The Importance of Setting Goals and Tracking Them in Nonprofit Management

As nonprofit leaders, one of our biggest responsibilities is to set clear expectations, measure progress, and hold teams accountable. However, many organizations struggle with either setting goals without a tracking system or creating reports that never get reviewed.

At The Charity CFO, we believe data and key performance indicators (KPIs) are essential for nonprofit financial management, donor engagement, and program impact measurement.

Why Nonprofits Need Data

KPIs allow nonprofit leaders to:

• Set measurable goals for fundraising, programs, and operations.
• Track performance to identify trends and adjust strategies.
• Improve financial transparency and ensure sustainability.
• Enhance donor confidence by demonstrating measurable impact.

What KPIs Should Nonprofits Track?

1. Fundraising & Donor Engagement

• New donor acquisition: How many new donors contribute each month?
• Retention rate: How many donors continue giving year over year?
• Newsletter opt-ins: Are you growing your audience for future fundraising?
• Average gift size: Are donations increasing or decreasing over time?

2. Program Impact & Effectiveness

• Services delivered: How many individuals are benefiting from your programs?
• Referral sources: Where are your participants coming from?
• Program outcomes: Are you meeting funder expectations for impact?

3. Financial Health & Operational Efficiency

• Cash flow and reserves: Do you have enough unrestricted funding?
• Expense-to-revenue ratio: Are you operating sustainably?
• Grant reporting accuracy: Are you meeting compliance requirements?

How to Implement KPIs in Your Nonprofit

1. Define measurable goals for each department.
2. Use software tools to automate data tracking.
3. Incorporate KPIs into regular meetings to review progress.
4. Adjust strategies based on real-time data insights.

Tracking KPIs doesn’t have to be overwhelming. Once implemented, they become a powerful tool for nonprofit growth and impact. 

Need help structuring your nonprofit’s financial KPIs or even setting up basic financial reporting? 

Book a free consultation and we can see how we might be able to help!

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The effectiveness of a nonprofit’s finance committee can be a major factor in an organization’s success. An effective, engaged committee helps the organization proactively and effectively manage its finances to advance its mission. An ineffective committee, however, can hold your organization back and could even lead to poor financial health.

Are you worried your finance committee isn’t as effective as it should be? Look for these five warning signs that your committee isn’t effective.

Lack of Financial Expertise Among Members

The finance committee’s main goal is to provide financial oversight for your organization. This means each member of the committee should have enough financial knowledge to make informed decisions.

Many ineffective finance committees have only one or two members with this important financial knowledge, meaning they must rely on a single expert. While your finance committee doesn’t need to be made up of finance professionals, each member should be able to understand the complexities of your organization’s finances. If they don’t, you could face frequent misunderstandings between the committee and your accounting team. Your committee might also lack the ability to accurately interpret financial data or reports, making the committee less effective overall.

The good news is it’s relatively easy to combat a lack of knowledge. Consider providing financial committee members with financial training to improve their financial literacy. When it’s time to bring on new members, look for members who have experience and expertise in finance, even if they’re not direct financial professionals.

Poor Meeting Attendance and Engagement

Getting things done in a meeting where attendees are disengaged and uninterested is almost impossible. It’s even more difficult if members are skipping meetings or leaving early. Low engagement and attendance rates can also pull down the overall morale of other committee members.

Even if members make it to meetings, they might come unprepared. An unprepared committee makes it more difficult to make decisions and stretches out the time it takes to complete tasks.

A committee full of engaged members, however, is ready to tackle difficult questions and make smart decisions for the nonprofit. Much like an engaged board of directors, an engaged finance committee can become your organization’s greatest ambassadors and advocates.

Three ways to improve your finance committee’s attendance and engagement include:

• Set clear attendance expectations and requirements for committee members so they understand the required time commitment.
• Improve the meeting structure for a better flow from topic to topic and provide detailed agendas to members before meetings.
• Foster a culture of accountability by delegating small tasks to each member, further improving their engagement and ownership in the committee.

Inadequate Financial Oversight

The finance committee plays an important role in the financial success of your organization by monitoring the budget and reviewing financial statements. However, one of the key roles of the committee is to provide financial oversight and ensure the organization follows set financial processes and policies. Without proper oversight, the organization risks financial instability, mismanagement, and even potential legal or compliance issues.

An ineffective finance committee doesn’t provide the financial oversight your organizaiton needs. Signs of inadequate oversight include:

• The committee misses discrepancies in financial statements.
• Committee members skip or delay regular financial reviews which leads to outdated information.
• The committee overlooks missing internal controls.

To solve these issues, the finance committee members may need to create their own processes and controls. For example, the committee can set up a financial review calendar that includes monthly budget reviews, quarterly financial statement analysis, and annual financial overviews.

Ineffective Communication with the Board

The board of directors and finance committee must work together to create a successful nonprofit organization through clear and timely communication. A finance committee that isn’t effective might delay reporting to the board or not provide enough information for the board to accurately assess the organization’s finances.

Poor communication with the board of directors can leave board members uninformed about the financial health of the organization. This could lead to miscommunications and poor decision-making from the board of directors.

Organizations can improve communication between the board of directors and the finance committee by fostering an open dialogue and establishing regular reporting schedules. You can also encourage your finance members to use clear and concise communications to help reduce the risk of miscommunication between members.

Reactive Financial Planning

One of the biggest signs of an ineffective finance committee is reactive financial planning. A committee that reacts to financial challenges–rather than proactively anticipating them–is likely unengaged and inefficient. This might include a lack of budget forecasts or the absence of a financial strategy.

Your organization needs a finance committee that will proactively address issues and pave the way for financial success. Providing targeted financial training and professional development opportunities to committee members can help them move from reactive to proactive. 

Evaluating Your Finance Committee

Disengaged committee members, lack of financial understanding, and poor internal financial controls can all lead to an ineffective finance committee. As a nonprofit leader, you can help improve the effectiveness of your committee by evaluating it and implementing solutions as needed. Taking the time to review your finance committee can help your organization improve its financial health.

Need help with nonprofit finances? The Charity CFO specializes in providing expert financial advice to nonprofits. Our team understands the complex financial needs and challenges of nonprofits. We can help you better understand your organization’s financial health.

Contact us today to learn more about our nonprofit financial services!

