The Dual Purposes of Accounting and Fundraising Software

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Modern nonprofit leaders are always looking for ways to use technology to make everyday tasks easier. One of the most sought-after tools is a platform or software to integrate your fundraising and accounting data seamlessly. So why does it seem so hard to find this unicorn platform?

The short answer: these two datasets serve different purposes. This makes it challenging to create technology that tracks data for fundraising purposes while still following accounting principles.

Let’s explore why these two systems will likely never fully integrate by considering their separate purposes and data requirements.

The Core Functions of Fundraising Software

Fundraising software is a great way for your nonprofit to invest in technology and has four main purposes:

  • Relationship Management: Helping you nurture donor relations
  • Donor Engagement: Measuring the engagement of specific donors or donor demographics
  • Campaign Tracking: Tracking the success of fundraising campaigns
  • Fundraising Analytics: Giving you insights into your fundraising efforts

Each function helps fundraisers and nonprofit leaders gather and analyze data to make informed decisions that boost fundraising for the organization. To achieve this, fundraising software is flexible and customizable to meet the unique needs of different campaigns and donor interactions.

For example, fundraising software generally includes features such as:

  • Donor segmentation
  • Pledge tracking
  • Event management

These features help you track and measure the success of various fundraising efforts, campaigns, and events.

The Core Functions of Accounting Software

Like fundraising software, accounting software uses technology to simplify your bookkeeping and accounting processes. The core functions of accounting software differ from fundraising software, as accounting tools are used for:

  • Financial Reporting: Tracking revenue, expenses, assets, and liabilities in a structured manner
  • Budget Management: Planning, monitoring, and adjusting budgets to properly allocate resources
  • Compliance with GAAP (Generally Accepted Accounting Principles): Ensuring transparency and accuracy in financial data by adhering to GAAP

Accounting software doesn’t usually include a lot of customization features. Instead, accounting software prioritizes accuracy, standardization, and regulatory compliance. For example, some key features of accounting software include:

  • Maintaining the general ledger
  • Creating financial statements
  • Accounts payable/receivable management

The Incompatibility of Fundraising and Accounting Data

The core functions of fundraising and accounting software play the main role in why you can’t integrate them. Specifically, there’s an inherent difference in data structure that makes it nearly impossible to combine them in a clean, usable way:

  • Fundraising software tracks donor-centric data like donor preferences, relationships (i.e. individual and corporation connections), history, donor intent, or soft credits
  • Accounting software tracks financial transactions with strict adherence to GAAP

Integrating two systems with fundamentally different data priorities can risk data inconsistencies, inaccuracies, and loss of information. This makes it difficult to maintain the integrity of both donor and financial records when attempting to sync the two systems.

The Impact of GAAP on Integration Efforts

We’ve mentioned GAAP several times, but why do these principles affect integration so much?

Generally Accepted Accounting Principles, or GAAP, is a set of standardized accounting rules and guidelines that govern how you report financial information. For nonprofits, GAAP ensures transparency, accuracy, and consistency in financial statements. Accurate and transparent financial data makes it easier for stakeholders and regulators to understand an organization’s financial health.

GAAP requires strict financial reporting, which may not align with the flexible, donor-centric data in fundraising software. This misalignment can make it challenging to add fundraising data into accounting systems without risking compliance or accuracy issues.

Let’s consider an example. You have a donor that has verbally pledged a $100,000 gift during a lunch – you have no written record. Accounting rules suggest (and your auditors would require) that this gift be made in writing. The fundraiser on your team would record this verbal pledge in their fundraising database – rightfully so. The verbal pledge does not meet accounting standards, so it should not be included in your accounting database. An integration, in this case would allow the fundraiser to inadvertently make changes to your accounting system that would result in a misstatement.

If you did try to integrate fundraising data into accounting systems, you run the risk of:

  • Data inconsistencies
  • Non-compliance with regulations
  • Misallocation of funds
  • Loss of public trust

Human Judgment Reigns Supreme

Technology is a great tool, but there are some things that just work better with a human touch. Interpreting and reconciling data between fundraising and accounting is one of those things.

Humans can interpret the nuanced behavior behind donor contributions to help ensure that restricted funds and donor preferences are accurately reflected in financial reports. Additionally, automated systems may not fully capture the complexities of donor intent or specific reporting requirements. Humans can provide necessary manual oversight to correct discrepancies and maintain accurate data.

For example, a human can track and manage a pledged donation to make sure it’s recorded properly whether it’s already received or has yet to be fulfilled. Soft credits also need manual reconciliation to ensure that they are accurately reflected in donor records without affecting accounting entries.

Alternative Approaches to Integration

You can still make sure your fundraising and accounting data align, even while managing them separately, following these best practices:

Additionally, you can use third-party tools or middleware to facilitate limited integration without compromising data integrity. These systems automate data synchronization and transform data formats to align with the needs of both fundraising and accounting systems. For example, a system might validate and error-check data to identify and correct discrepancies.

Keeping Fundraising and Accounting Software Separate

The fundamental differences in fundraising and accounting data purpose and structure mean it’s unlikely your systems will ever fully integrate. And while that might sound like a drawback to the software, there’s many benefits to maintaining separate, specialized systems for fundraising and accounting. Using two separate tools makes it easier to keep your datasets clean and prevent data corruption–which is especially important for compliance purposes.

Although you can’t integrate fully, your organization can still use data from each software to help reach goals and advance your mission. Encourage open and regular communication between your fundraising and accounting teams for effective management of these critical functions.

Need some help interpreting your financial data? The Charity CFO provides expert financial advice and resources for nonprofits. Contact us today to learn more!

