Why Strategic Planning Fails Nonprofits — And What To Do Instead

Strategic planning. If that phrase makes your eyes glaze over—or your blood pressure spike—you’re not alone. Nonprofit leaders know they should have a plan. But what that plan looks like? That’s often where the confusion sets in.

In this episode of A Modern Nonprofit Podcast, Tosha Anderson sits down with Steve Strang, Practice Director at Spectrum Nonprofit Services, to demystify strategic planning and help nonprofit leaders stop spinning their wheels.

Steve makes one thing crystal clear: Strategic planning isn’t just a document. It’s a process. One that must adapt to your organization’s current reality—people, finances, and all.

“Our planning process helps you identify the impact you’re trying to have, and your method to get there,” -Steve Strang 

But that method? It’s not one-size-fits-all.

In fact, the “classic” five-year strategic plan might be doing more harm than good. Especially in today’s volatile environment, Steve recommends looking 12–18 months ahead—max. The key isn’t how long the plan is. It’s how often it gets reviewed, challenged, and adapted.

And that starts with asking better questions. One of Steve’s favorites? 

“How much impact can we afford right now?”

Why Strategic Planning Fails Nonprofits — And What To Do Instead

This echoes what we covered in our recent blog on Strategic Planning vs. Scenario Planning, where we broke down why static plans often fall apart—and how scenario planning can help you respond to real-time challenges with more confidence.

Whether you’re eyeing growth or simply trying to stabilize, strategic planning needs to start with reality, not wishful thinking. That means bringing in financial data, team feedback, and external factors like labor markets and policy changes. Without that, you’re building a strategy in a vacuum.

Boards, CEOs, staff—everyone has a seat at the table. But not all at once. Steve recommends a small, cross-functional task force (ideally under 10 people) to drive the process. And if that team can’t access basic performance data? That’s your red flag that systems—and people—aren’t in place to support strategy.

In the end, the best plan is one you’ll actually use. Not a report that gathers dust, but a tool that guides your team week by week, quarter by quarter.

Because strategic planning isn’t a retreat. It’s how you lead—intentionally, adaptively, and with eyes wide open.

Connect with Steve

Practice Director at Spectrum Nonprofit Services

Website: https://spectrumnonprofit.com/
LinkedIn: https://www.linkedin.com/in/stevenstrang/

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Strategic Planning vs Scenario Planning

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About The Charity CFO

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Cleaning Up the Skeletons in Your Financial Closet

Is this you? “I don’t know if my nonprofit’s accounting systems are bad… and I probably won’t know for sure until something bad happens.”

99% of nonprofit founders we work with don’t have a background in finance. If you struggle with feeling confident that your books are in order… and don’t know how to tell if they’re in order or not, this episode is for you.

This week on A Modern Nonprofit Podcast we discuss common red flags you can check today to verify your organization’s financial health.

In this episode, Isabel Sippo joins me to talk about the most common reasons why your nonprofit’s finances might be a mess, and ways to clean them up.

Isabel is the Onboarding Specialist at The Charity CFO. She focuses on helping new clients feel more confident about their financial records by re-engineering financial systems and minimizing opportunities for errors.

In this episode, you’ll discover…

  • Key questions to ask if your books are out-of-date (5:50)
  • 3 common issues that lead to messy, inconsistent books (10:56)
  • The Big Red Flag you need to check for and how to fix it (15:28)
  • How to get started so you minimize opportunities for errors (31:29)

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

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

🎧 Click here to listen to the Podcast on AnchorFM or Apple Podcasts

👇 Or scroll below to read the full transcript of our conversation

A Modern Nonprofit Podcast
Data Privacy Strategies for Modern Nonprofits


3/2/2022

Tosha Anderson:

Hey everyone. Welcome back to another episode of a modern nonprofit podcast. My name’s Tasha Anderson. I’m your host today? I brought along a special friend of mine, Isabel, not only, uh, do I consider you Isabel, a friend, but also a colleague of many, many years. And now more recently, one of my fellow coworkers, she actually works at the charity CFO now, and I’m super excited to have this conversation and I thought it was really cool to have you Isabel on because we have very similar, um, backgrounds, um, almost identical backgrounds, frankly. So Isabel you started your career. Um, actually even prior to public accounting, working on a couple different finance, finance, accounting, depart working for some pretty large organizations, um, both on the for-profit side, I think, and on the nonprofit side, but then you did a stint in public accounting and that’s where all of us accountants get a crash course and all things, accounting, um, across industries and myriad of problems that we come in contact with.

Tosha Anderson:

And that’s actually where I met. You used to audit nonprofit organizations back in the day, similar to me, but while I was the CFO of a nonprofit, you were my auditor. And when I left that organization, you actually took my spot. So really interesting stories. So you and I have both seen so many different nonprofits and we’ve both seen how quickly things it out of control, and we’ve both been responsible for cleaning up those messes. And now that you’re with the charity CFO, you are an onboarding specialist and your only job really is to help the newest clients in fixing their messes. And by messes, we mean, the books are just wrong. Um, they don’t know how to get them, right. Um, it could be just a failure to have any consistent processes, right? So how do I get this going and how do I get buy in from my team and how do I get it done consistently? Um, so that we can ensure we get through audits and then just kind of balancing all of those things together. So it Isabel, thanks for humoring me and coming on today and having conversations about your experience with messy accounting and how to get it fixed. Um, so again, thank you for, for taking time out of your busy schedule and chatting with me today about this.

Isabel Sippo:

Well thank you for having me and yeah, you’re absolutely right. I got to follow a lot of your footsteps. Um, some of your direct footsteps, which you left a great, uh, path for me. And then of course, as things evolve and companies change and get bigger and stuff, things change and yeah. Uh, you just have to learn to adapt.

Tosha Anderson:

Yeah. That’s one thing for certain in the nonprofit world and you and I both worked for an organization that was growing very quickly because they went through a merger, but even without that, right, uh, different funding opportunities come up and those get compounded onto the existing accounting needs. It’s already there. And then of course, funders change their mind or the accounting rules have changed over the last few years for nonprofits. So there’s always something that requires some sort of re-engineering. And that I think is where a lot of organizations really struggle. A couple things actually, number one, that we’ve alluded to transition in leadership. So transitioning from one account to the other, whether it’s an outsource person, it’s a senior level person or even a bookkeeper. And frankly, I think the transition, the bookkeepers are even, um, more susceptible to error and where things get really, really messy for our clients.

Tosha Anderson:

So that’s, that’s a common issue. And then also you have issues of size and complexity challenges, um, where you might have a person doing your accounting in place, but things have changed for one reason or another. And all of a sudden now that is beyond their skillset and we keep limping along and limping along, limping along, and then we keep adding more and more people because we think it’s a, uh, a band length issue. It’s a capacity issue. You, and really oftentimes it’s an understanding of the compliance needs issue, um, and a skillset, frankly, rather than, rather than a… a number of bodies issue. And so we’ve seen that happen a lot of times with organizations and before they know it fast forward, something happens. Um, it triggers in which they realize, wow, our accounting is not on track. And that’s what we’re gonna talk a little bit about today.

Tosha Anderson:

And I just wanna validate everybody. Um, I would say 99% of the people that I talk to that lead organizations, they do not come from a business background. They do not come from a finance background and their fear is always what they say to me. I don’t know what, I don’t know. I don’t know if my accounting is bad. I don’t know if my financial reports are inaccurate. I have some framework in which I might look at it and know, uh, that doesn’t seem totally right, but it’s not until something happens. And that’s something that happens is usually an auditor comes in, whether it’s your funder, whether it’s your financial statement, auditor, maybe it’s the tax return gets filed in correctly, or your board is just savvy enough to say, Hey, what’s going on here? And then you end up peeling, you know, the curtains a little bit and you realize, oh my gosh, this is an absolute disaster.

Tosha Anderson:

So we’re gonna talk about that. And for all of you that might suspect this may be happening. We’re gonna give you some tips on how to identify when that’s actually happening. So let’s just dive in Isabel with the first day. You look at a lot of accounting files all the time as part of your work here, certainly in your work, when you were a controller, a nonprofit organization, isn’t even prior to that, when you were an auditor, you’ve looked at a lot of accounting files. You’ve seen a lot of financial reports. What is the first few red flags that you see or that you go to when reviewing files, um, and those red flags or those points of referenced that helps you understand, okay, what is good or bad about this county system? What immediately speaks out to you? Like, Hey, we’ve got problems.

Isabel Sippo:

So I think, uh, the first place you always wanna look at is where they are in reconciling. Like, have they reconciled anything recently? Has it been years? If so, then you already know that you’re going into, um, get your, have to get your hands a little dirty to dig in and see, first of all, why they’re so behind and second of all, uh, what they need in order to be successful in reconciling. And then, um, the first place I always reconcile is if they’ve been audited, like let’s try and compare to the audited statements. Yeah. Why are they off? Why are they different? Usually it’s very simple. Um, after that, you just wanna go a little more in depth of looking at their outstanding accounts receivable. Why do we have outstanding accounts receivable? Are we billing timely? Are we expecting the money to come in? You know, where are we having hiccups in the road? Um, is there a cash flow issue? You could also determine that by looking at their accounts payable, like, why aren’t we paying bills? Are we nervous that we won’t have enough money in the bank? And, um, there are just a lot of different areas like that. You kind of want, uh, things clean. So how current they are is, uh, will help you determine if it’s a red flag or not. And comparing things to the audit is always the first step that I take.

Tosha Anderson:

Absolutely. And to reconcile that word is used, I think so regularly in the accounting world that it trips people up that are not accountants. So when I think of reconciling I’m with Isabel, I, I, first thing I do when somebody shares a file with me, when they’re like, oh, I wanna really share how far behind we are. Maybe a couple months. Like, just, why don’t you go ahead and send me your file. Uh, and the first thing I do is I look at the bank accounts, right? This is about like the cash. When is the last time they refiled their checking account, right? And if it’s been six months, eight months, 10 months, never, I’ve seen that before. Never. Um, then that tells you that what they’re, what that’s telling you is that what has hit the bank account, which is substantially almost everything that’s gonna show up in your accounting reports has never been actually double checked.

Tosha Anderson:

You’ve no one’s ever actually double checked that what’s hit. The bank account is actually been entered into the accounting system. And the opposite could happen are things that were hitting the bank account were omitted for in the accounting system. And then there’s also cases where things were put into the accounting system that never actually had the bank go and there could be duplicates and there could be omissions and there could be all sorts of things. And then the second type of reconciliation that we talk about, we talk about the balance sheet reconciliation. So basically you run a balance sheet report and essentially everything on that report should have, um, kind of an outside spreadsheet. You might be able to do it within the accounting system, but most accountants have an Excel spreadsheet. Now, Ismail, and I will say in practice, most accountants might only reconcile that once a year in practice.

Tosha Anderson:

Um, that’s not totally uncommon, but I would say best practice. What we like to do here is we do that every single month. So those are things of it Isabel’s referencing too. Are you when’s the last time somebody’s actually checked prepaids and here’s a here’s in my mind, a, a pretty sure sign that things are messy. Um, I look at when’s the last time the bank accounts have been reconciled and, and you should be able to find that in any accounting system, um, assuming that you’re not using like Excel, obviously Excel, wouldn’t be able to tell you that, but a QuickBooks or, you know, anything else that you’re using. The same thing I do is run the balance sheet report. And if you see any negative numbers on that balance sheet report, ask a lot of questions. If your accounts receivable is negative, if your accounts payable is negative, if there’s anything negative on there other than like accumulated depreciation, um, that’s a sure sign that something might be off and to Isabel coin.