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The nonprofit sector is full of rewarding and impactful careers because it plays a crucial role in addressing various social, environmental, and humanitarian challenges. In this mission-driven landscape, nonprofit accounting jobs hold a significant role as they serve as the financial backbone that ensures organizations remain:

• Transparent
• Compliant
• Efficient in their operations

They go beyond traditional finance roles, as nonprofit accountants are required to:

• Understand the intricacies of nonprofit financial management
• Compliance with unique regulations
• Communicate financial data to stakeholders effectively

For people seeking a career that blends a passion for making a positive impact with their financial expertise, nonprofit accounting offers the best route.

Ready to dive deep into this exciting realm? In this complete guide, we will explore:

• Common myths associated with nonprofit accounting
• The biggest challenges in the accounting industry
• The role and responsibilities of a nonprofit accountant
• Why nonprofit expertise is crucial
• How a good culture benefits accountants and keeps an organization moving forward

Whether you are a seasoned accountant looking to transition into the nonprofit world or a recent graduate eager to make a difference, this guide will equip you with the knowledge and tools you need to navigate the nonprofit accounting industry.

Myths of Nonprofit Accounting and Why They Matter to Job Seekers

Unfortunately, many job seekers fall victim to the stereotypes and believe the myths surrounding nonprofit accounting. When job seekers lean into the falsities, they write off positions they could succeed in. 

In this section, we will debunk the three most common nonprofit accounting myths. 

Myth #1: Nonprofit Accounting is Completely Different from For-Profit Accounting

One reason accountants seeking a new role may steer clear of a nonprofit accounting position is that they assume the methods are completely different. However, most of it is actually the same. 

On a basic level, the two key differences are: 

• How/when revenue is tracked 
• How ownership (or equity) is categorized

With respect to nonprofits, revenue is typically tracked when it is earned or pledged (a gift is promised) regardless if cash has been collected. In the for-profit world, revenue is typically only recorded when earned or cash has been collected.

In the for-profit world, businesses are owned by some party (individuals or other businesses). The value of this ownership is summarized as equity on the balance sheet.  In the nonprofit world, there is no ownership of an organization. Because ownership doesn’t exist, we call equity net assets in the nonprofit sector. The net assets can be further tracked by those with donor restrictions and net assets without donor restrictions.

Neither of these key differences has a significant impact on how the accounting is handled. This means most of the knowledge job seekers have in for-profit accounting still applies to nonprofit accounting. 

Myth #2: Nonprofits Cannot Make a Profit

Being classified as a “nonprofit” gives many people the impression that profits can’t or shouldn’t be made, which often turns accountants away from the industry. However, nonprofits CAN and SHOULD be generating a surplus (or, as the for-profit world calls it, a profit).

Like any business, nonprofits need more money coming in than what is being spent. This is the only way an organization can grow and expand. 

For accountants, this means the profit-generating strategies and investment ideas you bring to the table are still applicable and can make a massive impact. 

Myth #3: Nonprofit Accounting (GAAP) and the IRS Rules are the Same

Another common misconception is that GAAP and IRS rules are the same when it comes to nonprofits, however, they are not. 

One key differentiator is that what is recorded following GAAP is what will show up on the audit and may not show up on the IRS tax form, Federal Form 990.

The IRS report only pays attention to tangible monetary value which means things like in-kind services or unrealized gains/losses on investments are excluded. The way functional expenses and special events are recorded may also differ. 

All of these differences are summarized in the 990, a document unique to nonprofits. 

Biggest Challenges in the Nonprofit Accounting Industry

There are plenty of challenges facing the accounting industry, nonprofit accounting included. These challenges are causing accountants to quit, change career paths, or hop from one job to another more quickly than they’d like.

Some of the challenges include: 

• Limited opportunities for growth: In many organizations, once you’ve hit a certain level, there’s no room left for growth. This can stump your professional development and keep you from excelling in your career. Once this happens, it often leads to accountants leaving the position or the industry entirely.
• Underpaid and/or the department is underfunded: This is an understandable challenge and when it gets in the way, it leads to frustration and demotivation. This challenge is most often felt in in-house accounting positions, especially in the nonprofit sector. 
• Outdated workplace: Technology isn’t the wave of the future, it’s an essential element in today’s workplace. Given the increasing use of accounting software to do day-to-day tasks, accountants need to not just be proficient in accounting, they have to be tech savvy. Accountants deserve positions that leverage technology to improve the department and the organization and when they don’t get that, it creates a challenge. When accountants are provided with the technology and tools they need to succeed, they can spend more time strategizing and implementing tactics to strengthen the organization’s financial position. 
• Toxic workplace: A toxic workplace can be emotionally draining and leave an impact on your overall health. When this becomes a challenge, many employed accountants will quickly become job seekers. A good culture is the only solution to this challenge. 

Accountants play a crucial role in any organization. Your talents are valuable, and finding a workplace that appreciates and nurtures them can make all the difference in your professional fulfillment. This is why it’s so essential to search for a workplace that acknowledges these challenges and puts all its efforts into correcting the issues. 

If you are in a workplace where these challenges (and/or others) are becoming too much to handle, remind yourself that there are organizations working to address these concerns. 

Understand the Role of a Nonprofit Accounting Job

An accountant’s role is crucial in ensuring the financial health of a nonprofit organization. Because of their tax-exempt status and the extra focus on fulfilling their mission, there are unique and specific responsibilities in the nonprofit sector.

Here are some of the key responsibilities in a nonprofit accounting job:

Financial Management

Nonprofit accountants are responsible for managing the organization’s financial activities, including:

• Budgeting
• Financial planning
• Record-keeping

To keep a clear picture of the organization’s financial standings, they track:

• Income, including donations and grants
• Expenses 
• Cash balances to ensure sustainability 
• Grant spending to ensure we spend funds in accordance with funder wishes
• And many more…

Strong financial management is one of the most important roles because, at the end of the day, this is the difference between a successful organization and an unsuccessful one. 

Compliance

Like traditional accounting positions, nonprofit accountants have to ensure compliance with tax laws and regulations. However, they have slightly different rules to follow, so they have to make sure the organization aligns with the requirements of governing nonprofit entities. 