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How Fundraisers and Accountants can Better Communicate

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The relationship between fundraisers and accountants in a nonprofit organization can be challenging. Fundraising and accounting departments provide vital services to the organization, but when they fail to communicate, it can lead to financial errors. Bridging this communication gap can help your organization ensure every dollar raised is used effectively.

In this article, we’ll cover the relationship between fundraisers and accountants, how each contributes to the organization, and why communication gaps exist. 

We’ll also look at the most effective strategies for improving communications and how technology can help bridge the gap.

communication

The Connection Between Fundraisers and Accountants

Both fundraisers and accountants play key roles in a nonprofit:

  • Fundraisers: Drive donations, build donor relationships, and organize events that support the organization
  • Accountants: Manage finances, ensure compliance, and maintain budgets

The fundraising department’s primary goal in a nonprofit is to bring in the necessary funds to support the organization’s mission. Accountants work to safeguard the financial health of the nonprofit by keeping detailed records and ensuring that funds are used appropriately.

For a nonprofit to thrive, these two departments have to work together. 

Fundraising is most impactful when paired with the proper management and allocation of those funds. When fundraisers and accountants collaborate effectively, they can maximize resources to drive the organization’s mission forward.

The Gap in Communication Between Fundraisers and Accountants

Lack of communication between fundraising and accounting departments is a common issue for nonprofits. Several factors can lead to communication gaps between fundraisers and accountants, including:

  • Differences in terminology and jargon: Each team uses language specific to their field, leading to misunderstandings.
  • Misaligned goals and priorities: Fundraisers focus on securing funds quickly, while accountants prioritize accurate recording and management.
  • Timing and urgency of information needs: The difference between when a team needs information can cause delays in gathering and reporting accurate financial data.
  • Lack of regular communication channels: Teams can miss details or misinterpret information due to a lack of open and consistent communication channels.

Strategies for Better Communication Between Fundraisers and Accountants

Fundraising and accounting teams can help bridge the gaps in communication by implementing a series of strategies, including:

  • Establishing clear communication channels
  • Aligning goals and objectives
  • Sharing transparent financial reports
  • Fostering a culture of open dialogue and feedback

1. Establish Clear Communication Channels

Without clear communication channels, your fundraising and accounting teams will never be able to collaborate effectively. Defined communication channels make it easy for fundraisers and accountants to share information before making decisions.

A few ways to establish these channels include:

  • Set up times for regular meetings and check-ins between fundraisers and accountants.
  • Use collaborative tools and platforms–such as project management software–to modernize your nonprofit.
  • Create defined points of contact for specific issues or projects.

2. Align Goals and Objectives

It’s easiest for different departments to work together when they share similar goals and objectives. Regularly scheduled joint planning sessions can help align each team’s activities with the overall goals of the nonprofit.

During these meetings, both teams can discuss upcoming fundraising campaigns, budget needs, and financial constraints to ensure everyone is on the same page. A collaborative approach reduces misunderstandings and ensures that fundraising efforts are supported by the accounting team.

Fundraising and accounting teams should also set shared objectives and nonprofit KPIs to measure success together. Working toward the same targets means accounting and fundraising teams will need to regularly check in with one another to meet shared goals. This not only improves collaboration and communication, but it can also improve the overall effectiveness of the nonprofit.

Pro Tip: In our experience, the biggest goal conflict is around the total fundraising goal. It’s important for the nonprofit’s leadership to define what the fundraising goal is. Specifically, whether the goal is on a cash-basis, “money in the door”, or aligned with how accounting has to reflect the figures in their financial reports – typically an accrual basis.

3. Transparent Financial Reporting

Accountants provide a variety of financial reports for the board of directors and other stakeholders.

The accounting team needs to make sure that the financial reports provided to fundraisers are clear and easy to understand. Simplifying complex financial data allows fundraisers to grasp the organization’s financial health and make informed decisions.

Additionally, accountants should communicate the financial impact of fundraising activities with the fundraising team. For example, accountants can explain how specific campaigns affect the budget and cash flow of the organization. This transparency helps fundraisers see the broader financial picture and plan their efforts more effectively.

4. Encourage Feedback and Open Dialogue

It’s important to remember that both the fundraising and accounting teams are essential parts of your nonprofit organization. Aim to foster an environment where both fundraisers and accountants feel comfortable sharing their insights and concerns. Encouraging open and effective communication helps identify potential issues early and promotes mutual understanding between teams.

You should also actively seek feedback from both teams through regular check-ins. Promoting ongoing dialogue makes it easier to address challenges promptly and proactively. An open line of communication helps both teams feel heard and valued in the decision-making process.

Tools and Tech Can Help Bridge the Gap, Too

You can use a variety of technology tools to help improve communication between your accounting and fundraising teams. Common technology tools for nonprofits include:

  • CRM Systems and Financial Software: A CRM system makes it easy to track donor interactions while financial software helps teams manage budgets and transactions to give a comprehensive view of fundraising efforts.
  • Collaboration Tools: Collaboration tools like Slack or Microsoft Teams facilitate real-time communication between fundraisers and accountants to streamline discussions, share updates, and resolve issues.
  • Reporting and Analytics Platforms: Leverage reporting tools to generate visually appealing fundraising and financial reports that help track KPIs and make informed decisions.

communication

Work With Accountants Who Communicate with Fundraisers Well

Effective communication between fundraisers and accountants can help your nonprofit avoid costly mistakes and miscommunications. Implementing the strategies discussed in this article will help your organization effectively bridge the gap between fundraising and accounting teams.

