The Dual Purposes of Accounting and Fundraising Software
Accounting software and fundraising software are both integral components of success in a nonprofit. And they each serve a unique purpose.
How Fundraisers and Accountants can Better Communicate
Bridging this communication gap can help your organization ensure every dollar raised is used effectively.
How Nonprofits Can Choose the Right Banking Partner
The right nonprofit banking partner may not be the first thought that comes to mind, but is very important for the organization.
Donation vs. Loan: Can a Foundation Give Money to a Nonprofit?
Donation vs. Loan: What’s the difference? In a nonprofit knowing how these two differ can be an important distinction.
Nonprofit Fundraising Strategies to Consider
Nonprofit fundraising strategies are essential for the health of an organization. Read this article to see some of the stratgies.
Nine Fundraising ideas for nonprofits
Fundraising ideas for nonprofits is a fun topic to think about when you’re feeling the need to generate money into your organization.
How to Comply with Accounting Standards for Nonprofits
Accounting standards for nonprofits are probably not the first thing you think about, but are crucial for your organization to succeed.
Why Your Church Shouldn’t Take Pass-Through Gifts
Pass-through gifts can seem exciting for your church, but make sure you understand the full legal requirements involved.
Understanding the Job of a Nonprofit Operations Manager
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There are more than 1.54 million nonprofits globally. To ensure that a nonprofit runs efficiently, several people work behind the scenes to make things much easier, and one of those people is the operations manager.
The operations manager might be the secret weapon of the most successful nonprofits we know. By taking charge of getting things done, an operations manager helps executive directors focus their energy on the strategic big-picture that will move their mission forward.
If you’re looking to enter the world of nonprofit organizations with a background in operations management, you might be wondering how your skills can help you. Or, if you’re a nonprofit founder or an executive director, you might be wondering how an operations manager can help make your organization ruthlessly efficient and highly effective.
Read on now to find out what the job description of a nonprofit operations manager might look like.
What does an operations manager do?
A nonprofit operations manager, or director of operations for a nonprofit, is responsible for the day-to-day operations of the organization.
They oversee the administrative staff and make sure that the office runs smoothly. They also develop and implement operational procedures and systems and manage budgets and financial reports. In short, they ensure that the nonprofit runs like a well-oiled machine!
Now, if that sounds like they do a bit of everything, it’s because that’s true!
An operations manager, by definition, is a manager. They don’t necessarily need to be an expert at any one thing. Still, they need to be able to be proficient enough at many things to manage a highly productive team to get results for their organization.
Here’s how Krysta Grangeno described her day-to-day tasks in operations for a nonprofit organization:
Who reports to the operations manager?
And who do they report to?
It depends on the organization, but generally, any department is responsible for the day-to-day operations of the entity. That may include
- Finance Department
- Fundraising Department
- Program directors
- Human Resources
- Information Technology
- And more!
You can see that, depending on the size and structure of your organization, the ops manager will have to oversee a large number of departments.
In turn, your operations manager will either report to the Director of Operations, the Chief Operating Officer (COO), or directly to the CEO or Executive Director. They may also have some direct interaction with the Board of Directors, although the board isn’t technically their supervisor.
What are the job responsibilities of a nonprofit operations manager?
As mentioned above, their primary role is to supervise and organize the efforts of the departments under their responsibility. Here’s a breakdown of what duties a nonprofit operations manager will be expected to handle:
Ensure the Office Runs Smoothly
The administrative staff is responsible for keeping the office organized and running smoothly on a day-to-day basis. The operations manager will make sure that they have everything they need to do their job effectively and that they are meeting all deadlines.
An operations manager must be exceptionally well organized, as they’ll be responsible for creating systems and processes that ensure every department is meeting its expectations. Often, they’ll also need to be aware of all legal or reporting requirements that the organization may have in executing their programs.
Implement Budgets and Oversee Financial Strategy
The operations manager will be responsible for spearheading the budgeting process for the organization and ensuring that the accounting department delivers timely and accurate financial statements for the board of directors or other stakeholders. You’ll also need to be intimately familiar with these statements as well and review them proactively to identify potential issues before they become problems.
As the operations manager, part of your role is to ensure that the financial department runs effectively. This includes ensuring that checks and balances are in place and that employees in the financial department are adequately trained to do their jobs.
The operations manager must also be acutely in-tune with the organization’s budget. Because their role is so wide-reaching, they need to be aware of how shortfalls in one area (like fundraising) may impact the ability to execute in others (like executing programs or meeting payroll).
That doesn’t mean that the operations manager needs to be an accountant. Generally, they’ll oversee the accounting team or work as a liaison with an outsourced accounting firm. But ultimately, they are responsible for ensuring that the accounting work is done correctly and on time.
Supervise Human Resources
Ideally, the operations manager’s role in human resources is limited to supervision, but that’s not always the case. In some smaller nonprofits, HR may get put completely onto the ops manager’s plate, but we’d recommend against it.
Human resources is a specialized field that requires experience and specific knowledge. You need to comply with employment law, collect the correct information, withhold taxes appropriately, and onboard and train new employees.
A knowledgeable HR professional should establish the policies and procedures for the human resources department, but many nonprofits can’t afford a full-time HR coordinator. That’s why many nonprofits choose to outsource their HR to external firms as well.