To support and maintain the organization’s tax-exempt status, nonprofit accountants have to understand and adhere to IRS rules for:

• Tax-exempt organizations
• Reporting requirements
• Maintaining proper documentation

Reporting

Financial reports and statements provide a transparent view of the organization’s financial performance. These documents are helpful to internal stakeholders, like the board of directors, and external parties like:

• Donors
• Grantors
• Government agencies
• Financial statement auditors

These reports allow interested parties to make informed decisions and keep a pulse of the organization’s financial health.

Grant Management

Many nonprofit organizations rely on grants and donations to fund their operations and programs. These grants often require specific tracking guidelines and reporting. 

It’s the accountant’s job to properly manage grant funds and ensure that they are meeting the grant guidelines and creating the proper reports. In some cases, they’ll also be responsible for communicating with grantors.

Not only are accountants included in the management of grants like tracking how the funds are spent, they are also involved in the fundraising process by building budgets to justify the request. Fundraising and accounting typically work in tandem to strategize on what fundraising gaps exist and how to best ask for funding.

Fund Accounting

Fund accounting is primarily used by non-profit organizations, government entities, and some financial institutions to track and manage financial resources that are segregated into separate funds or accounts. 

This method helps to ensure that resources are allocated and used according to specific:

• Purposes
• Programs
• Projects
• Restrictions
• Donor intentions

It’s the accountant’s role to help allocate expenses and revenues to the correct funds to ensure accountability and transparency.

Internal Controls

Unfortunately, fraud, mismanagement of funds, and financial irregularities can happen often in the nonprofit sector. However, implementing and maintaining strong internal controls is the best way to prevent these things from happening.

It’s the role of nonprofit accountants to help establish and enforce these controls to protect the organization’s assets.

Budgeting and Planning

Budgeting and planning are two essential aspects of a nonprofit accounting system. It’s the accountant’s responsibility to participate in the budgeting process. They’ll have the insight needed to make accurate decisions and craft a well-rounded budget. 

Nonprofit accountants should also collaborate with program managers and leadership to create realistic financial plans. This collaboration will ensure the plans align with the organization’s mission and objectives.

It might be a surprise to some that nonprofits typically have multiple budgets. An organization typically has a company-wide budget that serves as its overall financial framework. Additionally, a nonprofit will have grant budgets for each of its funding sources. The grant budgets are typically a subset of the organizational budget. 

Audits

Nonprofits are not exempt from audits. In fact, many states require audits for larger organizations. Accountants typically work closely with external auditors during the annual audit process.

This ensures all of the financial statements are accurate and meet accounting standards.

Nonprofit Expertise is Crucial

The roles of an accountant are essential to keep a nonprofit moving towards its mission. While many of these roles are similar to those of a traditional business, it’s still advantageous for accountants to have nonprofit expertise. 

Here are several reasons why expertise is crucial in nonprofit accounting: 

Unique Financial Reporting

Nonprofit organizations and for-profit entities have different financial reporting requirements. 

To be successful, nonprofit accountants have to understand and follow the accounting standards and regulations that are specific to the nonprofit sector. One example of this is the Financial Accounting Standards Board (FASB) guidelines for nonprofit organizations. 

Having expertise in nonprofit accounting will ensure the financial statements are prepared accurately and according to the unique reporting standards.

Compliance with Tax Regulations

Tax-exempt statuses are unique to nonprofit organizations, but to maintain these statuses, they have to comply with specific tax laws and regulations. 

This means nonprofit accountants need a deep understanding of the tax code to ensure the organization meets all of the tax-related requirements. 

If an organization doesn’t comply with the regulations it can jeopardize its tax-exempt status and lead to financial and legal consequences.

Fund Accounting

As mentioned previously, fund accounting is uniquely used by nonprofits to manage and report on resources that are assigned for specific purposes. 

This approach requires a strong understanding of the nonprofit and how to allocate revenues and expenses to different funds.

Donor Restrictions and Reporting

It’s not unusual for nonprofits to receive donations and grants that come with restrictions on how they should be used. 

Understanding and properly accounting for these donor-imposed restrictions is essential to succeed in a nonprofit accounting role. This ensures funds are used as intended and lets donors see that their donations are being used as intended.

Grant Management

Again, grant management is a key responsibility that is unique to nonprofit accountants. Expertise in this area is successful in order to manage grants effectively. 

To properly manage grants, nonprofit accountants will need to know how to: 

• Build a budget 
• Track expenses 
• Meet reporting requirements (which are sometimes set by the grantor)
• Comply with grant restrictions (ex: how the grant is used) 

Mission-Driven Focus

Nonprofit organizations are driven by their mission and are determined to make a positive impact. 

Expertise in the nonprofit sector will allow accountants to better align financial strategies with the organization’s mission and goals. When financial strategies and the mission is aligned it ensures financial resources are being used to make the most impact.

Financial Stewardship

The nature of nonprofits makes good financial stewardship even more of a priority. Accountants are required to protect the organization’s assets and maintain the trust of stakeholders, like:

• Donors
• Board members
• Beneficiaries
• Employees
• The public

With expertise in the industry, nonprofit accountants can maintain transparency and accountability in financial practices, ultimately enhancing the organization’s reputation and credibility.

Good Culture Keeps the Organization Moving Forward

Working for a nonprofit organization can be tough. There are a lot of moving pieces and the work can be stressful at times. However, a good culture is one of the best ways to ease that burden. It plays a critical role in keeping an organization and its hard-working employees moving forward. 

Here are some of the many ways a good culture positively impacts a nonprofit organization:

Promotes Collaboration and Teamwork

Collaboration and teamwork are some of the most underrated aspects of nonprofit success. To foster these two concepts, there has to be a positive culture. This encourages open communication and trust among employees and creates a comfortable environment for sharing:

• Ideas
• Concerns
• Feedback 

This leads to diverse perspectives and innovative solutions to challenges, further propelling the organization forward.

Additionally, a teamwork-focused environment reinforces the idea that everyone has a shared sense of purpose and is working towards a common goal to further the organization’s mission.

When you work in an environment that prioritizes these things, you’ll never have to wonder if everyone has the same goals. 

Learning and Professional Development

A good culture can help combat one of the biggest challenges for nonprofit accountants, limited opportunities for growth.

Good cultures value continuous learning and provide opportunities for professional development. Organizations that promote this encourage employees to enhance their skills and knowledge so they can further themselves professionally and become more effective contributors to the organization.

