matters most – furthering your mission and making a positive impact in your community.

At The Charity CFO, we believe that your finances should never limit your true value and impact. That’s why we offer a comprehensive suite of accounting, bookkeeping, and financial consulting services to help you achieve your goals. We understand your unique challenges and can tailor our services to meet your specific needs.

If you’re ready to take your nonprofit to the next level, we’re here to help. Contact us today to schedule a free consultation and start getting accurate accounting, audit-ready financial reports, and the strategic advice you need to succeed.

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Raising Funds & Exposure with Press Releases

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Getting exposure for your nonprofit can lead to better fundraising totals and bigger partnerships, bringing you closer to achieving your mission.

And when people want exposure, they naturally turn to press releases. But many nonprofits are disappointed when their fundraiser or program launch doesn’t become front-page news.

How can you learn to use press releases to effectively level-up your nonprofit?

Enter Mickie Kennedy, the Founder and President of eReleases, the small business leader for press release distribution, now celebrating 22 years in business. 

In this episode, the self-described Press Release Ninja shares his tips for helping you increase your visibility and credibility by doing press releases better.

We’ll talk about the common mistakes nonprofits make with press releases, how to create ‘hooks’ that journalists can’t resist, and how a single press release created millions of dollars of revenue for one of his clients.

Thanks for listening and be sure to subscribe for new episodes every week!

Here’s a preview on YouTube:

Mastering Press Releases: Crafting Compelling Announcements for Media Attention

 

To watch the full episode, click on the Spotify player above or search it wherever you get your podcasts.

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The 5 BIG Myths of Nonprofit Accounting

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In this episode, A Modern Nonprofit Podcast host Tosha Anderson comes to you directly, to talk about the 5 biggest myths she’s encountered time and again while working with nonprofits.

Don’t be misinformed, join Tosha as she reveals the truth behind concepts that tie nonprofit founders, board members, and bookkeepers in knots.

For more nonprofit accounting resources check out www.thecharitycfo.com

Here’s a preview on YouTube:

Understanding Nonprofit vs. For-Profit Accounting: Myths Debunked

To watch the full episode, click on the Spotify player above or search it wherever you get your podcasts.

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The Making of An Executive Director

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In most industries, you work your way up through the ranks, learning from those who came before you. But in nonprofits, it doesn’t always work that way. A founder can often find themselves sitting in the Executive Director’s chair without any prior management experience, or even an idea of how the organization needs to run.

And that’s the experience that Miki Reynolds had when she took over the reins of her organization, Grid 10.

After a career in supporting roles, she suddenly found herself in charge of the show. And had to overcome battles with imposter syndrome, financial mindset, learning to ask for help, and more.

Her story covers many of the common struggles that Executive Directors face, and in this episode, she’ll walk you through how she overcame her biggest obstacles so you can learn from her experience.

Miki is the Executive Director and founding member of Grid110, an organization that provides entrepreneurs with access to community mentors and critical resources through no cost equity programs.

Join her for a wide-ranging conversation and practical approaches to problems you may be facing today.

Here’s a preview on YouTube:

Managing Complexity as an Executive Director

To watch the full episode, click on the Spotify player above or search it wherever you get your podcasts.

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What Are Net Assets?

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Since nonprofit organizations don’t profit from the money they make, the accounting processes for nonprofits look somewhat different than for-profit companies. And one of the key differences is that nonprofits talk about net assets rather than net income or equity.

Net assets aren’t a complex topic to understand. It’s mostly a difference in terminology in nonprofit accounting vs. for-profit accounting. But it’s not a term that most non-accountants are familiar with, and there are a few differences in how it’s reported. So we thought a quick explainer was in order. 

How to Calculate Net Assets

The formula to calculate net assets is the same as used to calculate equity in a for-profit company. It looks like this:

(Assets – Liabilities = Net Assets)

In this equation, your assets are anything you own that has value to your organization, such as cash, investments, or physical property (e.g., buildings, land, equipment). 

On the other hand, your liabilities are everything you owe to other people, like credit card balances, loans, mortgages, lines of credit, accounts payable, and more.

Understanding Nonprofit Net Assets

As shown above, Net Assets are simply the value of what you own (Assets) versus what you owe to others (Liabilities).

So another way to think of it is that your Net Assets are the amount of money you’d have left if your organization sold all of its assets and paid off all debts it owes to anyone else. 

On the for-profit side of things, this left-over balance is called equity because it is how much money shareholders and partners would split after the debt is settled. But since there aren’t any shareholders in a nonprofit, this balance of value is called “Net Assets” instead.