Even if you’re working with an external firm, the operations manager will probably need to be involved in many day-to-day items related to HR—like searching for employees to hire, interviewing, training, counseling, and terminating employees.
Manage Technology Integration
Technology is a massive part of the work that nonprofits do. Almost every person in your organization depends on technology. And the networks and systems that keep those people aligned take organization, security, and maintenance.
Depending on your mission, you may even be dealing with highly sensitive personal information that you have a legal responsibility to protect, even in digital form. As the operations manager, you’ve got to make sure the appropriate technology systems and controls are implemented throughout the business.
Not utilizing the proper systems could mean the loss of crucial data needed in the future. Or it could mean a crumbling IT infrastructure that can’t support the business model being implemented.
Nonprofits often don’t need, or can’t afford, an internal IT department. And relying on someone’s husband or nephew to fix problems isn’t an acceptable solution. Instead, many organizations outsource their IT department to a service provider. In this case, it’s the operations manager’s job to liaison with the IT provider to ensure the office gets the support it requires.
Ensure Compliance and Organization
Records need to be kept in order within any business. There are several reasons for this, but compliance is an important one for many nonprofits.
Your organization needs to comply with accounting regulations, legal restrictions, employment rules, and other industry-specific regulations. And the operations manager is ultimately responsible for ensuring that the company is prepared to prove its compliance when audited.
Not only does record organization help when something needs to be located, but it also speeds up business efficiency. Instead of wasting time hunting for something, it will be easy to access the record database. All you’ve got to do is type in some information and locate the data needed.
How to evaluate performance and further development
Whether you’re building the leadership team to include an operations roles, or you’re currently in an operational leadership role — it’s important to regularly evaluate performance as well as work on developing to further improve your work.
If you’re evaluating your ideal candidate, after they’ve been in the position for a certain period (a year, for example), it’s important to compare their achievements to the job description. For self-evaluations, read resources (like this one) to find usable knowledge to help improve your performance.
Key areas to concentrate your efforts include:
- Purposeful communication: In operations, too much communication is nearly as problematic as not enough. What you say, how you say it, must be as useful as possible. That’s where developing purposeful communication tactics come in handy.
- Organizational processes: As someone who ensures compliance and handles intricate areas of a nonprofit, the ability to develop processes takes precedence over nearly every other aspect of your role.
- Continuing certifications: There are a number of nonprofit certificate programs available for leadership teams. Those instructing the programs often have robust experience in the sector. Taking these programs helps you find the additional knowledge to improve your performance.
A Note on Outsourcing Professional Services:
We’ve mentioned outsourcing a few times here, related explicitly to bookkeeping/accounting, human resources, and information technology. That’s because this is an emerging trend we see gaining steam in the industry.
Traditionally, many nonprofits had a scrappy, do-it-all mentality when it came to these areas. So, an operations manager or financial director frequently ended up having responsibility for everything— from making bank deposits and firing employees to troubleshooting network issues.
But this approach causes more problems than it solves. Having trained professionals handling complex tasks that are outside their area of expertise is hugely inefficient. And it’s just asking for mistakes.
Yet most organizations can’t afford a full-time accountant, HR coordinator, and IT professional. And that’s where the operations manager comes in.
When organizations outsource these 3 functions and have the operations manager work directly with each team, they can get the full professional support of each team without paying a full-time salary. Often, these teams are more talented and efficient than an internal team member would be.
We believe this is the operational business model of the future for successful mid-sized nonprofits in the $1M to $15M/year range. If you’d like to talk to us about outsourcing your bookkeeping and accounting to The Charity CFO, send us a message to set up a free consultation.
What Qualities Make a Good Operations Manager?
Let’s turn to Krysta again, to offer a first-hand perspective on what skills an operations manager needs:
What A Nonprofit Operations Manager Does: A Recap
A nonprofit operations manager has many responsibilities, but their primary role is to coordinate all the various departments to ensure that business runs smoothly.
The operations manager will oversee the finance department, human resources, information technology, programs, fundraising, and more. And they must grasp how each department impacts the other to ensure that the entire organization runs harmoniously.
By doing their job well and assuming responsibility, they free up each department to focus on what they do best, rather than overlapping tasks or getting tied up in work that’s unrelated to their department. They also help free up the directors to focus on strategy rather than the day-to-day minutiae of each department.
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How Do Nonprofits Make Money?
You need money to carry out your mission. But how do nonprofits make money anyway? We’ll walk you through 8 popular money-making strategies.
Financial Oversight Guidelines for Nonprofit Boards
Financial oversight is one of the primary roles of your nonprofit board of directors.
Every nonprofit is required to have a board of directors. According to the National Council of Nonprofits, the board has a responsibility to “steer the organization towards a sustainable future by adopting sound, ethical, and legal governance and financial management policies.”
But, in practice, the terms fiduciary duty or financial oversight are a bit ambiguous. And they create a lot of confusion for people new to the nonprofit sector. So rather than trying to define it, let’s look at some guidelines for what financial oversight looks like in real-life.
What is Financial Oversight?