Tosha Anderson:

The next thing I look at, you’re absolutely right. I look at accounts receivable. Um, and does that seem reasonable? You should know, as a leader of an organization, you generally owes me money and how frequently do people pay. So if you’re seeing, you know, funder, a, their balance is 120 days late, but, you know, fund a pays every single month, like clockwork, that’s a sure sign that things are off accounts payable, same way. If you’re noticing all of these positive and negative numbers on that report. And you’re showing that a lot of payments are over 90 days late, but you know, you have enough money and you’ve paid those bills. That’s another sure sign that things are off. So those are some pretty big red flags for me and Isabel when we inherit our clients. Um, and the good news is if you all have records like this, you are not alone.

Tosha Anderson:

You are not alone. Um, more often than not, this is common. Um, and unfortunately this happens, especially when you turn a over your accountants. And that is something that we see oftentimes in the nonprofit world, they’ll have a part-time person they’ll stick around, you know, for several months, a couple years, maybe then they change to another person and then they have to get up to speed. Um, and one thing about the county world as well, I don’t think people realize is much like any profession. There’s not always a black or white, right or wrong way of doing things is open to interpretation. And every accountant is going to have a different interpretation doesn’t necessarily mean it’s wrong. It’s just when you add all of these interpretations together, uh, you’re not in sync, you’re not in harmony. The, in the data of, within your accounting system could, um, not have a whole lot of it integrity. Right. So kinda keep that in mind. Okay. So now that we’ve looked at some of these accounting files and we’ve started seeing that doesn’t look right, what are some of the common issues you find when you take on some of our newest clients and look at their files? Like, what are the main things that are just wrong?

Isabel Sippo:

I, I think ultimately where all the issues stem from is the timeliness. So, um, many non-profit organizations, their finance department is always spread thin and helping every other department that they can, and then their finances always fall in the back burner. So, um, timeliness is usually the key of where all the issues are stemming from, like, why are the bank reconciliation not done on time? Why don’t have a finance report? Um, then when it does come to a deadline, they are scrambling to get things done. And there’s room for error there’s room for them not having the complete support time. I, you know, saved in the accounting system, saved in their files to reconcile to, and when people fall behind, they just keep falling behind. Yeah. And you have months of accounting work that doesn’t have any backup. Um, I feel like that’s where everything stems from.

Isabel Sippo:

There’s also the inconsistency of how things are recorded. So if people are picking things up and putting things down and then trying to fix it throughout the whole year, but they don’t have that standard. Like every month we’re gonna reconcile, you know, prepay aids and every month we’re gonna reconcile a bank. Um, it’s just hard to pick up and figure out where people left off, uh, during their cleanup also. Yeah. Some of the things that kind of piggybacking on what you said before is we have some bookkeepers that, um, you know, they were taught to do something one way and they never adapted, they have done the same journal entry every month for years, and it could be prepaids and we don’t have those expenses anymore, but we’re still allocating these random expenses and it’s, uh, they just don’t know when they should be adapting and when they should have changed and how they should look deeper into it, because they were told, this is how you do it. And sometimes They just need to have a process in reconciling and like looking at the back data to make sure that, uh, what they’re doing is actually what should be done

Tosha Anderson:

Well in, you said something that I think really, for me, boils down to the difference of doing accounting and bookkeeping. And what I tell people bookkeeping is getting the information into the accounting system. Accounting is to be able to look at those reports and know if that information was entered wrong, or the numbers are wrong and also understanding how to fix it. Right? Those are two totally different skill sets, um, is well, and I think so, oftentimes we see non-profits, they will hire bookkeepers that oftentimes have, uh, some sort of shared role. They do other things within the organization and you’re right. They just keep plugging along. This is the way we’ve always done it, da, da, but they don’t have somebody in house that can look at it and say, that is actually wrong. And here’s a pro tip. Um, and maybe I’ll get some hate mail from accountants out there later on.

Tosha Anderson:

But the funny thing is running the financial reports in a modern accounting system does not take any time hardly at all. It’s all of the work that goes into your financial reports, even being ready to be, um, paired, right? It’s all those reconciliations we’re talking about. So if your accountant is not giving you financial reports, they are 100% not getting, um, those reconciliations done. Otherwise they can hit print and the reports spit out mostly. Um, now a few messages from accountants out there that say, well, I have to do all these manual reports in most cases. And in essentially in almost every case for our clients, it’s all of the reconciliations that take a little bit of time, which is why it’s so important to be doing those on a monthly basis. Because if you do them on a monthly basis, then you’re only looking at if this is off, we’re only looking at 30 days or, you know, a month’s worth of activity.

Tosha Anderson:

If you’re not doing those. And you finally, as Isabel said, you get behind, you get behind, you get behind and then like, shoot. Now I have to go back and reconcile three months worth. Well, yeah, that’s why you can’t get the reports out because you’re taking that much more time to go through 90 days worth of activity and figure out where do things go wrong as opposed to just 30 days. So if you’re not getting your reports, it’s likely because you’re not getting the reconciliations done. And if the reconciliations aren’t being done, that likely means that there’s some disputes between what your accounting system says is in the system and what, um, your bank account says and what the accounting rules say should be in the system. So there’s a disconnect there. So that should be a pretty red flag, a pretty big red flag.

Tosha Anderson:

If you’re not getting ongoing financial reports, that means something within your accounting function has gone off the rails. And that usually means that those reconciliations aren’t getting done, or the information’s not getting into the accounting system. We just onboarded a client, um, a few months ago. And this is a pretty large organization. I mean, I think there are budgets about 6 million a year for many of you out there hearing we, well, you know, I’m a small organization and I have all these problems that I’m alone because I don’t have more money. And if I had more money, I can hire accounting teams. We are here to debunk that myth, um, that larger organizations don’t have these problems, Isabel and I work with and talk with very large organizations, uh, you know, upwards of 10 million or more a year that have had this same problems that we’re describing.

Tosha Anderson:

So you are not alone. That’s the good news. Um, the bad news is we still gotta fix the problems at some point. So even really large organizations have this issue. And if you know that once those financial reports stop rolling in things have gone off the rails. And so if it’s a matter of, well, I just haven’t had time to, you know, get things done. Um, that’s a pretty big issue because when you fall behind, it’s gonna take a lot more time to get things up to speed. Okay. So those are some of the common issues that we find. Um, when starting to look at accounting files, we kind of alluded to it. AR is really off cap payables, really off cash balance could be really off. Um, we might have determined, um, some of the other things that I find kind of looking at AR and AP at the same time.

Tosha Anderson:

Um, once you get all that information to the system, you might notice, oh, shoot, I forgot to build this funder pretty big problem. Um, so we wanna make sure that cash never ends. And without seeing those reports on a monthly basis, you don’t see is revenue hitting every single funder as it should on the property. And lost statement are the statement of activities. If it’s not, that might mean that cash is not gonna continue flowing into the organization. So you need to be. And I pro tip too, just because it shows up on the financial report does not mean your accountant actually submitted the billing to the funder. That’s a whole separate process. Um, we’ve had that mistake happen for our clients. Okay.

Isabel Sippo:

And we’ve had situations where they just have to plug in an estimate because they’re waiting from the funder to come back with them with like a new temp, something. And then, you know, by the time it comes out,

Tosha Anderson:

They’re behind.

Isabel Sippo:

But we still have that number that was accrued on our statement.

Tosha Anderson:

Yeah. I would say for me, common issues could include easy fixes, um, payments like bills, payments might have been entered twice. Deposits might have been entered twice. Those are easy things cuz we didn’t actually deposit the check twice. We didn’t actually pay ’em better twice. It’s just duplication. So those are kind of easier issues, more call common issues that some of those balance sheet accounts prepaids accrued expenses. Those sort of things were never booked accordingly. Um, depreciation expense. Those are pretty easy. You can just go and tweak those. So those are kind of like more common issue, more serious issues. I would say that we often find that billing has not been submitted to the funder and, and or collected, um, on a timely basis. So that in impacts your cashflow other issues where we’ve seen, um, where we’ve identified that payroll taxes were not being remitted to the IRS.

Tosha Anderson:

Right? And so they’re finding that they have fallen behind on remitting. Now this should be done by your payroll company automatically, but for whatever reason, some organizations decide to try to do yourself pro tip strongly advised not to do that. But anyway, some do. And then you realize really big things like your IRA or your 401k deferrals were not remitted. Your taxes weren’t remitted, right? If you are not checking, what’s hitting the bank account versus what’s supposed to be hitting the bank account. That’s where you fall into issues with the IRS potentially department of labor. So those are bigger issues that are aren’t as common, but they still happen often enough that it makes my list. Um, but those are the kind of things that you look at. All right. So now that we’ve invoked all of the fear, um, into everyone Isabel and that these are the things you should, um, kind of be looking at. These are kind of the worst case scenarios. What is some advice you’d offer up to leaders of nonprofits to so that they can check and make sure that their accountants are doing a quality job. They’re doing the things that they need to be doing to keep the wheels turning within the organization. What advice might you give?

Isabel Sippo:

Um, the first advice I would give is to kind of get involved with the auditors. Don’t get involved in the like nitty gritty, all the paperwork and stuff, but at the end of the audit, when they’re going over adjusting journal entries and like all the changes that they had to make, make your executive team or your CEO part of that so that they can see like, Hey, these adjustments that they did, are we capable of doing it internally? Like why are they doing this? Get an understanding of, um, where the auditors are seeing changes should be made and see if we can, like you can update your department on how to right. Uh, do those processes. Um, another thing I would definitely say to leadership is with the time issue, um, if your finance department isn’t getting things to you timely, why not? I have worked in a non profit.

Isabel Sippo:

Tasha has worked in a non-for-profit there have been days where I was the only person after hours and then a toilet’s running and they’re like, oh my gosh, what do do we call, um, you know, rocks thrown through breaking windows. And we have to take inventory quickly on if any technology was stolen, getting an alarm that goes off that, you know, there’s a suspicious person in the lobby. That’s not making people feel safe. They encounter all this stuff. And then a lot of the times since finance is part of admin and um, so someone’s not answering fault phones. The first department they go to is, Hey finance, can you answer phones and direct phones? And the team takes on more than they can chew. Most of the time, a lot falls on finance. I know that doesn’t sound like the number one place where it happens, but all these little things add up and then don’t get done.

Isabel Sippo:

So I would suggest like leaders talk to your finance department, why aren’t things getting done? What have you done? That’s outside of your job description? You know what your job description is and, um, figure out a plan on how to prioritize their job. I always recommend to, um, cuz I have clients that are like, well this happened or I found out my bookkeeper was helping with plugging in donations and stuff. Right? I always say, Hey, tell your staff. If someone asks me to do something, you have to talk to my supervisor and get my supervisor’s permission for me to, uh, take this thing. That’s not typically my task. Of course everyone wants their department to be a team player. So nobody wants to not help out. But, um, that I feel like tends to be one of the biggest issues with the timeliness that, you know, finance is helping with grants, finances, helping with reports or funders or, you know, new rules was because of the pandemic that came out with payroll. Now everyone’s wondering to know like how these things change and uh, just have to provide support to the finance team to make sure that they can actually do their finance jobs and try to keep them on their narrow path.

Tosha Anderson:

Yes, yes. And I, I wanna do a whole nother episode on our podcast about this, but you bring up a really good point. One of the things that so you and I both obviously worked within a nonprofit and there was nothing exceptionally unusual about this organization and by way of being pulled in so many different directions, right? It happens all the time. This is not a judgment on, on this one particular organization. I’ve seen it time after time, after time, after time and every single person that I have worked with that have chosen to leave nonprofit organizations and anybody listening that works for an organization. I know you can, um, validate this and I know you can re relate to it that you’re pulled in so many different directions that you find that your primary responsibility, which, which in this particular case that we’re talking about is accounting and finance becomes a very small percentage of what you’re actually doing.