Innovation and Risk-Taking

Nonprofits thrive on creativity and new ideas. A culture that promotes innovation and risk-taking opens the door for these contributions.

As a nonprofit accountant, you need the encouragement to share your thoughts and solutions so that you can contribute to the organization using your unique skill set.

Working with an organization that supports calculated risk-taking is more likely to seize opportunities and stay ahead of the competition, which is a benefit to you as an employee.

Value-Focused

A strong culture that emphasizes the organization’s core values helps employees align their work with the organization’s mission and vision.

A value-focused environment cultivates a sense of pride and ownership in the work employees do. It helps them understand how their contributions add value to the organization and the community it serves.

As an accountant, there are several key values you want the organizations you work with to hold in high regard, some of these include: 

• Growth-minded
• Impactful
• Collaborative
• Supportive
• Transparent
• Driven
• Inclusive
• Progressive

An organization that leans into the majority of these values will have the best chance to provide you with a good culture. 

The Ideal Nonprofit Accounting Job

With all of this being said, here is the good news: the ideal nonprofit accounting job DOES exist. There are plenty of organizations where you can find a good culture, good pay, opportunities for growth, and modern strategies. In fact, many nonprofit accountants work at a nonprofit organization. That said, this is not the only option!

However, if you’re searching for an in-house nonprofit accounting position, you may want to shift gears. 

The Charity CFO is an outsourced accounting firm for nonprofit organizations. We work with hundreds of nonprofits to provide bookkeeping and accounting support so they can focus on their mission. 

It’s our goal to create an environment where accountants can find work with a purpose and advance their professional journey. We want to make sure you have a space to be a person first and an accountant second.

Because there are so many organizations in need of bookkeeping and accounting support, The Charity CFO is looking to hire knowledgeable accountants with a passion for nonprofits. We are a growing firm and strongly believe we can provide you with the ideal nonprofit accounting job and a work environment that empowers you to grow personally and professionally. Our team is here to ensure that all nonprofits have the financial expertise they need to make informed decisions on how to best run their organization. 

At The Charity CFO, our journey began with a former nonprofit CFO’s vision. Today, we’re proud to bring on board accountants who share a passion for nonprofit accounting, even if they’re new to the field.  Alternatively, we’ve welcomed individuals with nonprofit backgrounds seeking a dynamic change. Our firm breaks the mold purposefully, targeting the challenges that often hold back for-profit accountings in search of purpose or nonprofit accountants aiming for greater resources and career development. 

If you’re interested in learning more about career opportunities with The Charity CFO, visit our careers page.

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If your nonprofit is growing, you have a lot on your plate. But one of the most underrated things you can do to make life easier and improve your future prospects is to work with a nonprofit financial advisor. 

These skilled professionals combine essential knowledge with a critical understanding of how the needs of nonprofits differ from other organizations. 

Read on as we explore more about this crucial role and how it can help your nonprofit.

Understanding the Role of a Nonprofit Financial Advisor

Before we move further into the role of a nonprofit financial advisor, it’s important to note that there are two different routes the term can take. 

The first focuses more on investments. They will guide you in deciding where your money should go to optimize it. 

The second is the financial advisor role that we will refer to, which takes on more of an accounting services perspective.

At the most basic level, they can help ensure your organization’s finances are in order and help resolve issues involving financial reports and compliance. They can also work to institute best practices for budgeting, allowing you to easily and more effectively allocate money. And in the event of an audit (whether it’s the IRS, another external group, or even an internal one), your advisor will have your organization prepared and guide you through the process.

One of the more beneficial pieces of their role is that they can use their experience to provide strategic advice, allowing you to make the most of your resources, both financially and staff-wise. 

With their added expertise, you can expect:

• Improved fundraising and grant approvals
• A smoother operation that allows you and your employees to focus on your mission

Finding the Right Nonprofit Financial Advisor

When choosing a partner, you don’t just want any old financial advisor, even as skilled as most are. When looking to grow your nonprofit, it’s crucial to find one with experience in the nonprofit sector, one who’s familiar with the general ups and downs of nonprofit life, as well as their common issues and requirements. 

Ask about past work from potential candidates, as well as any certifications like the familiar CFP (certified financial planner.) However, there are also more specific but less common credentials that could be extremely helpful as well, like:

• The Certified Nonprofit Accounting Professional
• The highly-specialized Chartered Advisor in Philanthropy

It’s also vital to find an advisor who works for your organization’s values, goals, and specific personalities. Naturally, you’ll want someone who understands the purpose of your nonprofit and why you and your staff work so hard toward your goal. 

Having a good personal relationship between your advisor and nonprofit leaders is also critical, as both sides need open and frank communication and collaboration to make the most of your partnership.

Preparing for Your First Meeting

Once you’ve selected the perfect nonprofit financial advisor, you need to get your relationship off on the right foot. 

They’ll likely have a lot of questions for you and other organization leaders as they get a sense of:

• Your mission
• Your finances
• The issues that may be holding you back 

On your part, you should bring:

• Relevant financial documents and information, which will allow your advisor to get an immediate look at vital data
• A  list of questions and concerns
• A clear idea of your goals and what you see as the challenges in your way

At the end of your first meeting, your advisor may give you some tasks they’d like you to accomplish or data to provide in advance of your next meeting. With this simple, low-stress introduction, your organization will be on its way to a brighter financial future.

Tips for Working With Your Nonprofit Financial Advisor

To make the most of your nonprofit financial advisor, it’s critical to consider them as another member of your team. This means open communication and collaboration, with regular check-ins to make sure things are on track for both sides. The more intimately they understand your operations, the better they can assist. 

However, ensure both you and your advisor don’t feel overburdened with excess communication or meetings. This partnership is meant to relieve a burden, not create one.

Make sure to set clear goals and expectations with your financial advisor. In your initial meetings, it can be helpful to explicitly lay out some short-, medium-, and long-term goals, which can be valuable in balancing your financial planning.

A Nonprofit Financial Advisor Can Help Your Organization Grow

While it may be tempting to go it alone, smart nonprofit leaders know they make the most impact when their team members focus on their strengths and are set up for success. Working with an outside nonprofit financial advisor is one of the simplest and most impactful ways to do just that. You’ll be excited to see the growth or other improvements these experienced professionals can unlock in your organization’s everyday operations.