Generally, liabilities are categorized based on due dates. So, if an organization has liabilities it expects to pay off within the year, these are classified as current liabilities. Long-term liabilities, as the name implies, are those with due dates further in the future (more than one year away). 

What Are Restricted Net Assets?

Because nonprofits often receive gifts or funds that are earmarked for a specific purpose, they must show their Net Assets in more detail.

Every nonprofit must show two categories of Net Assets on its Balance Sheet: Net Assets with Donor Restrictions and Net Assets without Donor Restrictions.

Restricted net assets are those with donor restrictions, which combine temporarily and permanently restricted classes. When a donor specifies a designated purpose for their contribution, the organization must use the donation toward that particular purpose. 

For example, suppose Daniel Donor gives a $10,000 donation designated to go towards expanding the food bank warehouse downtown. In that case, the nonprofit must use those funds towards its efforts to expand the downtown food bank warehouse. Those funds cannot be used in the general fund for other purposes. 

So, when your nonprofit receives a donation with restrictions, it must record it as donor-restricted contribution revenue and report it accordingly on its financial statements. 

What Are Unrestricted Net Assets?

Unrestricted net assets are assets with no specific restriction on how you can use them. So your organization can use these assets for any purpose that aligns with fulfilling the organization’s mission. 

Net Assets on the Statement of Activities

Most conversations about Net Assets revolve around the Balance Sheet or Statement of Financial Position. This is where you’ll find the balance of Net Assets that shows the accumulated financial reserves of your organization.

But you’ll also see the term Net Assets pop up on your Income Statement, or Statement of Activities. Here it will take the form of “Change in Net Assets.”

Your Change in Net Assets is the difference between the revenue you have recorded and the expenses incurred during a given period. It’s essentially what a for-profit company would call Net Income or Profit.

For instance, if you collect $500,000 in revenue and record $450,000 in expenses in a given month, your Change in Net Assets will be +$50,000. Conversely, if you register more expenses than revenue, your Change in Net Assets will be negative.

As the term “Change in Net Assets” implies, that $50,000 gain will flow through directly to the Balance Sheet. So your Total Net Assets on the Balance sheet will be $50,000 higher than at the previous month’s close.

Need Help Navigating Your Nonprofit’s Finances?

At Charity CFO, we understand the complexity of nonprofit accounting. Our dedicated team (including five former nonprofit auditors) focuses solely on nonprofit organizations to help navigate the complicated maze of accounting. 

We’ve helped 200+ nonprofits around the country optimize their bookkeeping, create consistent monthly reporting, and strengthen the finances of their organizations. So if you’re looking for reliable and talented financial assistance for your nonprofit, we’re here to help! 

Contact us to schedule a free consultation today. 

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6 Nonprofit Bookkeeping Tips to Save You Time & Money

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If you manage a nonprofit, you know very well that every day there are a million and one things to be done. And, of those a million and one things, bookkeeping is not at the top of your favorite things to do list. 

Good bookkeeping requires extreme accuracy and attention to detail. But it’s often seen as “busywork,” it rarely makes the priority list, and under-staffed nonprofit teams often fall behind. But you need accurate and timely bookkeeping to get the financial reports you need to run your programs, report to your grantmakers, and keep your operation on track.

But nonprofit bookkeeping doesn’t have to be so stressful.

Here are our six biggest nonprofit bookkeeping tips to help keep your organization’s books up-to-date without late-night sessions or stressful weekends at the office. 

Top Nonprofit Bookkeeping Tips

1. Use A Simple Accounting Software 

What’s our #1 nonprofit bookkeeping tip? If you are still using Excel spreadsheets or handwritten ledgers to track your finances, you need to stop asap. Outdated manual systems consume more of your time and make it easier for things to go missing. 

Instead, use simple accounting software like Quickbooks Online. 

Perfect for most small to mid-sized nonprofits, Quickbooks is easy to use, moves quickly from cash to accrual accounting, and almost every CPA or accountant is familiar with it. We specifically like to recommend Quickbooks Online, rather than nonprofit-specific software, for most small to mid-size nonprofits.

Quickbooks integrates with dozens of other financial software so you can automate many things (hello, easy payroll, and effortless expense reporting). And it’s accessible wherever and whenever you need it. 

Plus, if you fall behind on your bookkeeping for a month or two, you can quickly download bank and credit card transactions with just a click, saving you hours or days of manual input. 

If you’re scared about the learning curve, don’t be! If you taught yourself to do it by hand, learning how to use nonprofit accounting software will be a breeze. And tons of free tutorials and resources can help you quickly solve any problem.