Tosha Anderson:

And I believe so strongly in this, that I was, you know, my background is accounting and finance and I was spending so little of my time doing that and being put in roles that I don’t have any experience and I don’t have any, um, specific skills in necessarily. And then you end up finding yourself in a place where you’re kind of just surviving in all of these different, you’re not thriving in any particular area. You’re not excelling in any particular area. And if you, you have a high performer, that’s in that role. And they feel like day after day after day after day, that they’re only surviving. This is where the burnout comes into play. And I feel so strongly about this, that whenever I actually left that organization, I was there for four years and, and I started this firm and I thought we’re only gonna do the thing that we’re best at. We’re gonna do accounting and finance for nonprofits. We only work with nonprofit. We only do accounting work. We don’t pretend to be HR experts. We’re not it experts. We’re not facility managers. We’re not, you know, we’re none of these things I’m not gonna, I’m not your program compliance person. I’m none of these things. I not make any

Isabel Sippo:

Client database or

Tosha Anderson:

Yes, yes. All of these things. And within our organization, I’ve realized, um, as a leader, you know, that I, this is a little bit off the rails from accounting and finance, but I really tried to figure out what is every single person on my team. And we have, um, over 30 team members now, what is their primary job, their primary job. We have to have a few Swiss army knives, right? For all of the things that you were describing, Isabel, you know, this happens and this happens, we do have a couple Swiss army knives, but as we keep growing, I keep, you know, identifying, okay, how can we pair this person’s responsibilities down? How can we pair this person’s responsibilities down so that they really have a primary job. And so to your point, Isabel, if your accountant has 10 other jobs, and then you’re wondering why, um, we can’t get the finance in order why we can’t get the accounting in order.

Tosha Anderson:

Oftentimes it’s because that primary job of them having accounting and financial management is often a very, very, very secondary role. I used to joke. I came in from seven to 9:00 AM to work on the accounting, which I’m a CPA, you know, that’s what they hired me for, you know, accounting background. And I spent the whole working day putting fires out for everything, but accounting and finance, frankly. Um, and then not unusual at all. And so I’m with you as well. If there’s things going on, it’s usually there are two, two different options in my mind. Um, it’s, they’re way above their head. They’re way they’re in way above their head from a technical accounting standpoint. And they just don’t know how to do the work. Or number two, they’re distracted with all these ancillary like responsibility is that they don’t have time to do the work.

Tosha Anderson:

Right. And so oftentimes what we’ll see is we’ll keep adding. We meaning the nonprofit organizations, we’ll just keep adding on more and more and more people within the accounting function. But the person that really understands the accounting and the process and all those things, they still don’t have the time or the responsibilities to, um, I should say they don’t have the time, the capacity to focus on those responsibilities to actually delegate those things, to, to train those things. So I think what was wise for this particular organization, when, when I had left, they started hiring more formalized positions. Okay, we’re gonna hire an HR function to do the HR stuff that we used to have the account do. We’re gonna hire, you know, a database person to work on the program database. We’re gonna hire maybe billion people to focus on. I’m making things up now.

Tosha Anderson:

Right. Um, but really kinda start carving out more of those responsibilities that aren’t really accounting in finance, uh, so that you’re accounting and finance people can really focus on just that. So anyway, that’s a little soapbox I can go on. And again, I wanna do a whole different episode on that, but back to, you know, really the meat potatoes of why we’re here now that we’ve identified the something’s going wrong in the accounting department. Um, whatever we figure it out, let’s say it’s, it’s one of those issues that I mentioned, which is more often than not the case is the, uh, the accounts are weighing over their head, they’re weighing over their head. Um, so oftentimes I know Isabel, you’ve seen this where you’ve inherited a set of books from somebody that might have had a banking background. They might have had a financial type background.

Tosha Anderson:

Uh, and I think us non-accountants, uh, well, if you understand finance and it’s it’s finance and accounting and how different can it be? And the reality is there’s two different types of accountants in my mind. Um, probably more than that, but there’s the day to day routine, very tedious, very reliable, get the information to the accounting system kind of person. Then there’s more like creative high level strategy, fix the world problems kind of person. Right? And oftentimes what I see as an organization will either hire 80% of the work is in the, get the, get the information to the system and get it done accurately and timely, right? That’s probably 80% of the work. So a non-profit will hire that 80% person. There’s a skillset gap between where we are at and where we want go is that 20% problem solving strategic leader type of person is not really within that wheelhouse or they’ll hire the 20% person. This is strategy person, but they have no idea how to actually do the day to day accounting, or they don’t have any desire to do the day to day accounting. Right. And they get burned out and then they end up leaving in a couple years, and then you’re by to the same situation you’re looking to higher again. So there’s

Isabel Sippo:

Philosopher with their head in the clouds. Like they have these grand plans, but like we need to get down in the nitty gritty and get it done. Yeah.

Tosha Anderson:

To get the work done. Yeah. Yeah. So then these organizations, right. Find themselves, you know, they either let go of the 80% person because they’re not quite what they need. Um, or the 20% person either gets, let go or ends up leaving because they’re falling further and further behind. Um, or the person just burn out the work, doesn’t be their soul. And by the way, they got an offer making more money, doing something else who knows, right. These sort of things. So then you’re left to, okay, now we’ve figured out we have this huge accounting problem. Um, it’s messy and we need to clean it up. And I have no idea where to start. I’m pretending to be a leader. You can tell I’ve had this conversation so many times, Tasha, I am not an accountant. I’m a program person. I’ve been in the program side for 17 years.

Tosha Anderson:

I stepped into this position as an interim CEO. We’ve changed CFOs two times in the last three years. I don’t know what the accounting should look like. I don’t know what condition the accounting is. And frankly, I don’t even know how to effectively interview an accountant to make sure I hire a person that does know how to do it. I don’t even know where to go from here, but all I know is my funders haven’t been billed in several months, we’re running outta cash. I have to turn the ship the right way. And I don’t know where to go. This is a true story. And so that’s where a lot of leaders struggle with. How do I even write the ship? Um, so I wanna talk a little bit about the cleanup, just how you, when, like what steps you should initially take and maybe what skills you should look at, or, you know, just some bumper bowling. I call it like some parameters, some boundaries for which, you know, that things are moving in the right direction. So let’s talk about that as about a little bit, where do you typically like to start? Or where would you advise someone to start when they’re dealing with, we know the accounting files an absolute disaster and this whole accounting function is a disaster we need to move forward.

Isabel Sippo:

Um, I always say pick a point in time. It’s very easy when, uh, you have had an audit because you can start from the last audit that you’ve had, the auditors have done their work, they’ve done some due diligence. Like you have already financials that were presented out publicly. Um, it’s easy for them. You choose that last financial audit that you’ve had and you make sure that you reconcile, uh, the books to that. And then you have a starting point. Um, a lot of times nonprofits, uh, and you know, audit firms, aren’t bad guys. They want you to also succeed as well. So they will provide all these journal entry is that they just assume that they have to do every month. Um, so your books have never actually caught up internally. Uh, if you haven’t had an audit, that’s fine. Pick a point in time, do not pick 10 years ago.

Isabel Sippo:

You don’t need to be reconciling 10 years documentation start with last year, pick a date, re I, uh, and start reconciling from that point on, um, not only, uh, with tackling the accounts, they, they should be reconciling and cleaning things up and writing things off. It’s also a time for them to review the chart of accounts, their project codes, their T codes and stuff. If a lot of, I feel like a lot of nonprofits, a lot of account, you know, accounting systems in general, sometimes I think more is more and it’s not really like clean it up. Let’s hide things that have not been active in years. Let’s try to minimize any opportunities for errors, um, the value it, what you have. And then just, if things can be consolidated, we don’t need, you know, like supplies for the office and office supplies is a different, different account, you know, uh, try to make things as concise as possible, um, remove things that need to be removed because not only is it easier for you to do your day to day job, but then it’s easier and cleaner for board members, administration, donors, to be able to look at documentation and get a better understanding of what’s really going on.

Tosha Anderson:

Yeah. And I would add too, what we do for one of my favorite things that, that we do for, for our clients, when we go through onboarding, um, by onboarding, it usually includes cleanup, meaning, uh, we do a really intensive review, um, kind of an interview it’s usually takes an hour and a half, two hours. And we go through every single element of, of your accounting, more specifically, focusing on how money’s coming in and how money’s going out, right. The flow of funds. And we talk about those processes and we go down like, okay, let’s talk about all the different revenue sources. Let’s talk about all the different expense, you know, sources. How does expenses go out? Whether it’s through bill pays, um, through checks or credit cards or ACHs or whatever. Right. And then we talk about other things that are on the balance sheet.

Tosha Anderson:

So again, run that balance sheet report. If you don’t have a balance sheet report, pull out your last audit, pull out your last tax return, whichever and go through each one of those accounts. Okay. So if we have investments, do we know what makes up those investments? Do we know if there’s any strings tied to the investments? Like, ask all the questions. Okay. Prepaid expenses. Do we know what to have? That is, oh, that’s when we moved into our new office space and that’s a deposit. Okay, cool. To start understanding, like, what do these numbers stand for? And then take it a step further, especially on the billing on the money coming in and money going out. Do you understand what the processes are for every single one of those sources? Right. Um, and if you don’t, again, judgment zone, uh, you can blame the accountant, blame the transition and accountant or whatever, and have that conversation with your funders.

Tosha Anderson:

Hey, do you have a training guide? Do you have a funding manual? Um, I, you know, I can’t get, get passwords, like get passwords. So that’s always something that we talk about during our onboarding before we even completely dive in is just to make sure that business continues to operate and we will continue to populate the accounting database, but we understand the processes again, making sure money comes in, money goes out payroll, you know, how your employees are gonna get paid, any other key vendors that need to get paid, those sort of things. So definitely understanding what the process is. And then you can start getting that information into the accounting system as well. And then with Isabel. I love that. Go back to a point in time, which you believe very reasonably, that those numbers were accurate. If it was an audit that you have to assume is a hundred percent accurate because the auditors gave an opinion that it was accurate.

Tosha Anderson:

So you don’t wanna argue with that cuz you paid for that audit opinion. Now, if you don’t have an audit, go back to you, the last tax return that was prepared, um, for which, um, you know, somebody preferably hopefully, um, some sort of CPA has reviewed your files, felt confident enough in the numbers that they’d be willing to swap their name across the bottom of that tax return. So start with those numbers and then we call that kind of rolling forward. So as Isabel was saying, say your last tax return for was for December, 2020. Okay. Now you know that you have a whole year’s worth of activity. So then you’re gonna get all that information from your da your bank. Um, and then you’re gonna get that into your account sort, start categorizing it. And then you’re gonna start going through again, that process documentation of the institutional know, gathering of, do I know what all these sources of revenue are?

Tosha Anderson:

Do I know what all these expenses are, start populating that. And then what we do is go month by month and reconcile the bank statements, we’ve at least accounted for everything that hit the bank account, everything that hit the bank account. Now the categorization might need to be updated. That’s shown into office supplies instead of profession development or whatever. We know that all the money that came in and all the money that went out within the bank account ended up in our accounting system. So that’s usually where we start with things too. Um, okay. So coming up, running up out of time, Isabel, I wanna wrap this up. Any other advice that you might offer leaders of organizations inside or outside of the accounting function, right? Um, maybe how they can handle their accounting and financial management better. Um, I know we talked a little bit more about just having open and honest conversation with your finance folks about all the things that they’re dealing with, but anything else beyond that, that you might wanna share?