When it comes to picking a partner, there’s no better choice than The Charity CFO. Contact us today to learn more about how we can help your organization get started on the path to nonprofit financial success.

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Starting a nonprofit organization can be confusing and tricky, especially if it’s your first time and you don’t have any experience filling out a 501c(3) application. However, filling out the application is an essential step in setting up a nonprofit charity with the full benefits of tax-exempt status.

Follow along below as we discuss tips on how to fill out your 501c(3) application correctly so that your request is approved and your organization can get off to a great start.

What is a 501c(3) application?

A 501c(3) application is a document nonprofit organizations file with the Internal Revenue Service (IRS) to request tax-exempt status as a charitable organization. IRS Form 1023 is the document you must complete to apply for tax-exempt status with the IRS as a 501c(3). 

Once granted tax-exempt status, your organization is exempt from paying federal taxes on revenues from donations, grants, and income your nonprofit generates in carrying out your stated mission. When you’re not giving a percentage of your income to the IRS, you can use those financial resources to carry out your nonprofit’s mission. 

PRO TIP: Only income from activities “related to your mission” are exempt from tax. For more details on this, check out our article on which taxes nonprofits do (and don’t) have to pay here.

What should I include with Form 1023?

IRS Form 1023 is 28 pages long, and some applications can reach more than 100 pages when you count the attachments and schedules needed to substantiate your application. The more information you include with the form, the lower your chances the IRS will have additional questions.

Think of Form 1023 as a business plan for your nonprofit organization, including your governing structure, planned programs, and purpose. The IRS wants to see detailed information on how you plan to carry out your stated objective. And they want to ensure that your organization has the resources to follow through with your planned programs.

The IRS will also look out for possible conflicts of interest that can be grounds for denying your application for tax-exempt status.

What should you have before filing Form 1023?

Before you file your application, you’ll need to choose a type of legal entity for your nonprofit organization. The most common legal entity for a nonprofit is a C Corporation, but you can also be an LLC, unincorporated association, or a trust.

Which organizational type is right for you depends on what kinds of activities or services your organization will provide.  But you’ll need to decide on your business entity type before applying for tax-exempt status because you need to file formation documents before submitting Form 1023 to the IRS. 

You’ll also need to have an Employer Identification Number (EIN) before completing Form 1023. (You can get one for free by filing Form SS-4 with the IRS.)

Form 1023 vs. Form 1023-EZ

Now that you are ready to apply for a 501c(3) status with the IRS, you need to decide whether to file a Form 1023 or a Form 1023-EZ.

Form 1023 is considered the long-form version. It is a thorough questionnaire about your nonprofit organization over 40 pages long. You’ll have to pay $600 to file the form, and processing times can be as long as 6 to 12 months.

The shorter Form (1023-EZ) is more manageable to file, so many eligible nonprofits elect it over the longer form. If your nonprofit expects to have less than $50,000 in annual gross receipts in each of the next three years and does not have assets exceeding $250,000, you can file the shorter form. The form is only three pages long. It costs $275 to file with the IRS. And you’ll typically get a response within 2 to 4 weeks.

PRO TIP: Consider your choice carefully before deciding which 1023 to file. The EZ form is simpler, but there are some potential drawbacks to taking the easy path, like a higher audit rate and trouble securing large grant funds. Thoroughly assess your plans and goals before deciding which best fits your needs. 

What documents should you include with your 501c(3) application?

Starting a nonprofit organization can be confusing, so you should seek professional legal advice. Unfortunately, many people shy away from seeking legal help because they think it will cost them a lot of money. In reality, you might spend more money correcting your mistakes if you decide to do it yourself, especially if you make errors in your application or incorrectly file forms.

You must submit a complete form to the IRS, including all the required attachments, or they won’t be able to approve your application. In some cases, it can take up to 18 months for the IRS to approve. Ensuring all your paperwork is in order can help avoid further delays.

Here are the documents that you should with your application:

• Formation documents

If you formed a corporation, you must ensure that you have all the legal formation documents required in your state and attached to your application. These can include Articles of Incorporation and a list of your Board of Directors and officers. 

You may also need to include the business plan for your nonprofit and bylaws. The more information you have with your application, the less likely they will come back to you for additional questions or ask for other documentation.

The bylaws are fundamental to your operation as a nonprofit. They can be beneficial for regulating your members and officers and the Board of Directors to make sure that no unexpected conflicts of interest arise. 

• Financial Statements

You have to supply financial statements for the year and a proposed budget plan for at least the next two years for newly-established nonprofits. If you have been operating for at least three years, you need to show the current and prior year’s financial statements. 

• Primary and specific project plans

You declare your organization’s purpose to the IRS, which is the primary objective that your nonprofit wants to achieve. You’ll also need to give details on your planned projects. The IRS wants to ensure that your nonprofit will provide legitimate services to the community you choose to serve. 

So you’ve filed your 501c(3) application—what’s next?

After you’ve filed your 1023 for 501(c)(3) nonprofit status, it’s mostly a waiting game. Depending on which form you filed and how complete your application is, you may receive a letter of determination in as little as a few weeks. Or it may take up to a year or more.

In the meantime, the IRS says you should act as if your application will be approved. That means you should go about your activities as if you are exempt from federal taxes. And you should file IRS form 990 at the end of your fiscal year instead of a tax return.

The one tricky topic during the waiting period is donations. Your donors’ contributions will only be tax-deductible for them if your application is approved. Once you get your approval, all donations are tax-deductible retroactive to the date of your application. But if your application is rejected, those donors will not be able to claim a tax benefit from any money they’ve donated to you.

Hopefully, your application will be approved quickly, so you and your team can start raising money and executing your mission to help make this world just a little bit better!

Don’t sweat your bookkeeping & accounting!

After your 501(c)(3) application is approved, you will have A LOT to keep track of— donations, grants, expenses, program fees, and more. Keeping up with all that, bookkeeping and accounting often distract young nonprofits from accomplishing their mission. 

Nonprofit accounting is a challenging task that requires experience, know-how, and familiarity with the specific rules that nonprofits need to follow. An outsourced nonprofit accounting service can help keep you from getting bogged down in the paperwork, keep you out of trouble with the IRS, and help you create a well-planned path to financial success.