“In fact, Quickbooks or the other software provider of your choosing should offer these types of trainings,” says Katie Gray, the Content Manager for the all-in-one nonprofit software provider Springly. “Product demos, help center articles, blog posts — all these resources teach you nonprofit accounting through the specific software you’re using.”

2. Scan Your Receipts and Invoices 

Gone are the days of manually recording every receipt and invoice. Instead, dozens of convenient apps are out there to help you scan and upload receipts and invoices without touching your keyboard.

In most cases, you don’t even need a scanner to do it. For example, smartphone apps like Neat allow you to scan receipts using their app and the camera on your phone. Plus, they’ll help you organize and store your documents securely, so you never have to worry about a lost receipt.

Some receipt scanning options, like Wave, will offer free plan options. But you may need to pay a little for more users or storage. Still, the few dollars a month you’ll spend on the service can save you hours of payroll costs–so it’s worth the investment!

And if you’re using Quickbooks Online, they offer their receipt-scanning app that helps make your bookkeeping tasks easier than ever.

3. Go Paperless 

You can do almost everything online today, and the more you do online, the better, as far as we’re concerned.

From online bank and credit card statements to digital invoices and receipts, it’s much harder to lose online documents than a piece of paper. Plus, it helps keep your offices clean and makes it easier to coordinate with outside contractors, like your accountant.

Opt for digital-only communication from your financial documents and invoices, where possible. Most businesses will offer you this option–even the IRS requires nonprofits to file their Form 990 online!

This is one bookkeeping tip that makes life feel less chaotic for everybody in your organization.

4. Use Plastic, not Paper

No, we’re not talking about shopping bags here.

It’s time to put the cash away and use your debit or credit cards instead. 

Banks and credit card companies give you detailed digital spending statements, which helps when there’s confusion about a transaction. Of course, you’ll still need to keep (and scan!) your receipts, but at least the cards leave a paper trail.

Cash can go missing, and receipts get lost. So cards give you a better way to track your expenses and have a proof for your auditors at year-end. 

An extra bonus to this nonprofit bookkeeping tip? Digital spending statements can automatically sync with software like Quickbooks to eliminate all manual transaction entries.

5. Keep A Simple Chart of Accounts 

Most small nonprofits don’t need a complex chart of accounts. Yes, you must track your revenue and expenses properly to comply with fund accounting and functional expense reporting requirements. But you don’t need to overcomplicate things just for the sake of it.

A simple, straightforward chart of accounts will keep your financial statements clean and easy to read, which your board of directors and donors will undoubtedly appreciate. 

If you’re looking for guidance, you can click here to download our free chart of accounts template. 

6. Hire a Payroll Service 

Payroll is one of the most challenging and time-consuming tasks a nonprofit accounting department must face, so it’s no surprise it appears in our nonprofit bookkeeping tips!

It may seem like a good idea to save money by handling payroll in-house but do so at your own risk.

Payroll requires complex calculations and particular tax and reporting requirements. As a result, it’s easy for anyone not experienced to get lost. And payroll-related mistakes could cost your organization money in back taxes and penalties without your awareness.

Remember, nonprofits do have to pay some taxes. Nonprofits do have to pay payroll taxes for their employees, as well as withhold taxes in accordance with the information they submit on their W-4. 

Our advice? Don’t try to figure this out on your own. Deal with a professional payroll service instead. This is their business, so they make it easy for you to pay your employees AND stay compliant with federal, state, and local tax laws.

Bonus Nonprofit Bookkeeping Tip: Outsource Your Bookkeeping & Accounting

If you’d rather not deal with bookkeeping and accounting, or if you’re having difficulty finding and keeping skilled financial professionals, why not outsource your bookkeeping to an expert?

Many nonprofits hold themselves back by trying to work with volunteers, family members, or interns or by relying on their board treasurer to figure out their finances.

But professional bookkeeping might be the best investment you can make. The Charity CFO helps hundreds of nonprofits automate and optimize their accounting systems to go paper-free and get accurate monthly financial reports, like clockwork. No amount of nonprofit bookkeeping tips can do that.

Our team of nonprofit accountants and former nonprofit CFOs can help you eliminate the chaos to see your financial picture clearly. And for less than hiring an in-house accountant or keeping an expensive CPA on retainer.

If you’re wondering if outsourcing your finances could help your organization, reach out to us today for a free consultation. We’ll let you know how we can help you execute your mission.

Why branding matters to the modern nonprofit with Beth Brodovsky

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In this episode, Tosha will walk you through the most common misconceptions about nonprofit audits to let you know exactly what you can expect (and NOT expect) from a nonprofit audit before you commit.

Audits scare the daylights out of nonprofit founders.