Looking for an accountant who knows how to work with fundraisers? The Charity CFO offers a wide range of accounting and financial management services for nonprofits. We know how to effectively communicate with fundraisers so your nonprofit can better meet goals and objectives.

Contact us today to get started.

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How Nonprofits Can Choose the Right Banking Partner

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It may not seem like a significant aspect of your organization’s financial situation, but picking the right nonprofit banking partner is one of the most vital decisions leaders can make. 

While many banks seem to have many commonalities, the differences can make a massive impact on the financial management and sustainability of nonprofits. 

Read on as we break down why this decision is so important and explore how to size up potential bank choices.

Determining Your Nonprofit Banking Needs

Before you can figure out which bank is right for you, it’s vital to take the time to assess your true needs, wants, and must-avoids. This should be a collaborative process between:

  • Organizational leaders
  • Financial employees or board members
  • Outside accountants or advisers
  • Other important stakeholders

Look at your financial operations and determine the types of accounts and services that any banking partner will need to provide. Don’t just consider your needs now – think about your potential long-term goals and what would be required to operate comfortably. After all, switching banks can require a lot of time and energy, and it’s worth spending the extra effort to find the perfect partner for the long run.

Reviewing Nonprofit Banking Partner Options

It can be a bit overwhelming trying to sort through the extensive information and offerings of each potential nonprofit banking partner. Organization leaders can simplify it all by focusing on these key factors.

Nonprofit-Friendly Services

As you know, nonprofits have unique needs compared to for-profit companies or individuals, and some banks are far better than others when offering special services or catering their current ones toward nonprofits and charities. 

One of the biggest is donation processing, a fundamental need for nearly any organization. Consider the other merchant services offered as well, which can range from online or mobile payment gateways to integration into fundraising or financial software you use. Many banking partners also offer payroll solutions that can help eliminate the need for outside processors or services, saving organizations time and hassle.

Good Reputation

There’s no better way to find out what working with a bank is like than to talk with one of its current clients. Use your network throughout the nonprofit community to get some firsthand thoughts on various banks. They may bring up previously unknown benefits or problems you may not have expected. 

It can even be helpful to draw on the personal experiences of employees and others in your circle who may have valuable insights about customer service, availability, and more.

Consider Your Investment in the Bank

Unfortunately, working with a high-quality nonprofit banking partner doesn’t come for free. And it isn’t always easy to determine exactly how much using their services will cost you, as many charge different fees, rates, and other expenses. Carefully review these charges, making efforts to create the most apples-to-apples comparison possible. 

Meanwhile, as overall interest rates have risen, the amount earned by cash sitting in various accounts has become more significant. While it may not be a huge sum, the differences in interest income can be important for nonprofits always trying to make the most of their dollars. Remember to carefully look over account terms for both financial and non-financial things of note.

Compliance and Regulatory Considerations

Working with nonprofits comes with specific regulations and compliance requirements different from business or personal banking. These can be complex, which is why it’s crucial to find a partner that has experience with them. 

At a minimum, every partner should have a firm understanding of and respect for how important it is that your organization maintain its nonprofit tax-exempt status. 

Nonprofit leaders also need to address any legal or compliance concerns well in advance of selecting a partner. As with many financial and legal issues, it’s far easier to avoid the problems from the start than deal with them later.

Keep a Strong Relationship in Perspective

There are few things more vital to the success of a nonprofit than a good financial partner, so leaders should take the time and effort to maintain a strong partnership with their chosen bank. 

Ensure there are always clear communication channels between nonprofit leaders, financial staff, and bank representatives, allowing all sides to make the most of opportunities and quickly deal with issues. 

By developing these relationships, nonprofits can leverage the bank’s resources and expertise to improve their financial management, a benefit that can pay huge dividends over time.

Selecting the Right Nonprofit Banking Partner is Essential

A banking partner is like the financial engine of your nonprofit. Picking the right one and maintaining it in tip-top shape is one of the best ways to put any organization in a position for growth and expanding its impact. But we understand that the choice can be complicated. 

That’s why The Charity CFO is here to help, with expert guidance from our financial professionals, who know the ins and outs of the nonprofit banking world. Reach out to us today to learn more and get started.

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Donation vs. Loan: Can a Foundation Give Money to a Nonprofit?

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Bringing in money from significant contributors like foundations is vital for many nonprofits. It helps keep the lights on and achieve the organization’s goals with large chunks of cash rather than forcing them to chase down many small donors.

Donations are often the most significant part of this quest – but they’re not the only part. Loans from foundations can also play a critical role. However receiving funds in these two ways can mean significant differences from a financial, legal, and operational standpoint. Let’s take a closer look.

Understanding Donations and Loans and Their Impact on Nonprofits

It’s important to be clear about what we’re discussing before considering the benefits and drawbacks. 

Donations refer to any financial gift that isn’t expected to be paid back at any point. They typically offer some flexibility in terms of how they’re spent, except for restricted donations set aside for certain programs or uses. 

On the other hand, loans must be paid back over a defined schedule agreed to by both sides and may include interest in some cases. They’re generally provided for more specific purposes, particularly those that can generate revenue to repay the loan.

Legalities of Donations and Loans

Keeping on the right side of the law is a must for any nonprofit, and donations and loans have varying requirements on this front. Nonprofits receiving contributions must be registered with the appropriate status, usually as a 501(c)(3). In some cases, there may also be state or local registration requirements. 

Organizations must also maintain specific records and fulfill financial reporting requirements related to donations and taxes. Nonprofits receiving loans typically need board approval for the transaction and may be required to secure the loan with assets like organization-owned real estate. The cost of this financing should also be clearly documented in the nonprofit’s financial reports.