If you’re looking for a skilled nonprofit accountant to accompany you on your journey, reach out to The Charity CFO to see if we can help you!

Why does your nonprofit need an operating reserve? 

A report released last year by Candid and the Center for Disaster Philanthropy estimated the worst-case scenario would lead to the closure of 38% of nonprofits in the United States.

Hopefully, we’ll fall far short of that number. 

But there’s little doubt that nonprofits with reserve funds in place were more likely to survive when their offices closed suddenly and funding disappeared almost overnight in 2020.

If you’re still operating month-to-month or know that one disappointing fundraising quarter could shutter your operations, now is the time to build an operating reserve. 

What is a nonprofit operating reserve? 

An operating reserve is a balance of unrestricted funds (cash or highly liquid assets) that you can access in the case of emergency need.

They’re funds that you can use to keep your organization afloat in the case of unexpected events— like a pandemic, a natural disaster, or just a bad fundraising month.

PRO TIP: An operating reserve solves temporary, emergent problems, not structural financial problems. At best, it keeps you afloat and buys you time to develop new revenue streams or funding strategies. 

An operating reserve is a “surplus” of resources that can help get you through tough times. But it’s also a key financial indicator that large donors, grantmakers, and watchdog agencies will want to see.

In the eyes of those outside sources (like donors, foundations, or the Better Business Bureau), your operating reserve is more than just cash on hand– it includes all of your Net Assets that don’t have Donor Restrictions, less the value of your fixed assets (like real estate, automobiles, and furniture/equipment). 

If you have too little in reserve, it indicates you’re not planning ahead. 

But if you have too much, they may think you’re not investing enough into your programs…

So, how much money do you need in your operating reserve? 

There’s no official rule about how much you need in your nonprofit operating reserve, but United Way wants to see between 25% to 75% of your annual expenses in non-capital unrestricted net assets.

Doing some simple math (25% x 12 months = 3 months), we can safely say that you should start with a goal of at least 3 months of expenses as your operating reserve.

Once you reach that goal, keep saving and increase that reserve to 6 months of operating expenses. Depending on your organization, it may make sense for you to push that even higher. 

Consider these factors when deciding how big of an operating reserve you need: 

• Revenue sources: 
  • Do you get regular, contracted payments?
  • Do you have earned revenue sources? 
  • Or, do you rely on grants, events, and campaigns? 
  • Are you dependent on 1-2 major donors? Or a single fundraising event? 
• How stable are your revenue and expenses? 
• What’s the economic health of your community? 
• Is your region at risk for severe weather or natural disasters? 
• How long has your organization been around? 
• How well does your organization budget? And do you hit that budget consistently?
• Is there uncertainty (like new, unproven services) in your near future? 

Your circumstances might tell you that you need an operating reserve outside of the recommended range.

And that could be okay. But you need to detail the reasons and put them in writing as part of your official operating reserve policy.

Do you really need a policy? Or can you just set some money aside?

And the most effective way to make sure the reserve is built, administered, and allocated appropriately is to create an operating reserves policy. 

After all, it’s easy to say you will set aside 3-6 months of operating expenses. But a policy forces you to give real thought to how big your operating reserve needs to be. And it helps you and your team be accountable for reaching your goals.

With a policy in place, your board and executive team will know what to do with surplus funds, how reserves should be authorized and used, and the standards for reporting and monitoring their use. 

If you don’t have an operating reserve policy in place, your reserves tend to be whittled down unexpectedly. 

It’s like in your personal finances when you use your vacation fund to go out for pizza or pay for an oil change. Eventually, your vacation fund gets wiped out, and you have to start over.

An operating reserve policy also makes you more attractive to donors. Because it displays the proactive, prudent management practices that donors value. 

How do you build an operating reserve policy?

Detail your policy in a clear and straightforward document (typically no more than 2-3 pages) that outlines your reasons for building a reserve, how you plan to structure it, and criteria for when reserve funds can be used.

But before you start building your operating reserve policy, you’ll first need to talk to your board of directors and get buy-in on the concept.

Often, the finance committee will set up a committee to determine the targeted reserve amount and prepare the policy. But in a small organization, you may need to design it yourself and present it to your board.

Here are 8 questions your operating reserve policy should answer: 

1. What is your purpose for building and maintaining an operating reserve?

2. What types of reserves will be utilized (cash or other assets)?

3. What is your target level of operating reserve (of operating budget)?

4. How will you fund your operating reserve? (initially, and ongoing)

5. Who will have authority to spend the operating reserve? And what specific approvals do they need?

6. What are acceptable (and unacceptable) uses of reserve funds?

7. How will you report reserve fund balance and usage on your financial documents? (You might consider adding the reserve fund as a line item on your Statement of Financial Position)

8. What kind of investments can you make with your reserve funds, if any?

Once the draft policy is complete, you must present it to the Board for review and edits. Then, the committee and Board will finalize the policy and start implementing it.

Need Help Planning your Operating Reserve?

Developing a policy for operating reserves can help you prepare your organization for what’s to come. But if you’ve never done it before, you may not know where to start.

That’s where having an experienced partner in your corner can help.

At The Charity CFO, we focus exclusively on the unique financial challenges of nonprofit organizations everyday. And with 150+ nonprofit clients and over five decades of combined experience as nonprofit CFOs, auditors, accountants, financial directors and board members, we’re prepared to handle anything your organization can throw at us.

Expert nonprofit financial advice is part of our DNA.

When you work with our bookkeeping and accounting services, you get our expertise and advice free of charge. Whether establishing an operating reserve policy, drawing up your annual budget, or game-planning expansion options, we’re here to give our expert opinions on your organization.

So if you need an experienced financial partner to help your organization plan for a successful future, reach out to us for a free consultation.

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What is the Statement of Financial Position?

The Statement of Financial Position is the Balance Sheet of a nonprofit organization.

It gives you a snapshot of a nonprofit’s financial health at a point in time by displaying what the organization owns (assets), what it owes to others (liabilities), and its value (net assets).

The Statement of Financial Position can help you answer critical questions about your business. Like, “Do we have the cash available to pay our bills?” And “If we had to pay back all our debts tomorrow, could we do it?”

It is one of the essential financial statements that nonprofit founders need to know how to read. It’s vital for running your business effectively. And it’s a requirement for a nonprofit audit.