But at The Charity CFO, Tosha and her team need to prepare 50+ nonprofit partners for audits every year. Thankfully, they’ve got 5 former nonprofit auditors on staff, which means they know all there is to know about audits.

Listen to this episode to make sure you’re fully prepared for your audit!

Here’s a preview on YouTube:

Demystifying Branding: Understanding the Three Dimensions of Brand Strategy

To watch the full episode, click on the Spotify player above or search it wherever you get your podcasts.

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How To Avoid Nonprofit Accountant Turnover

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I’m sure you’ve heard about the “Great Resignation” that’s been taking place over the last year or so. Not surprisingly, this above-average employee turnover impacted nearly every industry, but it has hit nonprofits and financial professionals particularly hard. 

However, nonprofit accountant turnover is not a new problem in the sector. It’s an ongoing issue that’s merely exacerbated by the Great Resignation. Unfortunately, the issue seems to be getting worse rather than better, and it’s one of the biggest problems that many of our nonprofit clients face today. 

In this article, we’ll talk about “accountants” because the financial roles in nonprofit organizations are notoriously vague. But we’re actually talking about high-level accountants, directors of finance, CFOs, and a variety of financial leadership roles in the nonprofit world.

nonprofit_accounant_i_quit

Why Do Nonprofit Accountants Quit?

It’s hard to identify just one factor causing the high turnover rate of nonprofit accountants, treasurers, and chief financial officers. However, in a recent podcast with us, Trina Owens talked about the reasons that so many nonprofit accountants quit their jobs, such as: 

  • Limited growth opportunities
  • Low salaries
  • Underfunded financial departments
  • Inflexible or antiquated accounting systems
  • Toxic or unhealthy work environments 

Of these issues, the issue of underfunded departments is probably the one that accounts for the most turnover. And it’s often the driving factor behind the other factors, like low salaries and unhealthy work environments.

To cut corners, nonprofits often force nonprofit accountants to handle various responsibilities, including HR, payroll, and bookkeeping. Some CFOs and nonprofit treasurers even find themselves in charge of handling administrative tasks and operational issues, which really shouldn’t be in their area of responsibility.

In underfunded organizations, it’s not unusual to task your nonprofit treasurer or CFO with everything that falls outside of fundraising or programs. When this happens, your accountant gets spread too thin, frustrated that they’re not able to do anything well, and overwhelmed and unfulfilled in their role. 

Overworked, Unchallenged, and Burned Out

The best accountants, treasurers, and CFOs want to be in a role where they are growing, succeeding, and doing work they enjoy. But nonprofit budget constraints often force organizations to task the CFO with handling multiple roles, including specialized skills beyond their training.

For example, in many organizations, a financial director or CFO is forced to take on Human Resources, which creates some unique challenges.

First, it’s not their area of expertise or what they do best. So your critical financial professional must put in a lot of work to learn the job and spend much of their time on projects they don’t enjoy. Beyond that, it can expose the organization to legal problems and lawsuits, as HR is a specialized field with unique requirements and demands. 

When you give your financial professional too many responsibilities, they spend most of their time working long hours on projects that don’t maximize their skillset. It’s not what you paid them for. Eventually, they get burned out, frustrated with their lack of development, and they quit.

nonprofit_cfo_overworked

The Unseen Cost of Nonprofit Accountant Turnover

To make things worse, if that person was handling all the bookkeeping, accounting, tax filings, payroll, and HR, they throw your entire operation into disarray when they leave. 

To make things worse, hiring a new financial director is a time-consuming task. It’s hard to find good people with nonprofit experience, and the price is often higher than nonprofits can pay.

So you end up hiring someone who is underqualified or doesn’t have nonprofit experience. The new hire struggles to decipher the old accountant’s systems, and you overload them with responsibilities. Within a few years, you’re accepting their resignation and hunting for a reliable financial professional once again.

This endless carousel of recruiting, hiring, training, and then recruiting again drains resources from your organization. That’s why many nonprofits have started seeking alternative solutions to tackle their accounting needs.

Fixing the “Do-It-All Nonprofit CFO” Model

You can see that the Do-It-All CFO model is clearly broken and a core factor in the crisis of nonprofit accountant turnover. The challenge, of course, becomes how your nonprofit can allocate all of the work that previously was handled by a CFO, director of finance, or senior accountant. 