Financial oversight refers to a broad range of responsibilities. A few of the primary components include:
- Policy development
- Financial sustainability
- Compliance
But before we dig into what those look like, let’s talk about why fiduciary responsibility is such a big deal in nonprofits. And why the board of directors plays the primary role in providing financial oversight.
Nonprofits are fundamentally different from other businesses
You hear the term financial oversight in the nonprofit world and less in the for-profit world, largely due to the structure of a nonprofit. Unlike a for-profit company, a nonprofit organization doesn’t have an “owner.” Instead, it is funded by and belongs to the public.
But the term “nonprofit” itself can be misleading. I’d suggest you stop thinking of a nonprofit as “a business that doesn’t make a profit.” And instead, think of it as a business where the ‘profit’ must be directly reinvested to support its stated mission.
The owners of a private for-profit business can choose to distribute profits to themselves or spend as they choose. But the leader of a nonprofit cannot make distributions to themself because all expenses must be consistent with furthering the organization’s stated mission.
In return, for reinvesting your profits to further a charitable mission, the IRS allows you to operate free of income taxes.
But without proper financial oversight, you could inadvertently spend funds in ways that don’t directly impact your mission. And if you do that, you may risk losing that tax-free benefit or even find yourself in legal trouble.
Public responsibility brings a higher standard of fiduciary responsibility
In for-profit businesses owned by specific people, it’s clear who carries the risk and liability of operations. In most cases, a failure of financial oversight affects just the owners (and maybe their employees or vendors), but not the general public. In the case of a large public company, they have highly involved boards of directors to provide an additional layer of financial oversight.
But when public funds are at risk (in the form of donations and grants) an accountability system must be employed to ensure funds are used appropriately. The board of directors is the core element of this accountability system. And this is why all nonprofits are required to have a board starting from the moment of incorporation.
The board is charged from your inception with a fiduciary responsibility to ensure your organization lives up to the promises you made when you accepted public donations.
What Does Financial Oversight Look Like?
The idea of financial oversight can be overwhelming for founders, directors, and even board members who don’t have a financial background.
To help you start to grasp it, here are some best practices that a board should be performing to ensure effective financial oversight:
- Policy development. Your board should help to establish and monitor management policies, such as:
- Financial policies (investments, capitalization of fixed assets, operating reserves, financial key performance indicators (KPIs), segregation of duties, etc.) and
- Operational policies, such as conflict of interest and whistleblower policies.
- Financial sustainability. Your board should be involved in reviewing and approving the annual operating budget. It should also review financial statements at every board meeting and challenge management on numbers that don’t make sense.
- Compliance. Your board should review and approve the annual tax return (IRS Form 990). If your nonprofit requires an audit, the board should engage directly with the audit firm. Finally, the board should be aware of significant compliance requirements the nonprofit is subject to and ensure a system of accountability is in place.
Too often, we see financial oversight delegated to the Board Treasurer or the finance committee. However, your board cannot simply delegate financial oversight to the Finance Committee or a single board member.
Regardless of which committee you belong to, every board member has a fiduciary responsibility to the organization. Your lack of a financial background does not relieve you of the obligation to oversee the financial performance of the nonprofit. Instead, it’s your responsibility to educate yourself on the basics of financial management and oversight.
At a minimum, each board member should be able to do these things:
- Review annual tax return before filing
- Review annual audit
- Review periodic financial statements at each board meeting
PRO TIP: If you or one of your board members can’t understand nonprofit finances, don’t feel defeated. It’s very common. And it’s not that hard to get up to speed. Look for some resources, like our free masterclass for making sense of nonprofit financial statements, and get up to speed!
The Role of the Finance Committee in oversight
While all board members need to do their part, the finance committee does play a leading role in critical financial policies and decisions. For example, the finance committee will generally take the lead with things like:
- Reviewing the annual budget in detail, asking questions, and doing a preliminary approval of the budget before bringing it to the rest of the board
- Reviewing annual tax return for accuracy before bringing it to the rest of the board
- Spearheading communication with the audit firm and reviewing the audit prior to bringing it to the rest of the board
- Developing key financial policies for endowments, investments, capitalization, operating reserves, internal controls, etc.
- Reviewing financial statements in detail each month (financial reports reviewed at the finance committee level are generally more detailed than the reports going to the board level. The finance committee should understand the primary sources of revenue and expenses. The committee should also develop KPIs in line with the organization’s goals. KPIs may include: operating reserve %, days of cash on hand, accounts receivable collection period, aging of accounts payable listings, restricted vs. unrestricted net assets, etc. )
- Holding regular meetings to discuss finances and ensure that the organization is sustainable (finance committees typically meet monthly or every second month)
Simply put, good financial oversight looks something like this:
Every board member has a general understanding of the organization’s sources and uses of funds. In addition, they understand the overall financial position and sustainability.
Each board member is familiar with the critical compliance issues the organization faces and the policies created to ensure adherence to compliance standards.
The sign of effective financial oversight is the presence of fruitful conversations about the financial performance at your board meetings. All board members should participate, regardless of their background or committee assignments.
Need help managing your nonprofit’s finances?
The first step to better financial oversight is getting your board more comfortable understanding the organization’s financials. For example, understanding basic terminology, the underlying financial assumptions used for budgeting, and the organization’s primary sources and uses of funds.