Meanwhile, foundations have legal responsibilities of their own when giving funds to nonprofits, whether in the form of donations or loans. They should ensure any organization they’re working with is registered correctly in order to preserve the tax benefits of their gift. Foundations likely also have their financial reporting obligations that will have to be met for any donations of loans.

Advantages and Disadvantages of Nonprofit Donations

Like any funding source, donations have both their upsides and their downsides for each side of the transaction. Here are the most critical.

Benefits of Donations From Foundations

One of the most significant benefits foundations enjoy when they provide donations is tax deductibility. Money provided to qualified charities can help offset other tax liabilities, doing good while saving money at the same time. 

Nonprofits prefer gifts because they add tangible assets to the organization that doesn’t need to be paid back and can often be used flexibly. For both sides, donations and grants also provide the advantage of simplicity, with easier management of the gift on both sides.

Drawbacks of Donations From Foundations

Providing donations can require more upfront work from foundation staff, who need to ensure that the nonprofits they give funds to are properly registered and good stewards of the cash. Without this, funds can be used inefficiently, reducing the foundation’s overall impact. 

Charities must also deal with strict and clearly defined reporting requirements for grants and large donations.

Advantages and Disadvantages of Loans

Foundations that offer loans and nonprofits that accept them also have several critical things to consider on both sides of the issue.

Benefits of Loans from Foundations

Loans also offer the benefit of allowing the foundation to use the same cash to later help other charities or causes once it’s repaid from the original recipient, potentially multiplying their impact in significant ways.

Drawbacks of Loans from Foundations

For nonprofits, loans typically come with more strings attached, requiring nonprofits to use the funds for specific purposes. Loans also can’t offer the same financial benefits to nonprofits since they must keep them on their books as a liability. 

They’ll also need to dedicate administrative time to monitoring and paying off their loans, in addition to the financial cost of any interest payments that could otherwise go toward the nonprofit’s mission. Foundations will also need to spend this time, as loans are more complex legal documents than donations or grants.

Evaluating the Effectiveness of Donations and Loans

Improving your impact means tracking your results, whether you’re a foundation giving donations and loans or a nonprofit receiving them. Foundations should track the effects of their giving, especially for restricted donations with a specific purpose. This can allow them to look across their entire portfolio of giving to find the most effective partners. 

Nonprofits likewise should keep track of their largest donors and consider the organizational and mission impact of any requirements.

Donation vs. Loan: Still Need Help Understanding?

Both methods of funding from a foundation have their pros and cons. However, the best and most savvy charities and nonprofits keep both in mind when plotting out their financial strategy and carefully consider which might work best for their current circumstances and future goals. 

For those who need a little help in these crucial decisions, The Charity CFO is here. Our experienced financial professionals can help break down the details and allow you to move forward with confidence as we back your organization up with all legal and regulatory requirements. 

Contact us today to learn how we can transform the way you fund your organization!

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Nonprofit Fundraising Strategies to Consider

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What nonprofit fundraising strategies are you using to keep your organization healthy?

As nonprofit organizations rely heavily on donations to support their operations, programs and missions, fundraising is an essential component to their continued success. Organizations must be strategic and thoughtful in their fundraising efforts. Here we’ll explore some nonprofit fundraising strategies to effectively raise money for your organization. 

Fundraising is More Than Money

When beginning the task of building a nonprofit fundraising strategy, you must first consider the underlying philosophy of fundraising. At its core, fundraising is about building relationships with supporters who share your organization’s values and vision. Effective fundraising is about more than just asking for money; it’s about engaging donors in a meaningful way and demonstrating the impact of their support. 

To achieve this, nonprofit organizations should prioritize transparency, authenticity, and accountability in their fundraising efforts. This means being open and honest about your organization’s financial situation and how donations will be used and getting in the habit of regularly communicating with donors to keep them informed about your work and the impact of their support.

Remember, donors are individuals, with their own motivations, interests, and priorities. Therefore, fundraising cannot be a one-size-fits-all approach. The diversity of your donors should match the diversity of your fundraising strategies. Organizations should tailor their messaging and approach to the specific interests and needs of their donors. This requires getting to know your donors on a more personal level and building strong relationships with them based on a common interest: your mission. 

10 Nonprofit Fundraising Strategies to Consider 

With this foundation in mind, here are some great nonprofit fundraising strategies that your organization can use when developing your plans and determining how best to engage donors and raise funds. 

Individual Giving

This is the most common form of giving to nonprofits. To fundraise at the individual level requires understanding your target donor and how best to reach them. This type of outreach can take the form of direct mail campaigns, online giving, major gifts etc. Regular communication with donors is imperative to support the efforts toward individual giving. Demonstrating the impact of their donations can help donors feel valued and appreciated and entice them to continue giving in the future. 

Corporate Giving

This involves soliciting donations from businesses and corporations by way of sponsorships, cause marketing partnerships, and/or employee giving campaigns. Successful corporate giving efforts require organizations to identify businesses that share their values and work to develop mutually beneficial initiatives. Building these foundational relationships may require highlighting the ways in which the nonprofit’s work aligns with the company’s values, or offering opportunities for employee engagement or brand visibility. 

Grant Writing

Submitting proposals for grants from foundations, government agencies, and other organizations can help secure funding for specific projects or programs. These can be highly competitive and time-consuming, but the efforts can be greatly rewarded with significant funding when done well. Successful grant-writing is a specialized skill and requires the grant writers to have a clear understanding of the grant requirements and how the organization’s proposed project or program aligns with the funder’s priorities. 