There are three primary ways that you can do this: 

  1. Create multiple roles. This would mean, for example, having an accountant, a bookkeeper, and an HR professional. This lets each employee focus on what they do best. However, due to limited budgets, these often are part-time roles and can be challenging to fill. And without a true CFO, your organization may lack the high-level financial expertise you need.
  2. Hire support teams for your CFO. Another solution is adding more accounting and bookkeeping support to help your CFO with less advanced tasks. This can help ensure your CFO can focus on the most important things and isn’t overwhelmed by too many basic duties and responsibilities, but it gets expensive quickly.
  3. Outsource to a qualified financial partner. When you outsource bookkeeping and accounting to a professional nonprofit accounting team, you ensure your finance needs are met by a dedicated service team of highly skilled accountants, bookkeepers, and nonprofit financial experts. And you pay a fixed monthly fee that fits within your budget. 

outsource_nonprofit_accounting

Want to eliminate accountant turnover once and for all?

According to a report by the Society for Human Resource Management (SHRM), the average cost-per-hire is $4,693. Plus, turnover in your financial department can result in frustrated vendors, blown budgets, lost grant funding, and even worse.

So you can’t afford to get caught on the accountant hiring carousel.

At the Charity CFO, we understand your need for an effective and sustainable solution that you can count on. That’s why we’ve assembled the industry’s best team of nonprofit financial professionals to help nonprofits just like yours. 

Our team will help you update outdated accounting systems, optimize your processes, and get the timely financial statements and tax filing you require. Because our team works only with nonprofit clients, we understand the challenges you face every day. And we know the intricacies of nonprofit accounting—things like accounting for in-kind gifts, fund accounting, and donor-restricted assets—better than anyone.

Our unique outsourced model gives you both a dedicated service team and access to CFO-level guidance when you need it. It’s a modern and flexible accounting solution that ensures you’ll never have to deal with the nightmare of accountant turnover again.

After years of dealing with accountants quitting, today’s modern nonprofits have started to quit their accountants. When they do, we’re there as a qualified financial partner to fill that gap. Contact us today to learn more or to start working with our team.

No time to read this article now? Download it for later.

The Truth About Nonprofit Audits

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In this episode, Tosha will walk you through the most common misconceptions about nonprofit audits to let you know exactly what you can expect (and NOT expect) from a nonprofit audit before you commit.

Audits scare the daylights out of nonprofit founders.

But at The Charity CFO, Tosha and her team need to prepare 50+ nonprofit partners for audits every year. Thankfully, they’ve got 5 former nonprofit auditors on staff, which means they know all there is to know about audits.

Listen to this episode to make sure you’re fully prepared for your audit!

Or watch it on Youtube here  

Understanding Audits for Nonprofits: What They Are and What They Are Not

6 Steps To Recession-Proof Your Nonprofit

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A lot of nonprofit leaders are asking us about how to prepare their organizations for the possibility of a recession.

So I decided to change up the format of my A Modern Nonprofit Podcast this week to talk directly to you about the steps you can take to prepare your organization for a potential recession:

Navigating Economic Uncertainty: Financial Strategies for Nonprofits

Click here to listen to the podcast on Apple Podcasts or Spotify

6 Steps to Recession-Proof Your Nonprofit

1. Assess Your Cash Flow

First, you must understand if your organization bringing in more money than it is spending to see if your business is sustainable in the face of recession.

If you’re currently spending more than you’re bringing in, you’ll slowly start whittling down your savings accounts. And then you’re living on borrowed credit through operating loans, lines of credit, credit cards, and things of that nature.

If that is your case, I strongly encourage you to staff and figure out how you can flip things around to be consistently bringing in more than you spend over a long-term period, possible over the course of a year.

Having a grasp on your cash flow is ALWAYS important, but even more so in the face of economic and fundraising uncertainty brought on by a global or national recession.

2. Keep Your Debt to a Minimum

This is another everyday principle that becomes doubly important when the state of the economy is uncertain. You don’t want to head into a recession with a business that’s overly reliant on debt.

And it’s not just a matter of the health of your balance sheet, it’s about understanding, “What is this debt costing me?”

As in, how much of your much-needed cash are you tying up in debt payments every month? Every quarter? Every year?

Take a hard look at which debt you can pay off or restructure now to reduce your monthly payments. Ensure that you’ve got the cash to meet your obligations every month even if your cash inflows take a downturn due to macroeconomic factors beyond your control.

3. Increase Liquidity

Increasing liquidity means increasing your ability to tap into cash when you need it in the short term.

In times of recession and uncertainty, it’s important that you have as much of your cash available as possible, as opposed to being tied up in long-term investments or blocked by donor restrictions.

You should have at least 30 to 90 days of cash on hand, and don’t be afraid to lean toward the 90-day end of the spectrum if the recession intensifies or you experience a decrease in donations.