Isabel Sippo:

Yeah, I think, um, a great place to start, trying to make an improvement is to, uh, meet with your team regularly, meet with them first week, create a checklist. Was everyone responsible for have the checklist as detailed as possible. If you know that payroll can be in by the third of the month, make sure that’s the deadline. This also allows for, when you do meet with them monthly, you can talk to your team of specifically, Hey, you haven’t met these deadlines yet. Why not? And I don’t like to go talk to people, very judgmental, making assumption, you know, approach it positively. There’s positively logical reasons why. Yeah. Um, there’s been a delay and if there, it also allows you opportunity of if they are falling behind how you can approach them to say, what can I do to help you in order for us to meet our deadlines?

Isabel Sippo:

Um, yeah, be a little proactive. Uh, not only making checklists, you know, don’t reinvent the wheel, let’s work on trying to make templates. I feel like, especially from personal experience, you know, you create a uniform way to build all these different funders and stuff, try to create a template that’s kind of universal. Um, sometimes it, you kind of like lose your footing because suddenly all these funders want different information, uh, that you need to, uh, supply to them. So in those moments, take a few extra minutes and see if there’s an easier way that you could take add more into the monthly reporting that you’re doing so that you can kind of make it consistent across the board instead of constantly making a different, unique, um, process for every single step. Whenever for the most part, you could try to keep things as consistent as possible. Absolutely. Um, and in order to kind of improve timeliness, you know, create templates, create recurring entries, um, like I said, Uh, formatting of running reports that have all the information that you need. And then also evaluating like if development is needing certain kind of reports a certain way, is there a way for us to also build that kind of template in our system? Just so you’re, department’s not spending an hour manipulating data that you have every single time they need something. Yeah. Let’s try to think how we can use things, uh, more than once, uh, moving forward.

Tosha Anderson:

Love that. Speaking of that was gonna be my advice a little bit on the month end reports. I remember when I used to work at a nonprofit organization every single month, I would actually print the reports and I would sit down with the CEO and I would walk through every report every single month. And it was a good exercise, um, because I was then forced to be prepared to present the key findings and takeaways. And it forced her to sit down with me and understand and ask, follow up questions. And I will say now that I’m a leader of an organization, I really struggle with doing all of the things that I need to do to effectively manage the company. Um, there’s just so many things and so many people to be accountable for. So what I have found that works best for me is having systems of accountability for myself.

Tosha Anderson:

So I assign all these tasks to my team members that really sound like maybe I’m keeping, um, them accountable. It’s really a process that helps me keep myself accountable. So if I know that I’m asking for a report for each one of my team members so that we can go over it, I, in a meeting, they think they’re being accountable and oh, well I have to show Tasha what I’m doing every month. No, actually it’s so that when I sit down on that report or sit down at that meeting, I have all these reports and I’m forced to then sit down and walk through them. And then I ask all the appropriate questions. And because we have this recurring meeting set up every single month, I know that I’m gonna have to force myself to be prepared for that meeting. And I’m gonna look at these things.

Tosha Anderson:

So as, or this business has continued to grow and grow and grow and grow. Um, and I’m, you know, running around like, you know, uh, just a, a maniac, right? Um, and it’s not unique to nonprofits. It’s unique to any sort of entrepreneur leader of any business that you’re pulled in a million different directions. So have that system of accountability, I’ve talked to so many leaders of organizations that say they wish they understood their finances more. And I think the easiest way to get an understanding is set that recurring meeting with your accountant, have that person actually print that report. Don’t email it to you and expect you to review it on your own time. Is that gonna happen? At least initially when you develop the, have it’s sitting down actually with a paper, um, report if necessary, um, and pour over those numbers, understand those numbers, um, and ask questions, uh, and not just look at it from compared to last year, maybe compared to last month, why did cash go down this past month?

Tosha Anderson:

Oh, well, because this funder was late paying us or whatever. Um, so sit down and ask those questions. That would be our advice to you. But anyway, Isabel, we are running out of time. So I wanna say thank you again for joining us and having this conversation. I know it’s painful for a lot of people to even think about or talk about their skeletons and their financial closet, but, uh, we’re here to help if you all need any assistance or help go to our website, thecharitycfo.com, Isabel, and I will be happy to chat with you, about what that might look like for us to help you, or at least offer some, pointers in the right direction on how to handle that. So stay tuned for the next episode. Thanks again. Bye everyone.

Financial Reports to Share with Nonprofit Board

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Transparency and accountability are two of the most important factors in nonprofit accounting. Donors, the board of directors, and the public all want to know what your organization does with the funds it brings in. Being transparent in your nonprofit accounting helps build trust in your organization.

financial reports

But what financial reports are most important to build that trust through transparency with your board of directors? There are five main financial reports you may want to consider when presenting financial data to your board of directors, including:

  • Statement of Financial Position
  • Statement of Activities
  • Statement of Cash Flow
  • Budget vs. Actual Report
  • Fundraising and Development Report

1. Statement of Financial Position

Your statement of financial position is a financial report that provides an overview of the organization’s financials at a specific point in time. For-profit businesses also call the statement of financial position a balance sheet, and many nonprofits do the same.

Your balance sheet is a lot like a health chart for a medical patient–it shows the current overall financial health of your organization. Balance sheets show details on how much money and assets your organization has as well as what it owes to others. Your nonprofit balance sheet will typically have three main components:

  • Assets: What your organization owns
  • Liabilities: The amount your nonprofit owes
  • Net Assets: The value of your organization, or your assets minus your liabilities

Providing your board of directors with a statement of financial position can help them better understand the financial health, stability, and liquidity of your organization.

2. Statement of Activities

More commonly known as an income statement, the statement of activities report summarizes your organization’s revenues and expenses over a specific period. Generally, this report is provided monthly, quarterly, or annually. Organizations that have a high amount of revenue and expenses may want to provide multiple timeframes for their board of directors.

The statement of activities shows your board of directors how much revenue the organization has earned and the amount of expenses incurred over the specified time. The report also details whether your organization has generated a surplus or deficit during the period. Key components of the report include:

  • Revenue: Contributions, grants, program and service fees, and any other income
  • Expenses: Program expenses, payroll and staffing costs, fundraising events
  • Changes in Net Assets: Whether your organization has a surplus or deficit

An income statement report makes it easier for your board of directors to track revenue and expenses over time, which can help make long-term financial decisions.

3. Statement of Cash Flow

An organization’s statement of cash flow report tracks the inflow and outflow of cash over a set timeframe. The report is generally broken into three parts:

  • Operating Activities: Your day-to-day cash transactions including paying employee salaries
  • Investing Activities: Purchases and sales of an organization’s assets, such as buying new equipment
  • Financing Activities: Loans, grants, and donations to the organization

Proving your board with a statement of cash flow helps them better understand the ongoing cash flow management of the organization. You can the board can also use the report to look for opportunities to maximize cash flow and optimize cash flow management to make the organization more resilient to unexpected changes in the nonprofit’s finances.

4. Budget vs. Actual Report

A budget-to-actual report compares an organization’s actual financial performance with its budgeted figures. This report highlights the differences between budgeted and actual revenues and expenses.

Your board of directors can use this report to better assess the organization’s financial discipline and operational efficiency. Organizations with major variances between their budget and actual may need to adjust their cash flow and expense management practices.  Reviewing a budget vs an actual report also helps your organization identify discrepancies such as errors in accounting.

5. Fundraising and Development Report

A fundraising and development report focuses on the organization’s fundraising efforts and donor contributions. This report shows information on funds raised through various campaigns and events. It also generally includes data on donor acquisition and retention rates.

Your board of directors can use a fundraising and development report to evaluate the effectiveness of fundraising strategies. The report can also help show the organization’s financial sustainability through donor retention rates.

Fundraising and development reports are great tools for planning future fundraising ideas for the organization. You can use the report as a starting point to see what fundraising efforts your donors respond to best.

financial reports

Preparing Financial Reports for a Nonprofit Board

These five financial reports can provide your board of directors with an accurate picture of your organization’s financial health. Depending on your organization, some of your reports may be more or less in-depth, and some organizations may not need each report for every board meeting.

Working with an experienced nonprofit accounting firm, like the Charity CFO, is an easy way to ensure you’re providing the right reports for your board. The Charity CFO team specializes in nonprofit accounting and can help you navigate the complexities of financial reporting for your organization. We’ll help you create a nonprofit accounting system that uses technology to automate some aspects of reporting, saving time over manual processes.

Need help setting up a financial reporting process? Contact us today to find out how we can help!

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What is a W-9 and Why is it Important?

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Keeping your taxes in order is vital for any nonprofit. Unfortunately, it can get complicated and confusing when it comes to employees, especially if you’re hiring both traditional staff and regular contractors or freelancers. 

The W-9 is among the most crucial forms to help keep everything straight, but many don’t know much about it or when it’s used. 

Let’s take a closer look at the document and why it’s so important for nonprofits.

What is a W-9 Form?

A W-9 form (officially titled “Request for Taxpayer Identification Number and Certification”) is a simple, standardized federal form that allows employers to collect the necessary tax and personal information from those who work for them. 

The titular Taxpayer Identification Number is the most critical element of the form. In most cases, this will be an employee’s social security number, but it can also be a business’s EIN or less common identifiers like Individual Taxpayer Identification Number (ITIN) and Preparer Taxpayer Identification Number (PTIN). 

The payee also certifies that they’re not subject to any backup withholding, which would typically only be the case if they failed to provide information to previous employers or were caught underreporting income by the IRS. 

In addition, the W-9 requires details like the type of entity (individual, C corporation, S corporation, etc.) and an official address.

Why is the W-9 Form Important for Nonprofits?

Anyone who’s helped lead a nonprofit knows that keeping the organization’s tax-exempt status is the most critical factor to its survival. A crucial part of that is abiding by tax reporting and compliance requirements. This includes filing the appropriate tax forms with the feds, which, for contractors or freelancers, would be a 1099-NEC or 1099-MISC. 

The W-9 is designed to collect the information necessary to fulfill these requirements. Aside from legal requirements, diligently collecting W-9 information from contractors or vendors shows a commitment to transparency and fully documenting its work. Insisting on complete W-9s can also help avoid doing business with potentially unsavory partners who may not want to complete one for various reasons. 

No matter which reason applies most to your organization, they all show why getting this form completed should be a priority when working with contractors, freelancers, and vendors.

When Would a Nonprofit Need a W-9 Form?

There are three primary situations where an organization should typically get a W-9 completed by outside parties. 

The first, as we’ve mentioned, involves paying independent contractors and consultants. While 1099s must be issued to any person or business that receives more than $600 from your organization during the year, it’s good practice to require completed W-9s from every payee to avoid the need to track down the information later. 

In addition, W-9s are required for any vendors or companies that are engaged for outside services. On the flip side, your organization may occasionally need to fill out a W-9 itself. This generally happens if you’re contracted out by another organization to do some sort of limited work on their behalf. Large donors or grant givers may also request your organization fill out a W-9 to confirm relevant tax details.

Tips for Completing the W-9 Form

Tax forms can always feel a bit intimidating, but the W-9 is quite simple to fill out. 

  • First, identify who’s requesting the form and ensure it’s necessary. 
  • Then, collect your own information, like your organization’s TIN/EIN and official business name. Before you start, double-check to make sure you have the correct and most up-to-date version of the W-9 as well. 
  • Then, simply provide the information where indicated, including any exemptions if they’re applicable. 
  • Finally, complete the form by signing and dating it before returning it to the individual or organization requesting it. As with all pertinent tax records, you should keep a record and copy for yourself as well, just in case.

Reach Out to The Charity CFO for Help with the W-9

The W-9 is one of the most crucial tax forms to understand, whether your organization is soliciting them from freelancers and contractors or filling them out itself. But it’s relatively simple once you’ve looked over the particulars. 