This article will show you what you’ll see on the Statement of Financial Position, what you can learn from it, and what your CPA will look for on your Balance Sheet to see just how healthy your business is.

PRO TIP: The Statement of Financial Position is the same report that a for-profit company calls the Balance Sheet. If your team or board are more familiar with the for-profit terminology, referring to the Statement of Financial Position as ‘Balance Sheet is fine.’ There are no hard-and-fast rules when it comes to internal reports.

What’s on the Statement of Financial Position?

There are three sections on the Statement of Financial Position, and together they illustrate the nonprofit accounting equation:

Assets = Liability + Net Assets

To better understand what the equation means, let’s take a look at each of the three elements in the order that they appear on the report:

Assets: What do you own?

Assets are anything of value your organization possesses or is entitled to, such as cash, pledged donations, property, equipment, investments, etc.

On the Statement of Financial Position, your assets break down into current assets, fixed assets, and other assets.

Current assets are cash or assets you can reasonably expect to convert to currency within a year. Examples include bank balances, accounts receivable, pledged donations, investments, and prepaid expenses.

Fixed assets are long-term assets that are typically tangible items. Examples include buildings, furniture, vehicles, inventory, large equipment, and accumulated depreciation.

Non-current assets (or other current assets) are assets that you can’t convert into cash quickly. Examples include long-term investments, endowments, trademarks, and patents. Many small nonprofits won’t have any non-current assets on their books.

TIP: When organizing your cash assets, ask yourself: “Am I likely to receive this cash (or convert this asset into cash) within a year? If so, that’s a current asset. If not, it’s a non-current asset.

Liabilities: What do you owe?

Liabilities are anything your organization owes to someone else, like vendors, creditors, or employees.

You’ll find your organization’s liabilities organized by current and non-current liabilities on the Statement of Financial Position.

Current liabilities are liabilities you must repay within one year. Examples include outstanding bills, accrued expenses, payroll and payroll tax liabilities, lines of credit, and short-term loans.

Non-Current liabilities are liabilities that will not become due within the next year. Common examples include mortgages and loans.

Net assets: What is your value?

If we rearrange the accounting formula a bit with some 7th-grade algebra, we’ll see that it looks like this:

Net Assets = Assets – Liability

In other words, the value of your organization is the difference between what you own and what you owe.

For-profit businesses call this difference Equity. Your personal financial advisor calls it your Net Worth. In nonprofit accounting, we refer to it as Net Assets.

It’s the accumulation of all the surpluses of revenue over expenses (profit) that you’ve seen on your Statement of Activities since the start of your organization.

And it’s the answer to the simple question–what is the financial value of my organization?

How is a Nonprofit’s Balance Sheet Different?

The name is the most significant difference between a Statement of Financial Position and a for-profit Balance sheet.

But there is one other major difference, and it’s the issue of restricted funds.

Nonprofits use a system of accounting called fund accounting to track sources of revenue that they can only use in specific ways. Fund accounting requires that organizations keep track of these funds and report them on their Statement of Financial Position.

So, on a nonprofit Balance Sheet, you’ll see some extra lines detailing restricted assets, like this:

And you’ll also see them again in the Net Assets section:

Breaking out restricted funds on the Statement of Financial Position helps you answer a simple question:

Can I spend the money that I have to pay off my debts?

But that’s not the only question that your Statement of Financial Position can answer.

So, now let’s look at the questions a CPA or auditor will be asking themselves when reviewing your Balance Sheet…

What will your CPA look for on your Statement of Financial Position?

Your Statement of Financial Position is a snapshot of your business at a point in time. And it’s incredible how much a financial professional can learn about your business from it.

Here are some of the questions your CPA or nonprofit auditor will be asking when reviewing your Statement of Financial Position:

• Do you have enough cash to pay your bills? (More importantly, do you have enough unrestricted cash to pay your bills?)
• Are your accounts receivables increasing or decreasing over time?
• Are you paying down your liabilities or gaining new ones?
• Is your debt temporary or long-term?

But the biggest question they’ll be asking is this…

Do you have more assets than liabilities?

That’s the bottom line (literally) of your Statement of Financial Position and the easiest thing for you to take away from it at a glance.

Because if your Net Assets are increasing over time, you know you’re creating value and building a surplus you can use to achieve your future goals.

And if your Net Assets are decreasing, then something is wrong, and you’d better fix it or find yourself out of business.

Want to Put Your Accounting on Auto-Pilot?

When it comes to financial statements, reading them is the easy part!

It’s creating them that presents the more significant obstacle for time-challenged nonprofits.

Your team needs to spend countless hours entering receipts, invoicing clients, running payroll, and reconciling your books BEFORE you can get the reports you need to run your business the right way.

If you’re looking for an easier way to get accurate and on-time financial reports, consider outsourcing your nonprofit bookkeeping and accounting to The Charity CFO.

We’ll automate your bookkeeping processes to help you save a ton of time. And our expert accounting team will help you handle your trickiest tasks (like fund accounting and functional expense reporting) so that your books are always audit-ready!

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What is an inkind donation?

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In-kind donations are any non-cash gift of goods or services that your organization receives from donors.

These in-kind gifts can help your nonprofit get the resources it needs to carry out programs without constantly hounding your donors for cash. Some people are more likely to give if they know that their donation will go directly to helping others, rather than paying overhead costs or admin salaries.

For this reason, inkind gifts are an invaluable tool in your fundraising toolkit. But accounting for in-kind donations presents its own unique challenges.

Almost any non-cash gift to your nonprofit can be considered an in-kind donation, but most of them fall into one of two categories: goods or services. 

Here’s what this might look like:

 

• A food pantry receives a new walk-in freezer from an appliance store (donation of in-kind goods)
• A  licensed electrician then volunteers to install and wire the new freezer for free (donation of in-kind services)

Hopefully you already know a bit about what in-kind donations are and how they help grow your mission. In this article, we’ll dig into how to account for in-kind donations on your nonprofit’s books.

Why accounting for in-kind donations matters

Accounting for in-kind donations isn’t just important; it’s required for many nonprofit organizations. 

You need to track and report in-kind donations if your organization is required to… 

• Prepare financial statements per Generally Accepted Accounting Principles (GAAP)
• Submit to an annual audit
• File IRS Form 990 (in-kind goods only) 

While it may not be required to track in-kind services on your IRS Form 990, it’s a good idea to do so because many grants, lenders, and even state laws might require it for funding. 