If you don’t have 30 days of cash on hand, design a savings plan to get your cash balance to at least 30 days. And I’m not talking about 30 days on your very best day, right before that payroll…

You should have 30 days’ worth of cash on hand on your worst day after the last payroll hits and before your funding comes in.

4. Revisit Your Investment Strategy

I’m NOT an investment advisor, but anytime there is a change in the economic environment, you should check with your investment advisor to be sure your strategy is still appropriate.

The risk of certain investments will intensify during a recession, so just be sure to make that phone call and get the professional advice you need.

5. Lock in Your Funding Early

When there is a recession on the doorstep, it makes sense to lock in your fundraising plan earlier rather than later.

So start talking to your longstanding donors right away, let them know your plans, and make the ask now rather than at the end of the year. Many of them will be glad to give now and be thrilled that you’re making a proactive plan to weather the storm.

If these folks are supporters of your work, they’ll be happy to do their part in ensuring your mission survives an economic downturn.

6. Create a Detailed Fundraising Plan

I can’t tell you how many times we’ve worked with nonprofits that say, “Well, we raised a quarter of a million dollars last year. So we’ll plan a 10% increase for this year and budget based on that.”

But if you don’t have a plan for matching last year’s donations AND getting growth, then you don’t really have a plan. You have a dream. And recessions are dream killers.

So I encourage you to start looking at who gave you money last year and where you think your money will come from this year. And then strategize how you are going to come up with those dollars.

Set goals and track your progress month-by-month. That way, if you’re $10,000 behind on your annual fundraising goal in June, you’ll know. And you can identify why you’re behind. Is it because you missed out on a grant you got last year? A major donor missed a payment? Or a shift in your special event schedule?

All of this boils down to knowing your numbers. Because no business–including nonprofit businesses– can operate successfully without knowing their numbers. 

Is Your Nonprofit Recession-Ready?

By now, you should have a pretty good idea of whether you’re already prepared for a recession or if you’ve got work to do.

But there’s no need to panic, in any case.

Let’s be clear–as of this writing, economists agree that the US economy is not in recession today. But the warning signs are serious, and it’s better to start preparing now for a possible recession in 2023 and beyond.

So now is the time to start making measured steps to ensure your nonprofit can continue to serve your community in the case that an economic recession does arrive in the near future.

At The Charity CFO, we provide CFO-level financial guidance for nonprofit organizations, in addition to done-for-you bookkeeping and accounting services. So If you’re not confident in your numbers, or need some help optimizing your bookkeeping and accounting, check out our website to learn more: www.thecharitycfo.com.

Watch or listen to this episode on A Modern Nonprofit Podcast:

 

What Do Charity Watchdogs Want From Your Nonprofit?

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Trust is the name of the game when it comes to fundraising. And charity watchdogs are a critical source of information for donors, grantmakers, and other funding sources when deciding who to trust with their money. 

So if you want to do a better job of raising money for your cause, you’ll need to be in good standing with these organizations. But each of these charity watchdog organizations approaches the concept of “trust” differently. 

This article will summarize the principal criteria the top 3 charity watchdogs use to evaluate your nonprofit organization. So you can understand where your organization needs to improve to boost your levels of public trust.

What are Charity Watchdogs?

Charity Watchdogs is a term used to describe various organizations attempting to measure the quality of a nonprofit organization. In this article, we’ll discuss the big 3 that your donors are most likely to rely on today: Charity Navigator, The Better Business Bureau (BBB), and GuideStar.

Each watchdog organization uses its own criteria to determine the trustworthiness of your organization, using some combination of financial, governance, and transparency. The ultimate goal is to ensure donors that as much of their money as possible will go directly toward accomplishing your stated mission.

The 3 Charity Watchdogs You Should Know

charity_navigator

The Biggest Watchdog: Charity Navigator

Charity Navigator calls itself the world’s largest and most-trusted nonprofit evaluator, and it’s hard to argue with them. Over the past 23 years, Charity Navigator has become the go-to charity evaluator for informed donors and grantmakers throughout the USA.

Charity Navigator’s Star Rating System

Charity Navigator has issued ratings for over 9,000 nonprofits using an easy-to-understand star system. To qualify for a star rating, you have to meet the following rigorous criteria:

  • Be an IRS-recognized 501(c3) nonprofit
  • Be in business for at least 7 years
  • Have at least $1M in annual revenue
  • Generate at least $500k (and a minimum of 40% of total revenue) from public support
  • Allocate at least 1% of expenses to fundraising for 3 years
  • Allocate at least 1% of expenses to administration for 3 years

And these organizations are not eligible to be rated by Charity Navigator:

  • Land Trusts
  • Hospitals
  • Schools
  • Sororities/Fraternities
  • Donor-Advised Funds
  • Fiscal Sponsors

The Star Rating is based on a proprietary methodology that considers both Financial Health and Accountability/Transparency. Charity Navigator uses only publicly available data for its nonprofit evaluations, including the IRS 990 and the company website. Learn more about the criteria, methodology, and score calculator on their website.