Events

A fun and effective way to engage donors and raise funds, events can come in many different forms and can be tailored to different donor sets depending on their interests and needs. These can include galas, auctions, walks, and many other exciting fundraising ideas. The most successful events prioritize engagement and relationship-building. They should create opportunities for donors to connect with each other and with the nonprofit’s mission, as well as offer unique and memorable experiences that excite potential donors and encourage them to give. 

Major Gifts

These are large donations from individual donors, typically in the range of $10,000 or more. This type of fundraising is highly dependent on building strong personal relationships with donors and identifying those who have the capacity to make significant contributions. Once identified, these relationships can take time and must be cultivated. Donors that make large contributions involve a bit more work than your average individual donor. To build and solidify these types of relationships consider inviting these donors to exclusive events, providing them with personalized updates on the impact of their support, and offering opportunities for recognition and engagement.

Planned Giving 

Securing future donations through estate planning and other legacy gifts is a great way to ensure longevity in your organization. These types of donations can include bequests, charitable trusts, and other arrangements that allow donors to make significant contributions over time. Success in this type of fundraising strategy requires nonprofits to educate donors on the benefits of planned giving and to provide them with clear information about how to make a planned gift. This could involve working with outside support such as estate planning attorneys or financial advisors to provide donors with personalized advice and guidance. 

Online Fundraising

A rapidly growing area of fundraising and one that will be incredibly important as younger generations enter the workforce and have the capacity and funds to select and support organizations that align with their values. Using digital strategies such as crowdfunding, peer-to-peer fundraising, and social media campaigns is crucial to growing your nonprofit’s fundraising strategy. To be successful in digital spaces, your organization will have to leverage the power of storytelling and social proof to engage donors and build momentum for online campaigns.

Donor Stewardship

The benefits of building long-term relationships with donors and demonstrating the impact of their support can not be overemphasized. Building donor stewardship requires prioritizing transparency, authenticity and accountability in donor communications by providing regular updates on your work, highlighting the impact of donors’ support and offering personalized recognition and engagement opportunities. 

Community Fundraising

An organization that is deeply rooted in the community should not be underestimated. The power of community is powerful and tapping into the local community can provide incredible fundraising opportunities for an organization. To begin utilizing this power an organization must engage with supporters and local stakeholders in ways that benefit and support them. An organization can provide training and resources for community fundraising efforts and build partnerships with local businesses and organizations.

Capital Campaigns

These tend to be large-scale fundraising efforts that focus on raising funds for a specific project or initiative, such as a new building, program expansion, or endowment funds. Capital campaigns typically involve a multi-year fundraising effort and may require significant planning and coordination. 

Overall, creating a nonprofit fundraising strategy is a complex and multifaceted process that requires careful planning, execution, and ongoing relationship-building with donors and supporters. By prioritizing transparency and communication and tailoring your strategies to the interests and needs of specific donor sets, your organization can create successful fundraising campaigns that make a lasting impact on the world. There are many strategies that nonprofits can use to raise funds and build a strong network of supporters who share their values. Taking a holistic approach to fundraising and focusing on engagement and building relationships can support nonprofits in creating a sustainable and impactful fundraising strategy to effectively support their mission. 

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Nine Fundraising ideas for nonprofits

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Fundraising ideas for nonprofits are one of the more exciting ways to add needed momentum to your mission. 

The idea behind nonprofits is to support the public good. With over 1.3 million nonprofits in the United States, there are countless organizations available to provide shelter, medical assistance, and education, you name it! While this all sounds nice, there is a nagging question. 

How do these organizations have the money to operate? 

Even though nonprofits are not concerned with earning a profit, money is necessary for their success. Nonprofits need funds for the day-to-day services they provide, as well as to cover employee salaries, office space, and other administrative expenses. 

Fundraising ideas for nonprofits to fuel the mission

So, how do nonprofits make money? Common ways include donations, grants, and fundraising. This article will explore the latter in greater detail. 

Below are 9 fundraising ideas for nonprofits:

  • Sporting event

This could include a 5K, charity golf tournament, bowling event, tennis tournament, and many others. Your nonprofit may be able to partner with the facility the event is being hosted at, such as the golf course or tennis courts, to get discounted playing rates. However, keep in mind that hosting charity tournaments can be very expensive. It can be helpful to obtain sponsorships to offset costs. 

  • Auction

Attendees bid to win items, and the proceeds will go to your organization. Auctions are popular because the prizes are attractive to attendees. If your nonprofit is small, it may seem overwhelming to think about hosting an auction. Fortunately, auctions can be large or small, and hosting your auction online can be another way to cut costs. To choose items to auction off, you should consider the profile of your donors, such as age and the size of their donations. You should use this information, as well as following current trends, to come up with a list of items. 

  • Bake sale

The logistics of hosting a bake sale is often easier than some other fundraising ideas because most, if not all, of the items to be sold are donated. People may donate cookies, cakes, or brownies. Your organization will need volunteers to facilitate the event and sell the items. Instead of a bake sale, similar food-related events you could host include a chili cook-off or barbecue.

  • Themed gala

A gala is often an annual event that raises a lot of money and allows for donors to mingle with your nonprofit’s staff. Hosting a gala can require a lot of planning and costs, but the funds you raise can make it worth it. Also, while a gala is often thought of as a formal black-tie event, you can host a more informal event to cut costs. Having a theme for your gala can make the event seem more attractive to attendees. 

