In most industries, you work your way up through the ranks, learning from those who came before you. But in nonprofits, it doesn’t always work that way. A founder can often find themselves sitting in the Executive Director’s chair without any prior management experience, or even an idea of how the organization needs to run.
And that’s the experience that Miki Reynolds had when she took over the reins of her organization, Grid 10.
After a career in supporting roles, she suddenly found herself in charge of the show. And had to overcome battles with imposter syndrome, financial mindset, learning to ask for help, and more.
Her story covers many of the common struggles that Executive Directors face, and in this episode, she’ll walk you through how she overcame her biggest obstacles so you can learn from her experience.
Miki is the Executive Director and founding member of Grid110, an organization that provides entrepreneurs with access to community mentors and critical resources through no cost equity programs.
Join her for a wide-ranging conversation and practical approaches to problems you may be facing today.
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Since nonprofit organizations don’t profit from the money they make, the accounting processes for nonprofits look somewhat different than for-profit companies. And one of the key differences is that nonprofits talk about net assets rather than net income or equity.
Net assets aren’t a complex topic to understand. It’s mostly a difference in terminology in nonprofit accounting vs. for-profit accounting. But it’s not a term that most non-accountants are familiar with, and there are a few differences in how it’s reported. So we thought a quick explainer was in order.
In this equation, your assets are anything you own that has value to your organization, such as cash, investments, or physical property (e.g., buildings, land, equipment).
On the other hand, your liabilities are everything you owe to other people, like credit card balances, loans, mortgages, lines of credit, accounts payable, and more.
Understanding Nonprofit Net Assets
As shown above, Net Assets are simply the value of what you own (Assets) versus what you owe to others (Liabilities).
So another way to think of it is that your Net Assets are the amount of money you’d have left if your organization sold all of its assets and paid off all debts it owes to anyone else.
On the for-profit side of things, this left-over balance is called equity because it is how much money shareholders and partners would split after the debt is settled. But since there aren’t any shareholders in a nonprofit, this balance of value is called “Net Assets” instead.
Generally, liabilities are categorized based on due dates. So, if an organization has liabilities it expects to pay off within the year, these are classified as current liabilities. Long-term liabilities, as the name implies, are those with due dates further in the future (more than one year away).
What Are Restricted Net Assets?
Because nonprofits often receive gifts or funds that are earmarked for a specific purpose, they must show their Net Assets in more detail.
Every nonprofit must show two categories of Net Assets on its Balance Sheet: Net Assets with Donor Restrictions and Net Assets without Donor Restrictions.
Restricted net assets are those with donor restrictions, which combine temporarily and permanently restricted classes. When a donor specifies a designated purpose for their contribution, the organization must use the donation toward that particular purpose.
For example, suppose Daniel Donor gives a $10,000 donation designated to go towards expanding the food bank warehouse downtown. In that case, the nonprofit must use those funds towards its efforts to expand the downtown food bank warehouse. Those funds cannot be used in the general fund for other purposes.
So, when your nonprofit receives a donation with restrictions, it must record it as donor-restricted contribution revenue and report it accordingly on its financial statements.
What Are Unrestricted Net Assets?
Unrestricted net assets are assets with no specific restriction on how you can use them. So your organization can use these assets for any purpose that aligns with fulfilling the organization’s mission.
Net Assets on the Statement of Activities
Most conversations about Net Assets revolve around the Balance Sheet or Statement of Financial Position. This is where you’ll find the balance of Net Assets that shows the accumulated financial reserves of your organization.
But you’ll also see the term Net Assets pop up on your Income Statement, or Statement of Activities. Here it will take the form of “Change in Net Assets.”
Your Change in Net Assets is the difference between the revenue you have recorded and the expenses incurred during a given period. It’s essentially what a for-profit company would call Net Income or Profit.
For instance, if you collect $500,000 in revenue and record $450,000 in expenses in a given month, your Change in Net Assets will be +$50,000. Conversely, if you register more expenses than revenue, your Change in Net Assets will be negative.
As the term “Change in Net Assets” implies, that $50,000 gain will flow through directly to the Balance Sheet. So your Total Net Assets on the Balance sheet will be $50,000 higher than at the previous month’s close.