Based on the resulting score, nonprofit organizations are given a rating of zero to four stars, as shown in the chart below.

charity_navigator_star_ratings

Note: When Charity Navigator subjected their organization to their own review system, they ranked 4-stars with a score of 92.39 out of 100!

Charity Navigator’s Encompass Rating System

Because the standards for a star rating are so high, historically most nonprofits have not been eligible to be rated by Charity Navigator.

To help close this gap, Charity Navigator recently launched their new Encompass Rating System, which provides simpler ratings for over 200,000 organizations. It allows smaller and less-prominent nonprofits to have their basic information vetted and gain additional credibility with donors.

 

The Classic Watchdog: The Better Business Bureau (BBB)

Who did Charity Navigator turn to when they needed external evaluation of their own organization? The oldest name in the charity watchdog world: The Better Business Bureau.

You probably know the BBB for providing credibility for both for-profit and nonprofit businesses. They’ve been providing ratings for nonprofits in some form since the 1920s. And their brand is second-to-none when it comes to creating trust with the public.

BBB Wise Giving Alliance

Accreditation from the BBB’s Wise Giving Alliance is still the goal seal of success for many nonprofits. In fact, Charity Navigator was proud to announce its BBB accreditation when it received it in 2022.

Although the BBB has been rating nonprofits for nearly 100 years, The Wise Giving Alliance. was founded in 2001 when the National Charities Information Bureau merged with the Council of Better Business Bureaus Foundation. 

Unlike Charity Navigator, there is no minimum revenue, and you only have to be in operation for 6 months prior to submitting an accreditation request. For this reason, BBB remains extremely popular with smaller and newer nonprofits and the donors that fund them.

Wise Giving Alliance evaluates nonprofit organizations based on 20 Standards divided into 4 main categories:

  1. Governance and Oversight
  2. Measuring Effectiveness
  3. Finances
  4. Solicitations and Informational Materials

After they complete your review process, Wise Giving Alliance posts the full report on their website, like this one:

BBB_charity_assessment

To be accredited by the BBB, you must satisfy all 20 criteria (see those criteria here). If you don’t satisfy all 20 immediately, they will work with you to help you understand where you’re falling short and what you must do to be accredited.

To apply for BBB accreditation, visit Give.org to get started.

Is Wise Giving Alliance credible? Their #1 competitor, Charity Navigator, gives them a perfect score of 100/100 on their Encompass Rating System. That kind of praise from your top competition certainly helps build trust!

 

guidestar

The Data-Driven Watchdog: Guidestar

GuideStar bills itself as “the most complete, up-to-date nonprofit data available,” with data on over 1,800,000 nonprofit organizations. But their approach is different than the other Charity Watchdogs on this list.

Rather than evaluating nonprofits and issuing a rating, GuideStar’s mission is to make complete and accurate financial data on nonprofits as available as possible. They’ve done such a great job of accumulating financial data on nonprofits that Charity Navigator has partnered with them to share information. It’s yet another example of how these charity monitoring organizations work together.

By increasing transparency and consolidating resources into one platform, they hope their platform can build trust and streamline the grant writing process to make giving and receiving money much more efficient.

So, while they don’t rate your organization, they do make your information public to 12M+ annual visitors. And they offer you opportunities to make granular details of your finances available to their users.

GuideStar’s Candid Transparency Ratings

Through their Candid program, you can claim your nonprofit’s profile and update it with detailed information about your programs, your management team, and the specific impact you’re making in your community. And send all that information to 200+ charitable sites, including AmazonSmile, Facebook, and Network for Good.

Accurate contact information will get you Bronze Seal. And by sharing your financial statements, strategic plan, and demographic makeup, you can earn the coveted Platinum Seal of Transparency.

So Which Charity Watchdog Should You Use?

The simple answer is all of them.

Each of these charity evaluating organizations has its areas of strength. By seeking out accreditation and updating profiles on all 3 platforms, you give your organization the best chance of gaining credibility with the donors you need most.

Some grantmakers and donors will look at all three of these resources before making a decision, so being as transparent as possible will reflect very well on your organization.

Never pass up any opportunity to build trust with your potential donors. And each of these Charity Watchdogs will help you build that trust.

Are Your Books And Internal Controls Not Ready for BBB Accreditation?