While it might just seem like extra paperwork, it ensures all parties have the tax information they need to meet their reporting requirements.

Still, amid all the other tasks and requirements of running a nonprofit, it’s easy to allow things like prompt W-9 collecting, completing, and processing to fall through the cracks or end up delayed by everyday issues. That’s where The Charity CFO comes in. Our experienced team can help you stay diligent about your tax reporting and filing requirements, from W-9s to the many other tax forms and deadlines that always seem to be looming. 

Contact us today to learn more about how we can help your nonprofit and get started.

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Why Nonprofits Need to Stop Obsessing Over Expenses  

For some nonprofit leaders, it can be easy to spend too much time poring over each and every category of nonprofit expenses, carefully scrutinizing each dollar that’s spent. It can quickly become an obsession – and not one that will help you or your organization prosper in the long run. 

So, how do you change your thinking about the funds that are flowing out of your organization? 

Let’s take a closer look at the significant effects the issue can have and how to overcome them.

The Effects Expense-Obsession Has on Nonprofits

To be sure, overhead costs and routine expenditures are an essential part of any budget, and not keeping them under control is a certain path to trouble. But in some cases, nonprofit leaders need to take a step back and consider the reason they’re operating. 

Charities and other nonprofit organizations don’t exist solely to be ultra-efficient in their spending – they’re around to accomplish their mission, whether it’s helping needy children, the environment, animals, or anything else. There’s an old saying that you need to spend money to make money, which is as true as ever for nonprofits. Like it or not, making an impact requires spending money, as long as it’s done smartly.

Obsessing over every expenditure also has a negative effect on employee morale and the organizational culture. If employees feel like it’s a fight to secure every single dollar, they may set their goals lower for their work and accomplish less. 

Employees who think their leaders value their reserve funds more than their mission will also likely be less productive and motivated or even become so discouraged that they burn out of the industry.

Focus on Revenue Generation, Not Expenses

Most organizations can only cut so much from their spending while still functioning properly. However, the potential for growing revenue is nearly limitless with hard work and the right strategies. By bringing in more revenue, leaders can avoid worry and tough decisions over how to dole out limited money to worthwhile projects. 

The methods will vary from organization to organization, but nearly every nonprofit has the potential to tap into additional funding sources or put in place new strategies. 

Look to successful nonprofits in your industry for ideas or brainstorm among your team on how to amp up current fundraising. While organizations shouldn’t look at growing revenue as an excuse to spend carelessly, more funds can solve a great deal of problems, not to mention improve your reputation and impact.

Building a Culture of Revenue-Generation

As with all culture changes, switching from a cutting to a growth mindset starts at the top. Leaders should consistently be visibly working to optimize the revenue being brought in, including integrating advice and guidance from employees. 

Another significant part of this involves empowering staff not just to identify potential revenue opportunities but also to pursue them in the best way possible. This also helps employees take ownership of their responsibilities, creating an even more dedicated and engaged workforce. 

Over time, this kind of mindset becomes infectious, with new hires easily taking to the culture as benefits continue to compound.

Measure Your Impact, Not Your Overhead Costs

As we’ve noted, people start nonprofits to make a positive difference in the world, not make money or run extra efficiently. That’s why it’s dangerous to rely on low overhead costs as a benchmark for effectiveness. 

Instead, leaders and stakeholders need to determine their own key performance indicators that best measure the impact they’re hoping to achieve, whether it’s:

  • The number of events held
  • How many people benefited from your services
  • Projects completed

These should be objective and easily trackable, both to allow leaders to make the best changes and tweaks as necessary and also to provide real, concrete evidence to donors and board members about the direction of the organization.

Obsess Over Profit-Generation, Not Nonprofit Expenses

Obsession can be helpful for growing any organization – as long as it’s about the right things. For a thriving organization that’s growing its income, there’s no need to agonize over every single expense. Leaders need to be continually working to expand their fundraising, which can make achieving their mission so much easier than trying to slash budgets and find savings. 

After all, revenue can grow without limits, while expenses can only be cut so far.

Still, keeping a lid on nonprofit expenses remains vital and can’t be ignored simply because you’re focused on growing revenue. Our experienced financial professionals can help with managing expenses to leave you more time to increase your income and expand your impact. Plus, they can provide guidance on selecting the proper indicators to track when charting your organization’s plan for growth. 

Contact us today to see how we can help and get started toward ending that expense obsession.

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10 Tips for Nonprofit Financial Health

Just like a human body’s health situation can be complex, nonprofit financial health is similarly nuanced. 

That’s why staying financially healthy and keeping your nonprofit in tip-top shape requires the occasional “checkup” to see where you’re doing well and where you can improve. So what steps should nonprofit leaders take to ensure their organization will enjoy many happy years to come? 

Read on as we explore some of the top strategies.

Master Your Nonprofit Financial Health with These Tips

Preserving your good nonprofit financial health is surprisingly straightforward. Try these ten tips for the most significant impact.

1. Define Expectations Through Benchmarks and Other Metrics

Before you can figure out if your nonprofit is healthy, you have to define what healthy means to your organization. 

Work with stakeholders like donors, fundraising heads, program leaders, and others to determine what metrics and benchmarks should be used. By clearly identifying these indicators, it’s easy to see when one area is falling behind and take swift action to correct it. 

These expectations should be realistic but also provide a goal for your team to strive for.

2. Understand How to Gauge if Your Accountant is Doing a Good Job

Unfortunately, too many nonprofits allow their accountants to take care of business with little oversight. While this may be easy, it can also result in missing out on critical tax savings or, worse, exposing your organization to an audit for breaking the rules. 

Keep in touch with your accountant and ensure you’re asking questions about what they’re doing and why. If they can’t provide good answers, it may be time to switch.

Understanding the unique roles within your financial team is also crucial to the success of your nonprofit. Bookkeepers are not the same as accountants, just as staff accountants are not the same as Chief Financial Officers (CFOs). Each plays a distinct role in maintaining and enhancing your organization’s financial health.

3. Have Checks and Balances in Place

Every successful organization needs ways to check the influence of any individual member or department. This ensures all perspectives and impacts of decisions and programs are considered. Without these balances, leaders or others with influence can make decisions that don’t align with the organization’s over-arching goals.

4. Understand Compliance Needs

Compliance is an often underrated key to a thriving nonprofit. Mastering these technical issues and requirements is critical to:

  • Avoiding audits
  • Keeping donors’ confidence
  • Securing various grants and other funding

In some cases, neglecting compliance with state or federal requirements can even lead to your doors being shut.

5. Use the Right Software

It can be difficult to do the job correctly without the right tools, and these days, the right software is a critical tool. 

Your accounting and bookkeeping programs should be easy-to-use and have the appropriate features for an organization of your size. Consulting with an accountant who specializes in nonprofits is a great way to ensure you’re using the right software. 

6. Create the Right Financial Reports

With the many features of modern accounting and bookkeeping software, the amount of information and reports available can be overwhelming. However, a few matter more than most. 

Talk with your financial staff and accountant to figure out which you should be spending the most time creating and reviewing. This is vital for avoiding information overload.

7. Have a Succession Plan in Place

The best and healthiest nonprofits live on for decades or longer, far past the leadership and lifetime of their founders. They can do this because the critical members of the organization have proper succession plans. 

Younger leaders should be given more responsibility over time to prepare them for more senior roles, and current longtime heads should have clear plans for how and when they hope to hand off the reins. On the financial side, there are systems and processes that need to be in place, so make sure you consult with an accountant to get these sorted out.

All of this ensures a smooth transition when the time for a change comes, planned or unexpectedly.

8. Understand the Structure of Your Accounting System

Even if financial issues aren’t your particular skill set, nonprofit leaders need to understand how their accounting system works. 

It lends important insights into decisions about programs or other aspects of the organization and can help in conversations with donors who may have more detailed financial questions.

9. Share with Other Leaders of the Organization

If this all seems like a lot to handle on your own, it’s because it is. 

Bring in other leaders to help manage the burden of keeping your nonprofit financial health in good shape and enjoy the bonus benefit of their added insights. This goes hand-in-hand with a succession plan but also helps improve nonprofit operations in the meantime, as well.

10. Take a Look at Your Culture

At the end of the day, keeping a nonprofit healthy from a financial perspective requires the buy-in of all employees, donors, and other stakeholders. 

It’s a comprehensive mindset that focuses on maximizing always-limited resources and ensuring waste is minimized as much as possible. The rewards can be felt every day with an improved ability to carry out your organization’s goals and mission.

How is Your Nonprofit Financial Health?

As with your body, there’s no sense in putting off your nonprofit financial health checkup. Consider these key issues now, and you may be shocked at the improved performance of a “healthier” organization. 

But we realize these issues can be complex and time-consuming, so The Charity CFO is here to help. Contact us today to get started with our experienced financial professionals, who’ll set your nonprofit up for many healthy, happy years to come.

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How to Create a Nonprofit Operating Budget

Whether you’re a new organization or an established one working to get its finances under better control, there are few more important things to get right than your nonprofit operating budget. 

It serves as the backbone of your nonprofit’s spending, fundraising, and much more. But if you need some help putting one together, you’re not alone. 

Read on as we break down the process step-by-step and answer some critical questions many nonprofit leaders often have.

Understanding the Basics of a Nonprofit Operating Budget

All operating budgets can be broadly split into two categories – revenue and expenses. 

For nonprofits, revenue comes from:

  • Fundraising
  • Grants
  • Membership fees
  • Investment income
  • Any other activity that brings money into the organization

Expenses are more varied but cover your charity’s basic work to carry out its mission (program expenses) and costs associated with fundraising, as well as administrative expenses for salaries, rent, utilities, and similar bills.

Nonprofit operating budgets differ from regular for-profit business budgets in key ways. 

For one, they’re designed to reinvest any extra money back into the organization rather than take it out as income for business owners.

Additionally, for-profit budgets often have expenses closely linked to revenue, like the cost of goods sold or employee wages. That’s not the case for most nonprofits, which have separate arms for raising money and carrying out their missions.

Gathering Essential Information

Before you can figure out where your nonprofit is going, it’s vital to figure out what happened in the past. Take time to collect financial data from previous years as best as possible. Identify and log sources of revenue and common or recurring expenses. 

This can provide a baseline for future budgeting, allowing you to tweak as needed for your goals rather than starting from scratch. Simply collecting this crucial data can go a surprisingly long way toward identifying and solving organizational problems.

Creating Revenue Projections

Now, take some time to consider where your revenue is headed in the quarters or years ahead. Step back and assess your fundraising strategies and how potential changes could affect your expected contributions. Consider the impact of any grants or sponsorships, including both new ones you may win and current ones that may shrink or dry up. 

This is also where you should estimate any earned income or program fees if they apply to your situation. Think broadly about other revenue streams as well.

  • Is your organization receiving investment income?
  • Does it own property that could be rented or sold?

While you should consider everything, be as realistic as you can in setting revenue projections. While it might be less than ideal to underspend when your organization has the capacity to spend more, it’s far worse to overestimate fundraising or grants and end up scrambling to cover costs.

Determining and Allocating Expenses

The next step to creating your nonprofit operating budget is to figure out where the money you’ve raised will be spent. As mentioned above, expenses will primarily fall into one of three categories:

  • Program expenses
  • Fundraising expenses
  • Administrative expenses

While program expenses are the core of your organization’s mission, fundraising and administrative costs also need to be properly accounted for to keep the lights on. Therefore, it can be helpful to establish these first and figure out what’s left.

Be sure to consider whether your costs are fixed, like rent (staying the same no matter how you operate), or variable, like salaries and expenses for fundraising events (growing or shrinking as your operations do.) 

This is also a crucial step of the process because you’ll be setting your nonprofit’s priorities and goals by determining which get funded and which don’t.