If you or your board is struggling with any of these things, we’d like to help. That’s why we created our free online masterclass for nonprofit founders, directors, and board members to give you a crash course on nonprofit finances.
Check it out for free: https://www.thecharitycfo.com/university/
Private Foundation vs. Public Charity: What’s the Difference?
The IRS recognizes many different types of nonprofit organizations. Within those organizations, though, the 501(c)3 stands apart because of the unique tax benefits it enjoys. In addition to not paying income taxes, individuals and corporations that donate to a 501(c)(3) nonprofit can claim a tax deduction for their donations.
But even within the 501(c)(3) organizations, there are various types of organizations. Two of the most common are Public Charities, like churches, social support organizations and universities, and Private Foundations, like the Bill and Melinda Gates Foundation.
But what is the difference between a private foundation vs. public charity? We’ll dig into that right now.
Private Foundation vs. Public Charity
The IRS defines the two types of nonprofit organizations and sets rules for distinguishing a foundation from a charity. And the difference between them is based entirely on where (and from whom) they get their money.
What is a Private Foundation?
A private foundation is a 501(c)(3) nonprofit that generates much of its support from a small number of sources and investment income. According to the IRS, they “have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.”
Private foundations are often referred to as “family foundations” because they tend to be more closely controlled by a single family or a small group of people with aligned interests. It’s common for the board of a private foundation to all be related or to be made up of just a few people.
Some of the largest private foundations distribute annual gifts valued at hundreds of millions or billions of dollars. And their names are probably familiar to you, like The Bill and Melinda Gates Foundation, The Ford Foundation, and The Robert Wood Johnson Foundation.
What is a Public Charity?
Public charities generally receive the largest share of their financial support from the general public, private foundations, or governmental agencies. Rather than depending on a single funding source, like a family or a corporation, they actively raise money to fund their programs. And they have far greater interaction with the general public vs. private foundations.
The board members of public charities are often selected to represent the interest of their broader constituency. So they’re not controlled by one person or family.
A public charity is what you typically think of when you hear the term “nonprofit,” organizations like Goodwill, United Way, Habitat for Humanity, Greenpeace, and your local community organizations.
Which is better: a public charity or a private foundation?
We hear this question a lot, but neither type of charity is “better” than another. They are both equally valid models for operating a nonprofit. But they serve different purposes, and one may be a better fit than another depending on the goals and circumstances of the founder.
Suppose you intend to fund a nonprofit organization yourself and have close control over the operations. In that case, a private foundation is probably the best fit.
That’s why high-net-worth individuals, like Bill Gates, typically prefer the private foundation model when they want to start a nonprofit. However, the downside to this model is that the IRS applies more scrutiny and restrictions to a private foundation.
On the other hand, suppose you’re planning to rely on financial support from a broader base of individual donors and private grants or to rely on government grants. In this case, you’ll typically adopt the public charity model. Choosing a public charity enables you to operate with fewer restrictions from the IRS. And you’ll avoid paying taxes on any investment income as well.
Should I start a charity or a foundation?
When your organization applies for tax-exempt status with the IRS, you will indicate whether you are applying to be a private foundation vs. public charity.
However, each year, a public charity is required to complete Schedule A (an addendum to its 990 or 990-EZ) to verify that it still qualifies as a public charity. Schedule A contains several ‘tests’ and if your organization fails them, your status will be automatically converted to a private foundation.
PRO TIP: Churches, schools, and hospitals are automatically assumed to be public charities and are exempt from the Schedule A tests.
As a part of Schedule A, you will have to compute your public support percentage to validate that you are not simply self-funding your charity. The public support percentage is calculated a bit differently depending on various factors. But the goal is to approximate the proportion of support your organization receives from the general public.
To maintain its “charity” status, your nonprofit must maintain a public support percentage of 33⅓% or greater during at least one of its last two years. That means that a least one-third of your revenue must come from the “general public,” which excludes large private gifts and investment returns.
NOTE FOR STARTUPS: During the first five years of your operation as a nonprofit, you are not required to maintain a public support percentage above any threshold. But you ARE still required to calculate and report your public support percentage.
The public support percentage is calculated based on an accumulation of support received over a five-year period. So large private gifts from multiple years ago might still adversely impact your public support percentage.
How is fundraising different for a private foundation vs a public charity?
If you’re a public charity that wants to stay a public charity, you need to be careful about how your fundraising strategy impacts your public support percentage.
The first thing you should do is consult with your CPA to determine your current public support percentage based on your most recently filed 990. If you’re in danger of falling below the 33⅓% public support percentage threshold, you should develop a fundraising plan that enables you to diversify your funding sources.
Small-dollar gifts, government grants, and grants from other public charities will always improve your public support percentage, because those are all considered public support.
Meanwhile, large dollar gifts from private donors and grants from private foundations will decrease your public support percentage because those are not considered sources of public support.
So, should you start turning down all large-dollar gifts? No!
Most nonprofits solicit and receive large gifts to help fund their programs, and there is nothing wrong with that. They make your life a lot easier, after all.