  • Craft fair

This is similar in concept to a bake sale, since the inventory is all donated. Many crafters want to raise the visibility of their own small business, so they are often eager to participate in this type of event. The proceeds from the sold items go to your nonprofit. While hosting a craft fair can seem fairly straightforward, keep in mind that you will need to find a location and determine the layout of the vendors. 

  • Benefit concert

While hosting a benefit concert may sound intimidating, it doesn’t have to be. A benefit concert is when you host a performance of either one or more performers to raise money for your nonprofit. It can range in size and expense. You will need to book acts to perform, and for most nonprofits, a reasonable approach is to ask local musicians. Musicians will often be eager to perform at this type of event because in addition to raising funds for your organization, it is a way to increase the size of a musician’s audience. Money can be raised through ticket sales, concessions, and merchandise. 

  • Trivia night

Trivia nights are popular due to their entertainment value for existing donors and the overall community. It is relatively inexpensive to organize a trivia night, but you will still need to select a venue, determine a format, and come up with trivia questions. The planning can seem difficult, but after the first time, it will be much easier to plan similar events in the future. 

  • Email/Social media

Email and social media campaigns can be highly effective, and relatively easy, ways to raise money. When sending a fundraising email, make it personal, provide testimonials of your organization’s impact, and include a call to action. For social media campaigns, tell the story of your organization, be consistent, and use hashtags. 

  • Virtual event

Consider hosting events virtually to reach a greater audience. Many of the events previously discussed, such as a gala or auction, can occur in an online format. 

Fundraising ideas will impact your accounting

When raising money through fundraising, you need to consider how this affects your nonprofit’s accounting. The way revenue and expenses are recorded can differ for GAAP purposes and tax purposes (Form 990). 

When selling tickets to a gala or benefit concert, the ticket price is often higher than normal due to the added contribution. For tax, this excess amount is reported as a contribution, and for GAAP, it can be reported as either a contribution or special event revenue. When a venue donates space for your event, such as a golf course or concert hall, under GAAP you will report the fair market value of this donation. It will not be reported on Form 990. 

If items are donated to be auctioned off, you will need to report this as contribution income at fair market value. These are just a few examples of best practices when accounting for fundraisers, and there are also many others. 

The Charity CFO can help you sort out the accounting considerations of hosting a fundraiser. Specializing in nonprofits, we can be a helping hand to boost your nonprofit’s success. Schedule a free consultation today. 

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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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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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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.

operations-manager-nonprofit-roles

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.

nonprofit-operations-manager-budgeting

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.

nonprofit-operations-manager-technology

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?

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How do nonprofits make money?

Nonprofits exist to meet a societal need or provide a public benefit. Unlike an organization whose primary goal is to make money, nonprofits exist to meet a community’s needs. That said, while it’s not your primary purpose, your nonprofit must find ways to make money. 

So what are those ways? How do nonprofits make money? Let’s take a look…

Why Do Nonprofit Organizations Need to Make Money?

In reality, nonprofits need to make money to operate, just like any other business.

Your nonprofit may need various sources of income to pay overhead costs, fund its programs, and cover administrative fees. Nonprofits must raise the money to pay rent and salaries while keeping the lights on, just like a grocery store or a law office. The best mission in the world can’t overcome a lack of cash to fund operations and keep programs running. 

Of course, it raises an all-important question for leaders: how can your nonprofit make money? There are many ways nonprofits bring in revenue, and the healthiest nonprofits have various income streams. Diversifying sources of income makes it easier to hit budgeting goals, build up reserves, and ensure flexibility in good and bad economic times. 

Here are some tips to show you how nonprofits make money and help your organization hit its financial goals. 

8 Common Ways Nonprofits Make Money

Individual Donations

nonprofits-individual-donations

One of the most common sources of income for nonprofits is individual donations. And it’s probably the one that comes to mind first, whether it’s the Salvation Army’s Red Kettle Campaign or your local soup kitchen raising funds to feed the less fortunate.

Individual donations are a vital part of the funding for small and large nonprofits, but it is particularly essential for those with operating budgets under $500,000. Research from the Urban Institute found that small nonprofits earn roughly 30% of their income from donations, whereas larger organizations only rely on donations for about 18%.

Given the importance of individual donations, it’s not surprising that nonprofits spend a significant amount of time, money, and energy building a base of donors. Interestingly, one of the most effective ways to do this is to build a robust volunteer program, as engaged volunteers tend to translate into regular donors. 

In addition, nonprofits ensure steady income from donations by accepting online donations, creating systems for recurring donations, and soliciting planned giving. 

It’s also important to note that donations are tax deductible for most individuals, making this an attractive option for organizations and individuals wanting to support specific missions or efforts. 

Corporate Donations

Similarly to individual donations, corporations can also get a tax benefit for donating to 501(c)(3) nonprofit organizations. In fact, a corporation may contribute up to 25% of its taxable income to charitable causes!

And these don’t need to be big, multi-national corporations. Any business in your community can get a tax benefit from giving money to your nonprofit.

Also, many bigger corporations have matching gift programs that match their employees’ donations to nonprofits up to a specific dollar amount, doubling their donation. In addition, other corporations will donate money to you when their employees volunteer with your organization! 

Check out the website Double Your Donation to search for participating corporations. It’s an excellent way for your nonprofit to double the money you make without doubling your fundraising efforts.

Fundraising Events

nonprofit-events-gala

Fundraising events are another crucial part of how nonprofits make money. Most people have participated in a local run or 5k, attended a gala, bid in a silent auction, or seen a pledge-a-thon on TV. 