Factoring in Contingencies and Reserves

Anyone who’s run a nonprofit or any other organization knows the one thing you can expect is unexpected expenses. That’s why it’s vital to set aside part of your budget for these contingencies and reserves

Work to identify potential risks to your operations and create basic contingency plans that can make dealing with problems more straightforward when they occur. Your organization should also determine its policy on reserves, including the ideal long-term level as well as how much and when to contribute or draw them down.

Reviewing and Adjusting the Nonprofit Operating Budget

Congratulations – you now have the basics of your nonprofit operating budget! But the work isn’t over. 

Regular budget reviews on a quarterly or yearly basis are essential to see if you’re hitting your expected benchmarks in both revenue and expenses. 

Looking over your budget with new hard data will allow you to make any tweaks as necessary and head off serious potential problems.

Seeking Professional Assistance for Your Nonprofit Operating Budget

With these easy steps, you’re well on your way to creating a workable, up-to-date budget to help your organization thrive. 

By simply gathering your data, making revenue and expense projections, and regularly reviewing and updating your budget, you’ve conquered a key part of the business of running a nonprofit. 

But if you need a hand or are looking for some expert advice, The Charity CFO is here to help. Contact us today to learn more about how we can help your organization unlock its full potential by getting its budget on track.

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From Necessary Evil to Mission Fuel: The Strategic Role of Nonprofit Financial Statements

Nonprofit financial statements. Is this just a necessary evil just to meet compliance requirements, and make sure there’s enough cash in the bank? Or can your financial statements be a lens to view your organization and fuel the mission?

In this post, we’ll walk through the most important financial statements, and explain the strategic benefit you can gain by pulling the maximum value from the data. 

Nonprofit Financial Statements

You are likely familiar with the different nonprofit financial statements that are typically included in a reporting package:

  • Statement of Activities
  • Statement of Financial Position
  • Statement of Cash Flows
  • Statement of Functional Expenses

But we’d like to dive beyond the surface. This article explores the multifaceted uses of these financial statements and highlights their significance in enabling financial transparency, informed decision-making, and organizational effectiveness for nonprofit entities.  

Remember, these uses are not mutually exclusive, and some applications may overlap across the categories. The categorization of uses may vary depending on the specific context and goals of your nonprofit organization.

Statement of Activities

Financial Uses

  • Assessing Revenue Sources: Analyze the various revenue sources of a nonprofit, such as donations, grants, program fees, and investment income. This information is crucial for financial planning, budgeting, and identifying potential areas of revenue growth.
  • Evaluating Expenses: Evaluate the expenses incurred by the nonprofit, such as program expenses, administrative costs, fundraising expenses, etc. It enables financial analysis to identify cost-saving opportunities, manage expenses, and ensure efficient resource allocation.

Strategic Uses

  • Financial Planning: Provides insights into the financial health of the organization. Can help in identifying trends, forecasting future revenues and expenses, and making informed decisions about resource allocation, fundraising efforts, and program expansion.
  • Performance Evaluation: By comparing the revenues and expenses on the Statement of Activities with the nonprofit’s strategic goals and objectives, it becomes a valuable tool for assessing performance. It allows management to measure the effectiveness of programs, evaluate cost-efficiency, and make strategic adjustments to enhance overall performance.

Operational Uses

  • Program Evaluation: Evaluate the financial performance of individual programs or activities conducted by the nonprofit. By analyzing revenues and expenses associated with each program, it helps in assessing program viability, resource allocation, and identifying areas for improvement or expansion.
  • Stakeholder Communication: Serves as a transparent communication tool for stakeholders, including donors, board members, and grant-making organizations. It provides an overview of the nonprofit’s financial activities, highlighting its financial stability, sustainability, and the impact of its programs.

Statement of Financial Position

Financial Uses

  • Assessing Financial Health: Provides information about its assets, liabilities, and net assets, allowing stakeholders to evaluate solvency, liquidity, and overall financial position.
  • Analyzing Financial Structure: By presenting the organization’s assets and liabilities, the statement assists in analyzing the financial structure, including the composition of assets (e.g., cash, investments, receivables) and liabilities (e.g., accounts payable, loans). This analysis supports decision-making regarding debt management, investment strategies, and asset allocation.

Strategic Uses

  • Financial Planning and Budgeting: Provides insights into the organization’s available resources and financial capacity, enabling strategic decision-making regarding resource allocation, capital investments, and long-term financial sustainability.
  • Assessing Financial Viability: By examining the organization’s assets, liabilities, and net assets, the statement helps provide information on the organization’s ability to meet its financial obligations, support ongoing programs, and sustain its mission over the long term.

Operational Uses

  • Managing Cash Flow: By analyzing cash and cash equivalents, accounts receivable, and accounts payable, it helps monitor liquidity, plan for short-term financial needs, and ensure the smooth operation of the organization.
  • Evaluating Working Capital: Supports operational decision-making by evaluating the organization’s working capital and helps determine whether the nonprofit has sufficient working capital to cover day-to-day operational expenses and short-term obligations.

Statement of Cash Flows

Financial Uses

  • Cash Position Assessment: Assessing cash inflows and outflows, allows stakeholders to evaluate the availability and adequacy of cash resources, which is crucial for financial planning and decision-making.
  • Cash Flow Analysis: Assists in analyzing the sources and uses of cash within the organization. It provides insights into cash generated from operating activities, investing activities, and financing activities. This analysis supports financial analysis, budgeting, and investment decision-making.

Strategic Uses

  • Strategic Planning: Contributes to strategic planning by providing information on the organization’s cash flow patterns. It helps identify trends, fluctuations, and cash flow drivers, which are important for long-term financial sustainability and strategic decision-making.
  • Capital Expenditure Planning: Assists in planning for capital expenditures and major investments. By examining the cash flows related to investing activities, it helps assess the organization’s ability to fund capital projects, acquire assets, and allocate resources strategically.

Operational Uses

  • Cash Management: Aids in cash management by providing insights into the organization’s cash inflows and outflows on a detailed operational level. It helps monitor cash flow cycles, anticipate cash needs, and manage working capital efficiently.
  • Liquidity Assessment: Supports operational decision-making by evaluating the liquidity of the nonprofit. It provides information on the organization’s ability to meet short-term obligations and fund day-to-day operations.

Statement of Functional Expenses

Financial Uses

  • Expense Analysis: Helps analyze and categorize expenses by their functional nature, such as program services, management and general, and fundraising. By providing a breakdown of expenses, it allows stakeholders to assess cost structures, monitor expenditure trends, and identify areas for cost management and optimization.
  • Financial Reporting: Provides a comprehensive view of the organization’s expenses. It ensures compliance with reporting standards and provides transparency to stakeholders about how resources are allocated and utilized.

Strategic Uses

  • Program Evaluation: Aids in evaluating the financial performance and effectiveness of individual programs or services offered by the nonprofit. It helps assess the allocation of resources, cost-efficiency, and the impact of programs on the organization’s overall mission and strategic objectives.
  • Decision-Making: By analyzing expenses across different functional categories, the statement supports strategic decision-making. It helps identify areas where resources can be allocated or reallocated to align with the nonprofit’s strategic priorities and maximize the organization’s impact.

Operational Uses

  • Budgeting and Planning: Supports operational budgeting and planning by providing insights into historical expense patterns. It helps in setting realistic budgets for various functional areas, monitoring actual expenses, and ensuring effective resource allocation.
  • Cost Control and Efficiency: Assists in monitoring and controlling expenses on an operational level. By analyzing expenses within different functional categories, it helps identify cost-saving opportunities, manage spending, and improve operational efficiency.

Nonprofit financial statements fuel your mission

Financial statements play a crucial role in the financial management and governance of nonprofit organizations. By leveraging these financial statements and their diverse uses, nonprofit organizations can pursue their mission with confidence.

Additionally, adhering to compliance obligations reinforces credibility and trust among donors, board members, and regulatory bodies. As financial reporting standards and accountability expectations continue to evolve, nonprofit organizations must prioritize accurate and transparent financial reporting practices to thrive in an increasingly complex landscape. By harnessing the power of financial statements, nonprofits can navigate challenges, drive mission-driven impact, and foster sustainable growth for the betterment of their communities. 

The Charity CFO specializes in nonprofit accounting and bookkeeping. If you want to dig deeper, you can learn more in our Financial Statement Guide here.

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Outsourced bookkeeping for a nonprofit

Bookkeeping is a critical component of running a successful nonprofit organization. It involves the management of financial transactions and the maintenance of accurate records to ensure that your organization remains financially healthy and compliant with the law. However, managing bookkeeping in-house can be time-consuming and expensive, which is why many nonprofits are turning to outsourced bookkeeping services. 

A study by the Stanford Social Innovation Review found that nonprofits that invested in strong financial management practices, including bookkeeping, were more likely to achieve their mission and grow their organization. Strong financial management can come in many forms and there is no one size fits all for any nonprofit organization. As a leader, you’ll have to determine what is right for your nonprofit. In this article we’ll help you get started by exploring the benefits, risks and other considerations regarding outsourced bookkeeping for nonprofits. 

Benefits of Outsourced Bookkeeping for Nonprofits

Cost Savings

Outsourced bookkeeping has the potential to offer significant cost savings, depending on the complexity of your organization and your needs. When utilizing outsourced accounting services, you only pay for the services you need and you may have access to more premium software than you could purchase on your in-house budget.

Labor Costs

You will have the ability to obtain services when you need them without worrying about flexibility, vacation days, or geographical location. You can source the best services for your needs, exactly when you need them.

Expertise and Experience

Industry specific specialists can help your nonprofit organization minimize risk by providing professional tailored advice. As regulations surrounding nonprofits can be incredibly complex, expert guidance on financial matters, including compliance with tax laws and regulations, is key. This can be especially helpful if you don’t have a dedicated staff-person with the expertise level required. A few common areas where in-house staff may not be able to handle growing complexities are:

  • Audit experience – if your nonprofit is audited by the IRS, an outsourced bookkeeping service can support you in this process
  • Complex tax preparations – while nonprofits are tax-exempt, they are still required to file their Form 990, which in some cases can be incredibly confusing and complex
  • Key dependencies – if someone is out of the office, or unexpectedly leaves your organization, it may be difficult to backfill this position or understand all of the organizational knowledge they held

Scalability

While your in-house staff may be able to handle the day-to-day, as requirements increase and your organization grows, an outsourced service can support and grow with you, while also adding additional services that may not have been necessary before. Outsourced accounting services for nonprofits can handle a whole spectrum of accounting tasks for your organization:

  • Processing payables, receivables, and cash transactions
  • Reconciling accounts at month-end
  • Preparing financial statements, budgets and forecasts
  • Assisting with tax and grant-reporting requirements
  • Adequately communicating financial matters to your board
  • Accurately submitting state and federal filings

Time to Focus on Mission

Outsourcing your accounting could free up time for personnel to focus on the mission rather than keeping up with ever-changing accounting requirements, filings, and reporting. These requirements are typically too large for just one person to handle, thus making this endeavor more of a team effort. If there are many people stretching themselves to get this done, you might not only be utilizing their time inefficiently, in an area where they lack expertise, but you may also be taking away from their mission-critical efforts. Outsourced bookkeeping can provide peace of mind knowing experts are on top of the accounting so your staff can focus on what matters most.

Access to Premium Accounting Software

Accounting software comes in many shapes and sizes, but many times the software organizations start with is not tailored and cannot grow with them. As your organization grows, access to the appropriate software can become a large unforeseen expense. Using the scalability mentioned above, outsourced accounting services typically have access to these softwares to ensure that your accounting, reporting and filing is done accurately and efficiently. 