However, you should always seek to increase revenue from those sources which will be deemed public support. And because the public support percentage is calculated on a five-year basis, you need to have a long-term fundraising strategy that anticipates what your needs will be down the road as well.
Foundations vs Charities: Wrapping It All Up
Private foundations and public charities are both 501(c)(3) nonprofits dedicated to advancing the public good. They’re simply organized differently and have to abide by different regulations.
There are many more charities than foundations in the USA, with charities accounting for over 75% of all nonprofit revenue. But the private foundation is actually the default organizational structure for nonprofits in the eyes of the IRS. Therefore, the burden of proof lies with a charity to prove they meet the requirements to maintain their special status.
Regardless of which type of organization you choose, you should be sure to seek out a knowledgeable legal counsel and a CPA or accounting firm with expertise in the nonprofit sector. They’ll help you understand what you need to do to keep your nonprofit compliant with the IRS and local government agencies.
Is Your Nonprofit Ready For Federal Grant Funding?
According to The Nonprofit Times, almost 80% of all nonprofit revenue comes from the US government in the form of federal grant funding or fees for services. Those numbers may be skewed by some outliers, like education, but, regardless, there is still a lot of federal money up for grabs.
If you’re like most organizations, you would love to get some of that funding to put toward your mission. But before you start searching for grants you need to ask yourself– is your organization ready for federal funding?
This article will help you determine if you are ready or not.
And, if not, what you can do to prepare yourself.
What do I need to be eligible for federal funds?
There are a lot of things to consider when you start thinking about federal grants or service contracts. But the first one is this–do I meet the basic eligibility requirements?
Here are the main points you’ll need to check off:
- You have a 501(c)3 status in good standing with the IRS. (You have received your determination letter and you are filing your annual Form 990 or 990-EZ on time)
- You have an active Employer Identification Number (EIN), which would be issued and maintained by the IRS.
- You have registered your organization at grants.gov and sam.gov to be considered for grant proposals.
- You have been issued a DUNS number (Data Universal Numbering System). You can follow the steps outlined in this article to get one.
If you meet all of the 4 above criteria, you are likely eligible to apply for federal funding. But that doesn’t necessarily mean you’re ready to do it
Are my programs ready for federal funding?
When searching for federal grant funding, you need to consider whether your program team can actually deliver based on the proposal. Otherwise, you could find yourself scrambling to fill roles and failing to follow through on your commitments. You could even find yourself in worse shape than if you’d never secured the funding.
- Consider the following factors:
- Do I have team members with the appropriate skills and experience to achieve the program outcomes?
- Will I need to hire people if this proposal is accepted? If so, how easily or quickly will I be able to recruit and fill these positions?
- Does my organization have the appropriate institutional knowledge to execute on this grant I win the award?
- Do I have the software and physical infrastructure required to deliver on this proposal?
You don’t necessarily need to be ready to hit the ground running on day one. But you need be confident your organization can deliver on the proposal and any program outcomes within a reasonable period of time.
Here are some other factors to keep in mind:
- It takes more work than ever to recruit, hire, onboard, and train new employees. It also takes time to build-out software and technology capabilities.
- Will you need full-time employees or contractors (or both) to execute on the grant proposal. And will they require a specialized or hard-to-find skillset?
Neither of these factors alone can tell you not to apply for federal funding. Sometimes you need to make an aggressive move to push your mission forward. But be realistic about what you’ll be able to accomplish to avoid regretting your decision.
Are my finances ready to apply for federal grants?
Your financial system must be in good working order before you even consider applying for federal funding.
In fact, the government places very rigorous financial reporting requirements on organizations that receive federal funding. The Uniform Grant Guidance (UGG) outlines these rules that recipients of federal grants must follow to maintain compliance; and penalties for non compliance can be severe.
If your organization isn’t in a position to meet the requirements before you apply for funding, it’s highly unlikely you’ll be ready when you’re awarded funding. Therefore, it is imperative that you get your financial system ready before applying for federal grant funding.
The UGG is too extensive to explain here, but these are a few requirements you should consider:
- You must have an accounting system in place
- You must be closing your books each month; that means reconciling all of your bank accounts and credit cards
- You must be tracking your expenses in at least two dimensions; in other words, every expense must be recorded to a GL code/category and a funder/program/grant
- You must have a documented, consistent, and reasonable approach to allocating shared expenses such as payroll, facilities, and insurance
The UGG also outlines requirements for unallowable expenditures, but every grant will have its own set of requirements. It is imperative that you read your grant requirements carefully and that you only use grant dollars to cover allowable expenses for your organization.
Do I need an audit to secure federal grant funds?
No, you don’t always need a nonprofit audit in order to qualify for federal grant funding.
However, if you receive more than $750k in federal grant money in any given fiscal year (even if this was the result of multiple smaller federal grants), you will be required to undergo what’s known as a ‘single audit’.
A single audit is different from a financial statement audit, but the process is somewhat similar. The purpose of a single audit is to test whether the organization complied with grant guidelines and only used grant dollars for allowable purposes.
An independent CPA must prepare the single audit, at the expense of the nonprofit.
And just because you required a single audit last year, it doesn’t mean you’ll be required to do one this year. It is important that you evaluate each year the total dollars of federal funding you will be receiving to determine whether a single audit is required.