If you’re concerned that your bookkeeping, accounting, and internal controls aren’t ready for prime-time, it’s okay. You’re definitely not alone. But it might be time to look for help.

The Charity CFO provides expert bookkeeping, accounting, and financial consulting exclusively for 501(c)(3) organizations in the USA. We’ve helped dozens of our 200+ nonprofit clients get ready and achieve their BBB accreditation.

We can also help you modernize your accounting systems, digitize your bookkeeping, produce consistent financial statements, and keep you always audit-ready.

Reach out to us to discover how we can help you build more trust with your potential donors.

 

The 5-Minute Guide to Nonprofit Finances

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It’s a myth that all stakeholders need to be experts in every aspect of nonprofit finances. Even on nonprofit financial committees, some members may be skilled in accounting, others in banking, and others in investing or financial analysis.

Yet all nonprofit leaders, including board members, directors, and finance committee members, should have at least a basic understanding of nonprofit finances.

But if you bring zero experience in accounting or financial management to your organization, that’s okay. Because the basics of nonprofit finances are easy to grasp. 

In this article, we’ll walk you through the elements of nonprofit finance that every executive director, CFO, and accountant should know.

Step #1: Money In / Money Out

You can see how much revenue comes into an organization and how they spend that money by looking at the Statement of Activities (also called the Income Statement) or an updated Budget report (also referred to as the Budget vs. Actual report).

But you won’t understand a nonprofit’s finances based on financial statements alone. To start grasping a nonprofit’s finances, you should have in-depth conversations with staff to understand the various programs and major fundraising initiatives.  nonprofit_finances_expenses_revenue

Money In: Revenue

Start by investigating how the organization earns money and who pays them. 

For example, is the organization dependent upon special event fundraising? Or is it heavily funded by complex government grant funding?  And are there seasonal trends in funding, like a school with revenue during the school year but zero income during the summer? Or a big once-per-year fundraising event?

Understanding the sources and seasonal flow of revenue into the organization will help you anticipate needs and set realistic expectations.

Money Out: Expenses

Once you understand the revenue side, familiarize yourself with how, why, and when the organization is spending its money.

Close to 60% of expenses go to staffing pay and benefits in most nonprofits. Is that the case here? If not, where is the money going instead? And what makes up the balance of expenses? Are they going toward occupancy costs? Does the organization make grants to other nonprofits? Or does it spend a lot of money on supplies needed to execute its programs?

Once you understand money in and money out, take a look at the assets the nonprofit owns and the liabilities that it owes to others to get a grasp of their financial health. nonprofit-finances-assets-liabilities

Step #2: What do they own? And what do they owe?

You can find a nonprofit’s assets and liabilities on the Statement of Financial Position (also called the Balance Sheet), which gives you a quick snapshot of the long-term position of the organization. 

But, as with revenues and expenses, you can only learn so much from the reports. You’ll learn a lot more from intentional conversations with people inside the organization who can help you understand what those numbers mean. For instance…

  • Does the nonprofit have enough cash to fund its programs and meet payroll? 
  • Are there complex investments or endowments restricted to specific purposes? 
  • Has the nonprofit taken on significant debt or been slow to pay its creditors?  

If a nonprofit has had long-term effective financial oversight, it should have enough cash, smart investments, and plenty of assets.

Well-managed nonprofits should also be collecting on pledges or accounts receivable on a timely basis. Similarly, healthy nonprofits should carry minimal debt and pay their vendors on time.  On the other hand, a poorly managed nonprofit will have little money in the bank, few other assets, an accumulation of debt with no clear plan to repay it, and a ballooning accounts payable balance. nonprofit-finances-compliance

Step #3: Understand compliance

To fully grasp your nonprofit finances, you need to start to understand the major compliance requirements that impact your organization.

In most cases, these include an annual audit and federal tax return. While reviewing the audit or the tax return might seem overwhelming at first, sitting down with the finance committee while the auditors present the audit and 990 is a great way to accelerate your learning curve.  The audit team will identify any deficiencies in the accounting, review the various reports and explain what they mean, and discuss major details of the financials.

By actively inserting yourself in this process and asking questions, you’ll quickly start to grasp financial concepts you thought were beyond your reach.

Step #4: Never stop learning

Understanding nonprofit finances is a core responsibility of board members and executives.

And in most organizations, others on your finance committee or accounting team are glad to help. So lean on them, ask questions, and be inquisitive.  Plus, there are numerous free resources specific to nonprofit accounting and governance. Resources may include white papers, articles or blogs, and even online courses. 

If you’d like to learn more, check out our free online course on nonprofit finances and financial reporting here: www.thecharitycfouniversity.com