Risk of Outsourcing Nonprofit Accounting

While there are many benefits to outsourcing your bookkeeping, we would be remiss not to mention the potential downsides. Many organizations are close to the heart of their leadership, and letting go can be difficult. There are some potential downsides to outsourcing and it will be up to you to determine whether the benefits outweigh these for your organization. 

Loss of Control

Entrusting the financial management of your organization to an external party can feel difficult and like you are losing control of a key component that makes your organization run smoothly. Ensuring that your bookkeepers are transparent, experts and trustworthy can help ease this fear. Properly evaluate each company and their credentials before letting go of your financial data. 

Timeliness and Accessibility

Access is another common fear. Not having up to the minute transparency into your finances can be daunting. Make sure that you find a partner in your service provider and ensure that your access and communication channels are clearly defined. You may also choose to outsource certain aspects of your accounting that may require less immediate access.

Security Concerns

The financial data of an organization is incredibly sensitive. Ensure that your provider has proper security measures in place and ask to see these in action before proceeding.

Communication Challenges

As part of your diligence in selecting the right provider, you’ll need to consider what your communication preferences are, for both you and your staff. A bookkeeping or accounting service that is right for you will be able to accommodate your needs.

Transitioning

Transitioning from in-house to outsourced accounting services can be complex and time-consuming. You’ll need to have a solid plan outlining:

  • How financial data will flow
  • What are the communication channels and expectations
  • What software will be used and who will have access
  • Who will train the provider on your accounting processes and procedure
  • How quickly can they respond in a crisis
  • How long will this transition take

Compliance Requirements in Nonprofit Bookkeeping

Ultimately, you will need to evaluate the pros and cons of an outsourced nonprofit accounting service. By weighing the benefits you can take a look at where your organization might gain efficiencies and expertise while evaluating the best course of action. Remember, nonprofit accounting comes with a slew of special regulations, standards, and reporting requirements. There is no one size fits all solution. When determining your needs, be sure to consider what your complete financial package looks like and where you might need some help. Keep in mind:

  • Nonprofit accounting standards
  • Donor tracking 
  • Fund Accounting
  • IRS Regulations
  • GAAP Standards
  • State-specific requirements
  • Tax Filing
  • Grant Requirements 

By considering outsourced bookkeeping for your nonprofit, you can be on your way to more accurate reporting, more satisfied and less burnt-out employees, and, most importantly, more time to do the organizational work that really makes an impact on your mission. 

If you’ve decided the outsourced bookkeeping is right for your organization, get in contact with us and see how Charity CFO can help!

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How to maximize efficiency with nonprofit accounting software

How can nonprofit accounting software help your organization with efficiency?

We’re in the age of technology, and it seems that for every process or transaction, there is a corresponding technological solution designed to make our lives easier and our work more efficient. 

In today’s digital age, technology has revolutionized almost every aspect of business operations, including accounting and finance. For-profit companies have long used accounting software to track their financial transactions and monitor their bottom lines. However, nonprofit organizations face unique accounting challenges and not all commercial accounting software may be equipped to handle.

Where to start with nonprofit accounting software

Nonprofits have to comply with strict financial accounting standards. Meeting these requirements is crucial to the organization’s survival and to maintain donors’ trust. To help meet these requirements, many nonprofits are turning to accounting software that is specifically designed for their needs. When products are designed with nonprofit accounting in mind, you can expect some of the features to be available:

    • Fund accounting: Easy management and tracking of funds, tracking revenues sources and expenses for restricted and unrestricted funds separately. The software should also be able to generate reports that show the balances and activity for each fund. 
    • Incoming and outgoing payments: Record incoming payments, such as donations and grants, and outgoing payments, such as expenses and salaries. Might also include the ability to track pledges, payments received, and pledge balances.
    • Budgeting: Tools for creating and managing multiple budgets for different funds or projects and budget to actual reporting. Some tools may also provide forecasting based on historical data. 
  • Reporting requirements: General financial statements and other reports that are compliant with nonprofit accounting standards as well as reports that are required by grantors, donors and other regulatory bodies. 
  • Grant tracking: From application to closeout, including the ability to create budgets for each grant, track grant expenditures, and generate reports that show the status of each grant. Some tools will also include reminders for reporting deadlines and other grant-related tasks. 
  • Accepting donations: Tools typically include online donation forms and the ability to accept recurring donations. 
  • Donor Tracking: Allows organizations to track contact information, giving history, and communication preferences. Some tools may also allow you to segment donors into different groups based on criteria such as giving level or engagement level and ability to generate trend reports over time. 

How to evaluate nonprofit accounting software

One of the benefits of nonprofit accounting software is its ability to help organizations manage many elements of their finances in one place. It even helps automate some recurring tasks, reducing the chance of errors and duplication, and saving valuable hours each week. However, no one solution will be able to handle the vast needs of nonprofit accounting. Some good questions to keep in mind when evaluating a tool to support your accounting needs:

  • Is the system easy to learn? Is there support available?
  • How quickly do you need the software to be set up?
  • What specialized features will you need? These features might include a platform to file your Form 990-N or the ability to create custom reports.
  • Do you need integration with other systems?
  • How secure is the system?

“Talk to a customer service representative from each software provider you’re considering to get answers to these questions,” says Katie Gray, the Content Manager for the all-in-one nonprofit software provider Springly. “They can clarify these points so that you don’t have to go searching on their website.”

Software won’t do it all

It is important to note that while nonprofit accounting software is powerful, it is not a cure-all. Technological tools have their limitations and many of them are additions to tools made for for profit businesses. This introduces an element of uncertainty as to whether they will be kept up to date on all things nonprofit or are accurately configured for the standards that nonprofits must adhere to. It is not a substitute for the expertise of a professional accountant or bookkeeper.

These professionals can help ensure that the organization is meeting all the legal and regulatory requirements, and make sure that the software is being used effectively. Nonprofit organizations can benefit greatly from engaging an accountant with specific industry experience for several reasons:

  • An understanding of nonprofit accounting standards. They should be knowledgeable about these standards and can ensure that the organization’s financial statements are prepared in accordance with them.
  • Experience with grant and donor reporting,including compliance with federal and state regulations and reporting to grantors and donors.
  • Knowledgeable about compliance with tax exemption requirements to ensure that the organization remains in compliance with them.
  • Assistance with fundraising, budgeting, forecasting cash flows, and providing financial insights that can help the organization make informed decisions about fundraising and donor management.
  • Understanding of nonprofit financial statements and the unique financial reporting requirements of nonprofit organizations, including the Statement of Financial Position, Statement of Activities, and Statement of Cash Flows.

At the end of the day, all of these technologies are great and can truly make your operations run more smoothly, provide more insights in a quicker manner, and streamline your processes. However, there will always be the need for the human element. While technologies are getting much much better at reading data, the humans that are closely tied to your organization can make the minute and fine decisions that a technology doesn’t have the capability to understand. Having someone to talk to through issues, discuss problems and solutions, and analyze and decide what is ultimately best for your organization can not be replaced. 

Engaging an accountant with specific nonprofit industry experience combined with the power of technological tools is a powerful duo to set an organization up for success and ensure efficient and effective management of your finances. 

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Nonprofit Compliance Requirements

In order to confidently run your organization, it’s important to have a strong understanding of nonprofit compliance requirements.

Running a nonprofit is no small feat. In addition to the many struggles of running a business, nonprofits have additional hurdles to overcome as it relates to their mission, employment strategy, accounting, and compliance. While this last one, compliance, can tend to fall to the bottom of the priority list, it is actually one of the most important aspects to consider when running a successful and lasting nonprofit. 

However, compliance is not always very straightforward and it can be a huge task to undertake on your own. We’re here to provide you with background, information, and support to ensure that you’re on top of your compliance requirements.

 

What Does Nonprofit Compliance Mean?

Compliance is the act of assuring the public that nonprofit organizations are obeying the appropriate laws, contracts and commitments that they enter into as a nonprofit organization. Compliance laws protect the public and ensure that nonprofit organizations are eligible to receive the financial advantages offered and that they do not abuse these advantages.

Depending on your state, funding and other factors, your compliance and audit requirements might vary. Requirements at the federal and state levels also vary. 

Noncompliance can lead to dire consequences for your nonprofit organization, including

  • Fines
  • Lack of funds / Reduced funding
  • Diminishing donor/supporter trust
  • IRS audits
  • Revocation of tax exempt status 

Compliance Checks

Compliance checks may also vary by organization and can come in different forms. 

Compliance reviews: A less exhaustive, non-examination format for the IRS to check on the proper reporting of certain items. Compliance checks or compliance check questionnaires tend to be simpler than a full audit and are limited in scope. 

  • Recordkeeping and information reporting requirements
  • Consistency with tax exempt purpose

Audit: Can be conducted by the IRS if sent a letter, or may be required to be completed based on your federal funding status or other obligations. A field audit tends to be comprehensive and looks at: 

  • Timeliness
  • Completeness and accuracy 
  • Exemption status
  • Annual tax returns / Employment tax returns / Form 1099 series information returns
  • Proper payment of tax liabilities
  • Disclosure requirements for applications for exemption, for Form 990 series returns, and for fundraising solicitations and events.

If you are preparing for an external audit, it’s a good idea to properly prepare and gather all of the appropriate documentation. This can be a long and lengthy process. A great way to stay on top of these tasks is with an Audit Checklist.

Staying Compliant

The first step in staying compliant is understanding and being prepared.

Your Organization’s Compliance Requirements

The best thing you can do to ensure your nonprofit organization is always in compliance is first to understand, document, and distribute what those compliance requirements are in the various areas of your organization

  • Corporate requirements – your incorporation process, annual filings and fees
  • Fundraising requirements – registration to solicit donors in all states, countries and territories that your nonprofit operates in
  • Operational requirements – adherence to your bylaws and other operational duties
  • Accounting requirements – filing your Form 990 and adhering to proper accounting practices
  • Employment requirements – proper classification of employee exemption statuses
  • Record-keeping requirements – retaining the appropriate records to be easily accessed and for the required period of time
  • Private grant requirements – specific requirements as outlined in grants that your organization received
  • Restricted funds compliance – if restricted donations are received
  • Workforce health and safety – dependent upon state and federal requirements
  • Data security and privacy – following the laws in your areas of operation especially if you operate in the digital/web space with a website, app, or services
  • Local and state zoning and licenses – certain activities your organization may engage in could require permits or licenses

Labyrinth Inc., experts in charity state registrations, provides a great starting point to begin to research and understand some of these requirements

Accounting, Recordkeeping and Forms

The accounting and reporting function of an organization will play a crucial role in ensuring that you remain compliant. Having a CPA as a resource, whether internally or outsourced will be crucial to understanding the basics of nonprofit accounting. Generally, you will want to know that you are engaging with someone who has a deepening knowledge of the following:

  • Nonprofit accounting 
  • Unrestricted, temporarily restricted, and permanently restricted funds
  • Fund accounting
  • Cash and accrual basis accounting
  • Presentation of financial statements 
  • Accounting for donated assets
  • Filing the proper forms at local, state and federal levels
  • Reviewing accounting standards and updates
  • Proper internal controls

Compliance Questions 

Even if you’re new to compliance or aren’t an expert, there are a few questions that you should always ask and direct to those who are responsible for your compliance

  • Have you filed your IRS 990 every year?
  • Have you properly withheld payroll taxes? Without issues, notifications or penalties?
  • Has the department of labor audited your nonprofit for misclassifying employees?

If you do not know the answers to these questions, it’s best to seek help and find out sooner rather than later before compliance becomes a larger issue. 

Ongoing Maintenance

Once you have a handle on your compliance with good processes in place, the best way to avoid issues is constant maintenance. 