Are you ready to prepare for federal funding?
Obtaining federal grant funding is a scary process for most nonprofits, especially the first time.
You should carefully consider your preparedness in advance of submitting proposals. Ensure you’re in a good position to obtain funding and deliver on your program outcomes.
If you’re concerned that your financial systems and processes aren’t ready to handle that level of scrutiny, reach out to The Charity CFO to see if we can help you.
We provide professional, outsourced bookkeeping and accounting support for 150+ nonprofit organizations, many of which have to meet federal guidelines. Our team of nonprofit financial experts will give you the support that your organization has been missing. Reach out for a free consultation.
Cryptocurrency for Nonprofits: 6 Things You Need to Know
By now, you’ve heard about cryptocurrency…
But maybe you’re a bit wary of the technology.
Or you think it’s just another financial bubble.
Or a boiling swamp of high-risk speculation.
And you’re certainly not sure why your nonprofit should care about it.
We don’t want to exaggerate the impact…but trillions of dollars in wealth have been created in digital currency in record time.
And crypto donations to nonprofits grew over 2200% to $300 million over the past 2 years.
Cryptocurrency becomes a bigger force for good in the nonprofit sector year after year. So it’s time to get over your fears and pay attention, before you’re left behind.
In this article, we’ll talk about the top 6 things we think all nonprofits should know about cryptocurrency.
Note: Cryptocurrency is digital currency secured by a technology called a blockchain that records every transaction made involving the currency. Increasingly, you can use it as cash to purchase goods or services Or receive it as a donation. Our goal here is to discuss why cryptocurrency matters for nonprofits, not explain what it is or how it works. So if you don’t already have a basic understanding of how cryptocurrency works, first check out a graphic explainer like this one or a video explanation like this one.
The 6 Things You Need to Know About Cryptocurrency for Nonprofits
1. Crypto donations grew 971% to $300 million in just one year
The global cryptocurrency market cap peaked at over 3 trillion dollars in November 2021. And it is projected to reach nearly $5 trillion by 2030.
In 2021 we started to see some of that wealth spread, with over $300 million in crypto donations to nonprofits and charities. That’s a 971% increase from the $28M donated in 2020. And a 2207% increase in just two years ($13M in 2019).
According to a 2021 study by Gemini, the average crypto donor is younger, wealthier, and more likely to be located in an urban area than the average American.
And in 2020, 45% of cryptocurrency investors donated at least $1,000 to charity, making them among the most charitable investors on the planet.
Early crypto investors are already investing in innovative ways to change human behavior and society. They’re often driven by ideology and support the causes they believe in. Which means that a single investor who aligns with your values could change the trajectory of your organization in a few moments.
If you aren’t accepting crypto donations, you could miss out. And that’s why accpeting cryptocurrency for nonprofits is so critical.
“It’s still pretty early days for crypto philanthropy… but the rate at which it’s accelerating is extreme because now nonprofits are realizing what a big market this is.” – Alex Wilson, co-founder of The Giving Block
2. Cryptocurrency is more than just Bitcoin
Bitcoin gets a lot of press, but there are many more cryptocurrencies for nonprofits that matter.
Bitcoin is considered the first, and all other options are collectively known as altcoins. They vary in technology, features, scalability, privacy, and functionality.
The list of “most valuable” or “most popular” cryptocurrencies changes weekly. But some altcoins, like Ethereum, Tether, Litecoin, and Bitcoin Cash, have proven relatively stable and are becoming more widely adopted.
Bitcoin dominates the space, representing over 40% of all cryptocurrency value. But that means that 60% of the value in cryptocurrency is in coins other than Bitcoin. So it’s important that you don’t focus only on Bitcoin.
Once you start receiving cryptocurrency donations, you may want to consider the risk involved with that specific asset before converting it to cash immediately or holding onto for the long term.
3. Crypto users value anonymity (but the IRS… not so much)
Search #cryptogivingtuesday on Twitter, and you’ll find thousands of tweets about crypto investors who donated millions on Giving Tuesday in 2021.
But many people choose cryptocurrency specifically because they want to remain anonymous. And they want that anonymity to apply to their charitable activities as well.
Some donors choose to maintain anonymity for personal reasons. Others may wish to remain anonymous for more practical reasons (like avoiding your fundraising emails and weekly text-message campaigns). And others may not want the IRS knowing what they’ve been up to.
Donor anonymity makes it difficult for you to cultivate a relationship with your donors, confirm that the money comes from a legal source, and follow up about the use of the funds.
It also makes it challenging for a 501(c)(3) to report the source of donations of over $5,000 on Schedule B, as required by the IRS.
You can require personal data when accepting cryptocurrency donations. Yes, it may eliminate some potential donors, but it may also be legally required. So speak to your legal team and decide what is right for your organization.
4. Donors can use crypto donations to avoid capital gains tax
The IRS classifies cryptocurrency as property, similar to stocks, rather than cash. So, despite it functioning much like money, you won’t see it as “cash” on your Statement of Financial Position.
The property designation also means that donors can receive a tax deduction for the current fair market value of cryptocurrency assets rather than the amount they initially invested.