One of the biggest reasons to account for in-kind donations is because it helps you reflect the true impact your organization creates in the community. 

For the purposes of GAAP, donations of goods and services are valid revenue. If you don’t account for in-kind gifts properly, you risk understating the revenue (and expenses) of your organization, making you look smaller to donors, grant writers, banks and other organizations whose support you need.

How accounting for in-kind gifts works 

There are two steps to properly accounting for in-kind donations: establishing fair market value and recording the revenue and expense transactions associated with your in-kind gifts.

Step #1: Establish Fair Market Value 

Fair market value is the price you’d pay on the open market if you had to purchase the item or service instead of having it donated. 

To establish fair market value, you can check the price on the open market, get a competitor’s quote, use a third-party source, ask your donor, look at a salary survey, etc. 

The key is to set a standard for obtaining fair market value for a type of good or service and be consistent in how you use and track that value.  

How to calculate fair market value for in-kind goods: 

The most common way to establish value for in-kind goods is to look for the average cost, or conservative estimate, of a generic line-item product at a high-volume retailer like Amazon or Walmart. 

There’s no need to get specific for every type of donated item. It’s recommended that you lump materials and goods together as much as possible, so you’re not burdened with this task. 

Example #1: Canned beans

If you received 10 types of canned beans from two different brands, it’s acceptable to pick one brand and one type of canned bean and account for the total donation with that value. 

You can record it like this: 

In-Kind Good Received: 14 oz canned beans
Qty: 24 cans
Estimated Value: $0.79 each
Total Estimated Value: $18.96
Date Received: January 12, 2022

We’ll look at one more example that’s not as straightforward… 

Example #2: Office chairs

Let’s say you received 10 used office chairs. 

They’re in great condition, but an assortment of styles and brands.

The easiest way to get fair market value is to use an online market like Craigslist. Search for office chairs, do a quick scan of the price listed, take the lowest average price, and use that value for all ten chairs. The same can be done with many in-kind goods: clothing, furniture, office supplies, etc. 

Once you have those fair market values in place, use the same methodology consistently.

Don’t use Craigslist to get fair market value for office chairs and Facebook Marketplace for a new conference table. Don’t use generic tracking for canned beans, and get specific on brand and type for boxed pasta. Stay consistent, and your books (and to-do list) will thank you. 

NOTE: Donated or discounted use of real estate is also an in-kind good. So if you use donated space for your offices or programs, be sure you’re value it at the local market rate and record that value every month.

How to calculate fair market value for in-kind services: 

When it comes to in-kind professional services (typically associated with licensure, like an attorney, contractor, CPA, electrician, or architect), you can use their standard hourly rate.

Let’s say you receive pro bono legal services throughout the year. You’d ask your volunteer how much they would have charged you if they were being paid. Typically, they’d use their standard hourly rate and the total number of volunteer hours spent on your organization. 

NOTE: You can only apply their professional legal services fee to skilled volunteer hours. If a lawyer volunteers as a delivery driver, they’re just like any other volunteer. And most volunteer hours are not considered in-kind donations of services. According to Nolo.com, “the general rule is that such time may be counted only if the nonprofit would have purchased the services if they had not been donated.”

Step #2: Record Your In-Kind Donations 

Now that you’ve established the fair market value, let’s take a look at accounting for the value of these donations on your books.

You’ll want to track all of your in-kind donations along with donor information in a spreadsheet or CRM, too. But here we’ll talk about how to record the financial transaction in your accounting system.

Recording In-Kind Donations of Goods: 

1. Record the fair market value of the donated items on the day that they were received (or pledged, if not delivered immediately). Classify the revenue as “in-kind revenue” or the appropriate revenue account on your chart of accounts.

2. Record the same fair market value to either an expense account (if the items will be used immediately) or an asset account (if the items will remain in inventory or are tangible assets, like furniture or equipment).

Recording In-Kind Donations of Services: 

The estimated market value gets recorded as both revenue and an expense on your profit and loss statement. Let’s say you received $10,000 worth of legal services, here’s how you could record that donation:

1. Record the $10,000 donation to a revenue account (example: “In-Kind Gift Revenue: Service”)
2. Then, record the expense side of the transaction in its appropriate functional expense account (example: “Professional Services”)

In the case of in-kind services, the revenue and expense should always cancel each other out within the given time period.

How does accounting for in-kind donations help? 

Properly accounting for in-kind gifts increases your revenues and expenses by the same amount. In doing so, it directly impacts how outside observers perceive your organization by accurately reflecting the full impact you are making in the community.

If you want to learn more about in-kind donations and how accounting for them works, check out this video. Our Founder and CEO, Tosha Anderson, and Tim Hudson, Partner and COO, further break down in-kind donations for goods and services.  

Our favorite tools for tracking and reporting in-kind gifts: 

If you don’t have a system in place for tracking in-kind donations, check out these time-saving resources and tools you can use to get started today:

• In-Kind Donation Tracking Spreadsheet: Feeling stressed about creating yet another spreadsheet or template? No worries, Microsoft has a free Excel template (you can export it into Google docs) that tracks the donation, organization, date, value, and tax-exempt status.
• Free Online Giving Platform: RightGift.com is an online giving platform built for charities to create, manage, and collaborate virtual wish list campaigns. Right Gift also donates 1% cashback to the nonprofit of the donor’s choice for all purchases made on the platform.
• Customer Relationship Management Software: WildApricot by Personify is a customer relationship management tool that helps over 32,000 nonprofit membership organizations grow. They even have an in-kind donation tracking template ready for you to download and use. 

The information in this article should make accounting for in-kind donations a bit easier, so you can invest more of your time focused on growing your mission. 

Need help keeping track of your in-kind gifts? 

The Charity CFO is your best option for outsourced accounting, from bookkeeping and financial statements to accounting for in-kind donations. Why? Because nonprofit accounting is all we do. 

Let us worry about your books so you can focus on your mission. We’ll modernize and manage your accounting systems to save you time, money, and stress. 

If you’re looking to simplify and optimize your bookkeeping process, we’d love to hear from you. Contact us today to learn more about how we can help your nonprofit and get started.

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