These are all examples of fundraising events that nonprofits hold to earn the revenue needed to run their organization. These events can recur annually, quarterly, or be one-off events, depending on the type of event and the organizational needs. 

Besides raising money, fundraising events are also a great way to raise awareness about an organization and its impact on local communities. That said, most fundraising events also take a lot of planning, work, and resources, which is why most nonprofits dedicate a portion of their budget to fundraising efforts. 

This sometimes seems counterintuitive to people but is essential to how nonprofits work. Like any business, nonprofits have to spend some money to make money. Fundraising expenses are one clear example of this. 

Government Grants

Many large and mid-size nonprofit organizations rely on government grants to make money. In fact, government grants provide up to 10x more money to nonprofits than private foundation grants (see below).

Federal government grants are available, as well as grants at the state and local levels. And you can find grants for all types of nonprofits, from after-school programs to cultural centers, animal welfare organizations, and environmental nonprofits. 

Go to Grants.org to look for federal grants relevant to your mission.

Just keep in mind that government grants will require an application, which can be a time-consuming process. You may even need to hire a professional grant writer if it’s your first time. 

You’ll also need to have your financial statements up to date. A nonprofit audit may even be a requirement to apply. In addition, government grants often have detailed reporting requirements that you’ll need to submit monthly or quarterly, which creates more paperwork for your accounting team.

We don’t say that to discourage you—many nonprofits rely on government grants to make money for their programs—but you should be prepared that the big payoff will require significant work upfront.

Private Foundation Grants

nonprofit-foundation-grants

While government grants may dwarf gifts from private foundations, foundations still gave over $90 billion in 2021, so there is plenty of foundation money to go around!

Some of the most notable nonprofit names you’ve heard of—like the Gates Foundation, The Ford Foundation, and The Robert Wood Johnson Foundation—manage billions of dollars and give away hundreds of millions annually.

Similar to government grants, foundation grants are available for almost any type of nonprofit mission. You can search for available grants in your nonprofit segment at GrantWatch.com.

Private foundations are required to donate at least 5% of their assets every year—so as long as there are foundations, it’s an excellent source for nonprofits to make money.

Earned Income 

Many nonprofits have steady streams of earned income, primarily from activities related to the furtherance of their mission. For example, this income can include fees for services, merchandise, memberships, or tickets for performances. 

While you often don’t think about this income category for nonprofits, you see it all the time. Any time you buy Girl Scout cookies, purchase a zoo membership, visit an art museum gift shop, attend a symphony concert, or join your local YMCA, you’re helping a nonprofit make money through earned income.  

This type of income is essential to how nonprofits make money and is something all leaders should consider. It’s a great way to have a steady income stream while furthering your organization’s mission. 

When considering earned income, it’s worth looking at a critical distinction nonprofit leaders have to consider – the difference between related and unrelated business income. Income related to the nonprofit’s activities – for example, a ballet company selling tickets to their performances – is not taxable. 

In contrast, income not directly related to the organization’s tax-exempt purpose and occurs regularly—renting out unused building space, for example— is subject to federal income tax. 

Corporate Sponsorships and Partnerships

Corporate sponsorships or partnerships can be another abundant source of income for nonprofits. These can range from in-print advertisements to sponsorships of an entire event, in-kind sponsorships, or ongoing cash sponsorships. 

The options are varied and depend on the organization, but this type of income primarily focuses on helping a business get brand exposure in exchange for providing nonprofits with income. 

It can be an excellent way for nonprofits to make money to cover events or operating expenses. It is also an effective marketing strategy for corporations as they associate their name with important causes in their community. As a result, the corporation gains goodwill in the community, and the nonprofit earns needed income. It’s a classic win-win and essential to how nonprofits earn money. 

Investments

nonprofit-make-money-investments

One less well-known way that nonprofits make money is through investments. 

This type of income isn’t generally for day-to-day operations but is a way leaders can grow long-term savings and build increased reserves. The most common way nonprofits do this is through endowments, where nonprofits accept and then hold donations in an investment fund.

Investments, like stocks, can also be donated by individuals. It’s an attractive way for investors to avoid capital gains taxes and get a significant tax deduction—like when Elon Musk reportedly saved over $4 billion in taxes by donating $5.7 billion in stock to an unnamed nonprofit in 2022.

According to Nolo.com:

If someone owns stock for more than one year that has gone up in value, that person can donate the stock to a nonprofit, get a deduction equal to the fair market value of the stock at the time of the transfer (its increased value), and never pay capital gains tax on the appreciated value of the stock. The nonprofit will never owe that capital gains tax either. It can take the stock and either sell it right away and not pay any tax, or it can hold on to it—but it will never owe capital gains tax on the appreciated value the donor realized.

Many nonprofits will never see a donation of stock, but when it does happen, it could be a money-making windfall for any nonprofit. Every nonprofit should have an established investment policy agreed to by the board of directors, including what to do with donated stock or investments. You may want to hold on to them or liquidate them immediately, but either way, write it into your procedures before you need it. 

Investments or endowments are essential for building long-term sustainability for organizations and an effective way to stretch donor contributions as far as possible. 

Need Help Managing Your Nonprofit’s Money?

As leaders know all too well, making money is an essential function of every nonprofit. Without steady revenue streams, your nonprofit can’t keep its doors open or meet its organizational goals. 

Nonprofits receive money from many different sources, and the accounting can sometimes be complex. They also must be strategic with budgeting to ensure their income covers expenses. 

If your team struggles to budget correctly or even properly track and segregate your sources of income, it might be time to consider outsourcing your bookkeeping and accounting.