Here’s an example:
A crypto investor is looking to donate money to a charity. They have $1 million in hyper-appreciated cryptocurrency (they bought it for pennies and it’s now worth $1 million) that they want to donate to a charity they support.
They have two choices:
- Sell the cryptocurrency on the open market, pay $200,000 in capital gains taxes, and then donate the $800,000 remainder to charity. OR…
- Donate full $1 million in cryptocurrency to the charity of their choice and get a tax deduction worth $1 million!
The investor can support a good cause, avoid paying capital gains taxes and get a tax deduction for the full $1 million in market value by giving it to your nonprofit.
And you get a 25% larger donation.
In most cases, an investor won’t donate the total value of their position. Instead, they’d donate a portion of it to charity and use the tax deduction to offset the taxes they owe on the remaining amount.
This tax benefit will create a wave of new donations to nonprofit organizations over the next decade as cryptocurrency investors start to look for ways to reduce their tax liabilities.
5. Cryptocurrency can be as good as cash for nonprofits
Because cryptocurrency is considered property, not cash, you might have three options for what to do with it: convert it to cash immediately, hold indefinitely, or diversify part of the donation.
If you use an intermediary service or a 3rd party processor, you can convert most cryptocurrency donations to cash more or less immediately. So there’s no need for you to hold onto a wide variety of digital assets.
The highly volatile nature of the cryptocurrency market means that holding on to the asset brings significant risk. However, it also has the potential to rise significantly in value and support your cause for years to come.
Your nonprofit should have established policies on how to handle non-cash donations of potentially high-risk assets. So consult with your board members, legal team, and financial team to decide what you want to do with your cryptocurrency donations.
6. How to accept cryptocurrency donations as a nonprofit
There are four ways cryptocurrency for nonprofits donations can be processed: intermediary 501(c)(3), nonprofit crypto processors, crypto exchange, and a wallet.
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Intermediary 501(c)(3):
The easiest way to accept crypto donations is through another 501(c)(3) organization set up expressly to receive and convert cryptocurrency donations for other nonprofit organizations. Every.org and CryptoforCharity.io are two examples.
PRO TIP: Intermediaries accept the cryptocurrency donation, convert it to cash, handle tax receipts, and then pay you in cash. It’s simple. But it’s not for you if you intend to hold onto the cryptocurrency as an investment.
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Third-Party Processor
You can work with a 3rd party to process cryptocurrency donations like The Giving Block and Endaoment. They can either help you accept donations and convert them to cash immediately or hold onto it as an investment (using a digital wallet). Processors will also handle the administrative and tax requirements for you.
PRO TIP: Working with a high-profile processor can increase your visibility and put your name in front of donors already giving cryptocurrency, so you’re not having to “sell” this process. They can also help with marketing campaigns to encourage crypto donations.
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Crypto Exchange
A crypto exchange like BitPay and Coinbase gives you an embeddable cart checkout option you can install directly on your website. However, this option only provides automatic conversion to cash.
PRO TIP: This is an excellent option if you want to pay minimal fees and convert donations to cash immediately but don’t mind dealing with administrative, donor, and tax compliance tasks on your own.
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Digital Wallet
The most cumbersome of all the options, a digital (or crypto) wallet is where you can receive, send, and store crypto. It’s only recommended for someone with extensive experience in the area, as the technology can be challenging for an already-overworked nonprofit team.
PRO TIP: Donor information is not collected or stored in a wallet, so you’ll need another way to track transactions with donor information. You’ll also need to manage all administrative and tax requirements on your own.
Regardless of which method you use, you’ll need a written policy to accept cryptocurrency gifts and review them regularly.
Want to learn the basics of nonprofit accounting?
If you get frustrated when reading your nonprofit’s financial statements, or just don’t “get it,” we have a free 3-part video series that’ll take the stress and mystery out of nonprofit accounting. (Yes, even if you were bad at math in high school.)
The basics of nonprofit accounting are actually pretty simple. And, once you have the basic concepts down, you’ll feel more confident talking to your board, staff, and community about your organization’s financial wellbeing.
In less than an afternoon, you’ll walk through the basics of nonprofit accounting and essential financial statements—all through the eyes of a CFO.
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Nonprofit Audit Requirements: Do You Need An Audit?
Are you clear on the nonprofit audit requirements for your organization?
Contrary to what many people envision, a nonprofit audit doesn’t usually start with a letter from the IRS. Instead, an independent nonprofit audit is something you choose to build trust in your nonprofit organization.
In fact, the IRS doesn’t issue requirements for nonprofits to be audited, but other federal and state agencies do in some circumstances.
Plus, many grantmakers, foundations, lenders, and donors will require an independent audit before giving money to your nonprofit organization.
An audit can be a critical step for a growing nonprofit that needs to raise increasing amounts of funds. But it’s expensive. And time-consuming. So it’s not always a wise investment for some smaller nonprofits.
In this article, we’ll take a look at what an independent financial audit is and when your nonprofit might need one. And we’ll also look at your less-expensive alternatives for establishing financial credibility with your stakeholders.
What is a nonprofit financial audit?
A nonprofit financial audit is an independent examination of the accuracy of your accounting records, financial statements, and internal controls.