  • Keep up with new regulatory developments
  • Regularly review your organization’s financial statements
  • Conduct periodic internal audits
  • Setup a process for monitoring compliance
  • Evaluate the effectiveness of internal controls, financial policies, and procedures
  • Assess risks and make necessary changes to mitigate them
  • Create procedures for taking corrective action when necessary

The Charity CFO can help you stay in compliance with our expert teams with nonprofit experience. 

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What to look for in nonprofit accounting financial statements

Nonprofit accounting financial statements may seem like a chore. They can be meticulous and time-consuming to prepare. However, the benefits of these statements far outweigh any possible inconvenience. Nonprofits use financial statements to comply with IRS regulations, build trust with donors, and plan for the future. 

You may think that nonprofit financial statements are the same as those at for-profit companies, but this is not the case. The financial statements used by for-profit companies are typically the income statement, balance sheet, statement of cash flows, and statement of owner’s equity. While nonprofit financial statements have some overlap with these, there are key differences. 

Here are the main nonprofit accounting financial statements:

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

Let’s take a closer look at each. 

Statement of activities

This is the nonprofit equivalent of the income statement. As with the income statement, the statement of activities presents all revenue and expenses for a reporting period, but the goal is different. A for-profit company measures how much money they are making because they want to earn a profit. Nonprofits want to make money, but not to earn a profit. Expenses are subtracted from revenues to show the change in net assets, rather than net income. The money nonprofits make is reinvested into their programs and services. 

The statement of activities is exactly what it sounds like. It looks at all of your organization’s activities so you can see what is working and what isn’t. Common revenues for nonprofits include contributions, grants, and investment income. Common expenses include administrative expenses, fundraising, and program services.

The statement of activities looks a bit different from the income statement. Separate columns classify revenue based on whether it is restricted or unrestricted. Restricted revenue is funds that are for a specific purpose. If your nonprofit receives grant money, there may be stipulations over how it is used. On the other hand, unrestricted revenue can be used as the nonprofit wishes. 

Statement of financial position

As with the balance sheet, the statement of financial position is a snapshot of your nonprofit’s finances at a specific point in time. The balance sheet follows the basic accounting equation, which is:

Assets = Liabilities + Owner’s Equity

Instead of owner’s equity, the statement of financial position looks at net assets. Therefore, it displays assets (what you own), liabilities (what you owe), and net assets (your value).

Like the statement of activities, the statement of financial position sorts net assets based on whether or not they are restricted. 

Statement of cash flows

The nonprofit statement of cash flows is very similar to that of a for-profit company. It looks at cash inflows and cash outflows, which is cash coming in or leaving your organization. These cash flows are then sorted into the below categories:

    • Operating activities: Occur during the normal course of business
    • Investing activities: Buying or selling long-term assets
  • Financing activities: Funding, such as loans

Statement of functional expenses

This statement is unique to nonprofits. It is required for nonprofits to report expenses based on their functional classification and their natural classification. This may sound confusing at first, but it’s actually pretty straightforward. 

Classifying expenses by their function demonstrates what they were used for. Functional classifications include program costs, management and general costs, and fundraising costs.  Natural classifications look at the type, or nature, of the expenses. These include salaries, rent, utilities, and so forth. 

Getting maximum value from nonprofit financial statements

Now that you know what goes into the main nonprofit financial statements, it’s time to learn how to use them! While financial statements are required for reporting purposes, there is much more to it than that. The financial statements can help you assess how your business performed for the period. Your nonprofit probably has financial goals it wants to achieve. With these goals in mind, you can look at each of your financial statements and see whether or not you’re on track to achieve them. If not, you can always make adjustments. 

You should set goals, create a budget, and compare the budget to the actuals from your financial statements. 

Let’s take a look at how each of the financial statements we discussed can provide value for your organization. 

  • Statement of activities: You may find that your net assets are not as high as you want them to be. To make changes, you might need to find ways to cut back on expenses or find new funding opportunities to boost revenue. 
  • Statement of financial position: This broad overview of your nonprofit’s financial health gives you a quick look at your assets, liabilities, and net assets. As with the statement of activities, you may need to adjust your operations if your net assets are too low. You can determine if you’re paying off your liabilities and measure liquidity. 
  • Statement of cash flows: You can determine if there’s enough cash available to pay off expenses. If not, you can quickly make changes in your nonprofit’s operations to avoid running out of cash!
  • Statement of functional expenses: The main purpose of this statement is to comply with IRS regulations. It is part of Form 990. However, it is also beneficial to provide transparency to donors so they can see how you are using your funds. 

Need help with nonprofit accounting financial statements?

Nonprofit financial statements can be confusing. It’s important that they are accurate and are properly interpreted for use in future planning. Consider partnering with a firm to connect data to your goals and provide insights on where your nonprofit is going. 

The Charity CFO works exclusively with nonprofits to help with accounting, including preparing financial statements and providing CFO-level guidance. Contact us today to help your nonprofit succeed in its mission.  

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Understanding the Nonprofit Statement of Cash Flows

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

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

What is the nonprofit statement of cash flows?

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

Cash flows are sorted into the below categories:

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

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

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

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

How to prepare the nonprofit statement of cash flows

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

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

Let’s dive in to see how this works.

  • Begin with net income or net loss

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

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

  • Additions to cash

Next, you add back the values of the following:

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

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

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

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

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

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

  • Subtractions from cash

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

You will subtract:

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

This is because these changes do not represent cash inflows. 

  • Calculate cash flows from investing activities

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

  • Calculate cash flows from financing activities

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

  • Ending balance

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

Interpreting the nonprofit statement of cash flows

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

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

Need help with the statement of cash flows?

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

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

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Nonprofit Tax Filing: 7 Steps to Peace of Mind

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

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

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

Start With the Fundamentals of Nonprofit Tax Filing

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

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

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

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

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

But why is this really important?

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

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

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

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

Take a Year-Round approach

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

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

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

Tracking expenses

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

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

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

Tracking Revenue

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

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

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

Monthly Financial Reporting

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

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

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

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

Pay Quarterly Estimates

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

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

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

Work with a Trusted Expert for Peace of Mind

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

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

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

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

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How to Comply with Accounting Standards for Nonprofits

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

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

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

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

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

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

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

Understand the Basics of Nonprofit Accounting

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

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

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

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

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

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

Some of these include:

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

Identify Relevant Accounting Standards 

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

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

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

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

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

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

Implement Internal Controls 

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

These financial practices:

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

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

Other common nonprofit internal controls include:

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

Monitor Compliance 

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

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

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

Work with Compliance Experts

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

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

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

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

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Revenue Recognition for Nonprofits: 4 Mistakes to Avoid

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

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

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

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

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

4 Revenue Recognition for Nonprofits Mistakes

Not Recognizing Revenue at the Right Time

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

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

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

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

Not Understanding the Difference Between Cash and Accrual Accounting

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

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

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

The cash method of accounting is generally preferred for:

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

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

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

This method is an excellent option for nonprofits that:

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

Not Documenting Donations Properly

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

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

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

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

Not Tracking Unrestricted Funds Separately

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

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

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

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

Trust The Charity CFO Revenue Recognition for Nonprofits

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

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

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

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7 Essentials Of Nonprofit Financial Management

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

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

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

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

1. Policies for Good Financial Management

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

Consistent policies will ensure:

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

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

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

Gift acceptance policy

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

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

Asset management policies

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

Conflict of interest policy

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

Nonprofit fiscal policy

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

2. A Nonprofit Budget

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

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

This financial planning tool will:

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

Your nonprofit budget should include the following parts:

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

3. Nonprofit Financial Management Statements and Reports

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

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

Statement of financial position (Nonprofit balance sheet)

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

This tool provides several insights:

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

Statement of activities (Income statement)

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

It is split into 3 sections:

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

SOA helps to:

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

Statement of functional expenses (SOFE)

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

SOFE helps answer questions related to:

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

Cash flow statement (CFS)

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

4. Annual Report and Form 990 

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

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

The annual report should include the following:

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

5. Proper Organizational Structure

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

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

6. Financial Responsibility

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

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

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

7. Interdependence

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

Always Be Report-Ready With Accounting Solutions Built for Nonprofits

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

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

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

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Financial Statements Nonprofit: What You Really Need

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

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

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

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

But what are the financial statements?

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

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

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

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

Statement of Financial Position

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

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

1. Assets

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

Assets can be broken down as follows:

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

2. Liabilities

This includes anything that is owed or due to others.

They are categorized as either:

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

3. Net assets

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

For clarity:

Total Assets- Total Liabilities = Net assets

Let’s assume:

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

What’s the net asset?

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

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

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

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

Statement of Activities

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

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

1. Revenue

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

GAAP requires that you separate revenue as either:

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

2. Expenses

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

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

3. Change in net assets

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

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

Why is a statement of activities important?

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

Statement of Functional Expenses (SOFE)

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

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

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

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

 Cash Flow Statement

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

A CFS report has three sections:

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

Work with Financial Statements Nonprofit Expert

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

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

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

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Best Practices when Accounting for Grants

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

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

Why?

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

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

What is a Grant?

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

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

Grants may include:

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

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

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

Major Types Of Grants

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

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

8 Best Practices When Accounting For Grants

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

1. Make sure your team is on the same page

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

2. Put the necessary controls in place

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

3. Track expenses diligently

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

4. Develop strong financial reporting procedures

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

5. Keep up with changing compliance rules

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

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

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

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

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

8. Conduct regular audits

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

What Are The Main Challenges Of Grant Accounting?

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

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

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

Feeling Stuck? Outsource Your Grant Accounting Needs To A Professional

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

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

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

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

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

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Why Your Church Shouldn’t Take Pass-Through Gifts

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

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

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

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

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

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

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

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

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

2. Pass-through gifts can be misused.

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

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

3. Pass-through gifts can become a distraction.

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

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

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

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

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

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

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

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

Case in Point Example

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

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

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

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

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

Creating a special fund

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

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

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

A gift is considered charitable if it’s:

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

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

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

Protect Your Tax Exempt Status with The Charity CFO

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

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

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

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

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Budgets for Nonprofits: Get ready for 2023

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

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

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

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

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

A nonprofit budget helps your organization:

  • Stay fiscally healthy
  • Allocate resources
  • Set spending priorities 

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

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

Intro to Budgets for Nonprofits

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

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

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

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

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

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

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

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

7 Steps to Your Budget

1.    Determine a timeline

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

2.    Clarify context and articulate goals 

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

3.    Decide on the budget structure

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

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

4.    Develop a draft income budget

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

5.    Create a draft expense budget

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

6.    Review and revise the budget

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

7.    Finalize the budget

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

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

Specialized Nonprofit Budgeting Help

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

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

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

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

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Nonprofit Accounting Services: The Right Solution

What should you look for when evaluating nonprofit accounting services?

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

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

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

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

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

Benefits of Nonprofit Accounting Services

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

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

1. Saves time and money

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

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

2. Improves compliance

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

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

3. Boosts donor confidence

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

4. Generates accurate financial reports

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

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

Nonprofit Accounting Services: More than a Bookkeeper

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

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

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

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

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

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

Considerations When Choosing Nonprofit Accounting Services

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

1. Experience working with nonprofits

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

2. Offer a comprehensive suite of services

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

3. Utilize cutting-edge technology

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

4. Provide personalized service

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

5. Transparent and communicative nonprofit accounting services

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

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

6. Go beyond the numbers and offer strategic advice

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

Examples include: 

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

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

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

Nonprofit Accounting Services for Your Cause

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

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

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

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Raising Funds & Exposure with Press Releases

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

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

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

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

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

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

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

Here’s a preview on YouTube:

 

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

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The 5 BIG Myths of Nonprofit Accounting

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

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

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

Here’s a preview on YouTube:

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

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