The Charity CFO helps hundreds of nonprofits nationwide keep updated books, get monthly reporting, stay audit-ready, and manage their money more effectively. In addition, we can help you automate time-consuming practices, implement paper-saving technology, and create bullet-proof systems and processes that allow you to focus on your mission.

Many nonprofit directors and founders don’t love the financial part of the business. But without solid finances, you’ll never realize your mission. So if you’re looking for a nonprofit-experienced partner to help your team reach the next level, reach out to us today for a free consultation.

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

Financial Oversight Guidelines for Nonprofit Boards

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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?

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 higher standards of oversight

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.

Each board member should be able to do these things:

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?

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?

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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

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

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?

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.

Updated Accounting Standards for In-Kind Donations (2022)

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If your nonprofit uses donations of supplies, services, and even time to help fund your operations, you need to know about recent changes in accounting standards for in kind donations.

All the way back in 2020, the Financial Accounting Standards Board (FASB) released new standards for “Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets.” Or, in other much simpler words, in kind donations. 

But because the new standards didn’t go into effect immediately, many organizations put off making the necessary changes. And many others never even heard about the changes.

But the deadline for making the changes has passed, and the FINAL deadline (for interim reporting periods) is coming up next month. So now is the perfect time to make sure you report in kind gift donations in compliance with GAAP standards in 2022.

FASB changes in 2022

When do the changes to in kind gift reporting go into effect?

The changes are effective retrospectively, starting with annual periods beginning after June 15, 2021. So if your annual reporting period follows the calendar year, you’ll be required to be compliant when you file your IRS 990 for the 2022 tax year.

The changes are also effective for interim periods within the annual period beginning after June 15, 2022. So, if you file quarterly reports, then you’ll need to be following the new standards by next month, if not sooner.

And if you’ve already implemented the changes below, you’re in luck because the FASB did specify that early adoption of these standards is okay.

Who do the changes impact?

The changes to in kind donation reporting are specifically for organizations that follow generally accepted accounting principles (GAAP) in preparing their financial statements. Typically, a CPA would prepare these statements as part of a yearly review or audit.

The changes impact the presentation of your data, so you may not need to change the process for how you track or account for in kind contributions internally. And even if you’re not fully GAAP-compliant currently, implementing these best practices now will save you a lot of cleanup work later in the case you require a financial statement audit.

What exactly is changing about in kind donation reporting?

A few things are changing about how you show in kind gifts on your financial statements. The first one is about how you display them on your Statement of Activities. And the second will impact the information you include in your disclosures (footnotes) to your financial reports.

1 – Show in kind goods and services on Statement of Activities

Historically, nonprofits may not have shown in kind donations as a separate line item in the revenues and/or expense section of the Statement of Activities. The new standards require you to create a separate line item within each section to show which portion of your revenue and expenses can be attributed to non-financial assets.

2 – Break down how you used in kind contributions in disclosures

In the past, there was no clear direction for reporting details about the type of in kind gifts you received (goods vs. services) or how you used them. The new standard makes it very clear exactly how you need to display that information in the future:

  1. You must show each type of gift broken down by category (goods/services)
  2. Within each category, you must include additional detail, specifically:
    1. “Qualitative information” about whether you utilized or monetized the “contributed nonfinancial assets” during the reporting period. And, if you utilized the contributions, you need to disclose a description of the programs or other activities where you used those gifts 
    2. Your organization’s internal policy concerning monetizing vs. utilizing in kind contributions (if you have one)
    3. A description of any restrictions your donors attached to the gift of these non-financial assets 
    4. A description of the valuation techniques and inputs you used to determine the fair market value of the gifts (in accordance with Topic 820). 
    5. The principal market you used to arrive at a fair value measure if it’s a market that you can’t sell in based on restrictions your donors made on their gift. 

We’ve paraphrased the actual text of the standards for this article. You can download the official release from FASB here, including some helpful examples of how to make the required declarations.

And, of course, don’t trust your finances to a blog (even a well-informed one). Always talk to your CPA to ensure your organization is in full compliance with new regulations.

Statement of Activities reporting changes

Why is FASB making this change?

The update enhances your financial reporting by setting new standards for disclosing specific details about the in kind donations you receive. It makes it easy to see how much of your total revenue or expenses can be attributed to in kind donations.

This is especially important for nonprofits that receive substantial in kind contributions. Take the case of a food pantry, for instance. The majority of a food pantry’s product comes from in kind donations of food. If they report all of their revenue and expenses on one line, it would be impossible to tell how much cash they need to keep their programs running.

Hopefully, you can see why it would be important for donors and other interested parties to understand which portion of their revenue and expenses are cash vs. in kind gifts. 

Need a process to track in kind contributions?

Check out our blog on accounting for in-kind donations for more details. Or watch our webinar on the topic for even more actionable tips.

Want to know how to start asking for donations of in kind gifts or services?

Check out this episode of A Modern Nonprofit Podcast, featuring Allie Meador of RightGift:

https://https://youtu.be/2B8wqjxRlZg

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

Is Your Nonprofit Ready For Federal Grant Funding?

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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

nonprofit_federal_funding

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 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.

nonprofit_federal_grant_requirements

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

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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: 

  1. Sell the cryptocurrency on the open market, pay $200,000 in capital gains taxes, and then donate the $800,000 remainder to charity. OR…
  2. 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. 

  • 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. 

  • 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. 

  • 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.

  • 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.

Click the button below to get free and immediate access.

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Nonprofit Audit Requirements: Do You Need An Audit?

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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. 

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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? 

what_is_nonprofit_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: 

irs_audit

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: 

nonprofit_audit_alternatives

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.

 

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