It confirms your compliance with federal grant management standards. And many federal and state agencies require audits, depending your organization’s fundraising, size, and spending.
(For example, 26 states require an audit before a nonprofit can earn charitable registration — necessary for in-state fundraising. And, the Office of Management and Budget requires an audit when a nonprofit spends more than $750,000 in federal funds in a year through the end of 2024. Starting in 2025, the new threshold will increase to $1,000,000.)
When you pass the audit, you’ll receive a clean bill of health from your auditor and a professional opinion stating the accuracy and validity of your accounting records. It assures outside observers that “the organization’s financial records meet generally accepted accounting principles.”
Bottom line? An audit shows your organization is trustworthy, compliant, and well-managed.
And that inspires trust and confidence among potential funders, banks, and other potential partners.
What a nonprofit financial audit is NOT:
First, this isn’t the same as an IRS audit–it’s not an “I’m being audited!” situation.
Instead, it is a decision to take proactive ownership of your organization’s financial health, transparency, and validity by hiring a professional to examine your books.
It’s also not a compilation of your financial statements, your financial strategy, or a report of financial viability. Those are up to you and your in-house or outsourced accounting team.
What are the nonprofit audit requirements? And is your organization required to have one?
There are no hard-and-fast rules for when you need to conduct an audit. But here are some of the common external triggers that may require you to conduct an independent audit:
✔️ When you spend over $500,000 per year.
Nonprofits that spend $500,000 a year are typically required to do an annual audit (but this varies by state, so check your state’s requirements)
✔️ When it is in your bylaws.
Check your company’s founding documents. The founders may have stated the organization would complete annual audits.
✔️ When you receive federal funding.
Organizations that receive more than $750,000 in federal funding may be required to complete an audit.
✔️ When you want to get serious about grant funding.
Many grants require an audit (not a review or compilation) because it provides an opinion of assurance.
✔️ When you want to apply for a loan.
Many banks will ask for audited financials as a prerequisite for lending you money.
Some internal changes may also trigger an audit:
- Changes in services, programs, or leadership
- Acquiring, merging with, or losing a partner organization
- Shifting debt, leases, or contracts
The benefits of an independent financial audit for nonprofits:
No other report, review, or statement inspires more confidence than an audit. Which makes it easier for you to attract larger donations, apply for grant funds, and access lending facilities.
Because it’s a universal indicator that your organization takes fiscal responsibility seriously, it’s impact goes beyond fundraising. An audit is also a symbol to the media, volunteers, watchdog groups, and the community you serve.
Internally, it provides valuable oversight for your bookkeeper or accounting team. And it gives the board and leadership the peace of mind that your books are accurate and reliable.
All in all, a financial audit helps you hold your organization accountable to your mission, build trust with the outside world, and access money to pursue your goals.
Less expensive alternatives to a nonprofit audit:
Because a nonprofit audit can easily cost $10,000+, not every nonprofit can afford one.
If you need to build confidence but aren’t ready to invest in an audit, you have two main alternatives: a financial review and a financial compilation.
We’ll look at the differences between your three options here. But the primary difference between a financial review, a financial compilation, and an audit is the level of “assurance” they provide.
What is assurance?
Assurance is an opinion given by a CPA on the accuracy of an organization’s financial statements. It shows whether or not your accounting records are accurate per generally accepted accounting principles (GAAP), in the auditor’s professional judgment.
An audit provides reasonable assurance, a review offers limited assurance (but not a professional opinion), and a compilation offers zero assurance.
Nonprofit Audit Alternative #1: Financial Review
In a Financial Review, an independent auditor reviews your financial statements to determine if they’re consistent with generally accepted accounting principles (GAAP).
It offers limited assurance that no significant modifications need to be made. While it does evaluate the accuracy of financial records, no professional opinion is given on that accuracy. A financial review typically costs 40-60% less than an audit.
Despite the lower level of assurance, a financial review may be enough for some grantmakers to approve your organization. Even if a grant asks for audited financials, sometimes that isn’t a deal-breaker if you have a financial review and meet their other criteria.
But without at least a financial review, you’re probably out of luck when it comes to most grants.
Nonprofit Audit Alternative #2: Financial Compilation
A compilation simply organizes your financial records for a specific period in a GAAP-acceptable format without evaluating the accuracy of those records.
It’s a cost-effective option for organizations that need a GAAP report. But it offers zero assurance as to the accuracy of your books.
A compilation can help your nonprofit identify obvious errors by getting their books into an organized format. It adds primary value and serves owners, board members, creditors, and financial institutions. A compilation is your least expensive and time-consuming option.
Not sure if you meet the requirements for a nonprofit audit? We can help you figure that out.
The Charity CFO doesn’t conduct nonprofit audits. But we have 5 former nonprofit auditors on our team, so we know exactly how to prepare your organization to pass your audit the first time.
Even better, with our nonprofit bookkeeping and accounting services, we’ll ensure your books are always audit-ready. Plus, give you timely financial reports and expert advice that help you carry out your mission.
We’ll help clean up your books and implement state-of-the-art systems to save you time and bring your accounting department into the 21st century.
We’re honored that over 120 nonprofits trust us with their bookkeeping and accounting. And we’d be excited to show you how we can help your organization meet your goals.