Need Help Navigating Your Nonprofit’s Finances?
At Charity CFO, we understand the complexity of nonprofit accounting. Our dedicated team (including five former nonprofit auditors) focuses solely on nonprofit organizations to help navigate the complicated maze of accounting.
We’ve helped 200+ nonprofits around the country optimize their bookkeeping, create consistent monthly reporting, and strengthen the finances of their organizations. So if you’re looking for reliable and talented financial assistance for your nonprofit, we’re here to help!
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There are more than 1.54 million nonprofits globally. To ensure that a nonprofit runs efficiently, several people work behind the scenes to make things much easier, and one of those people is the operations manager.
The operations manager might be the secret weapon of the most successful nonprofits we know. By taking charge of getting things done, an operations manager helps executive directors focus their energy on the strategic big-picture that will move their mission forward.
If you’re looking to enter the world of nonprofit organizations with a background in operations management, you might be wondering how your skills can help you. Or, if you’re a nonprofit founder or an executive director, you might be wondering how an operations manager can help make your organization ruthlessly efficient and highly effective.
Read on now to find out what the job description of a nonprofit operations manager might look like.
What does an operations manager do?
A nonprofit operations manager, or director of operations for a nonprofit, is responsible for the day-to-day operations of the organization.
They oversee the administrative staff and make sure that the office runs smoothly. They also develop and implement operational procedures and systems and manage budgets and financial reports. In short, they ensure that the nonprofit runs like a well-oiled machine!
Now, if that sounds like they do a bit of everything, it’s because that’s true!
An operations manager, by definition, is a manager. They don’t necessarily need to be an expert at any one thing. Still, they need to be able to be proficient enough at many things to manage a highly productive team to get results for their organization.
Here’s how Krysta Grangeno described her day-to-day tasks in operations for a nonprofit organization:
Who reports to the operations manager? And who do they report to?
It depends on the organization, but generally, any department is responsible for the day-to-day operations of the entity. That may include
Finance Department
Fundraising Department
Program directors
Human Resources
Information Technology
And more!
You can see that, depending on the size and structure of your organization, the ops manager will have to oversee a large number of departments.
In turn, your operations manager will either report to the Director of Operations, the Chief Operating Officer (COO), or directly to the CEO or Executive Director. They may also have some direct interaction with the Board of Directors, although the board isn’t technically their supervisor.
What are the job responsibilities of a nonprofit operations manager?
As mentioned above, their primary role is to supervise and organize the efforts of the departments under their responsibility. Here’s a breakdown of what duties a nonprofit operations manager will be expected to handle:
Ensure the Office Runs Smoothly
The administrative staff is responsible for keeping the office organized and running smoothly on a day-to-day basis. The operations manager will make sure that they have everything they need to do their job effectively and that they are meeting all deadlines.
An operations manager must be exceptionally well organized, as they’ll be responsible for creating systems and processes that ensure every department is meeting its expectations. Often, they’ll also need to be aware of all legal or reporting requirements that the organization may have in executing their programs.
Implement Budgets and Oversee Financial Strategy
The operations manager will be responsible for spearheading the budgeting process for the organization and ensuring that the accounting department delivers timely and accurate financial statements for the board of directors or other stakeholders. You’ll also need to be intimately familiar with these statements as well and review them proactively to identify potential issues before they become problems.
As the operations manager, part of your role is to ensure that the financial department runs effectively. This includes ensuring that checks and balances are in place and that employees in the financial department are adequately trained to do their jobs.
The operations manager must also be acutely in-tune with the organization’s budget. Because their role is so wide-reaching, they need to be aware of how shortfalls in one area (like fundraising) may impact the ability to execute in others (like executing programs or meeting payroll).
That doesn’t mean that the operations manager needs to be an accountant. Generally, they’ll oversee the accounting team or work as a liaison with an outsourced accounting firm. But ultimately, they are responsible for ensuring that the accounting work is done correctly and on time.
Supervise Human Resources
Ideally, the operations manager’s role in human resources is limited to supervision, but that’s not always the case. In some smaller nonprofits, HR may get put completely onto the ops manager’s plate, but we’d recommend against it.
Human resources is a specialized field that requires experience and specific knowledge. You need to comply with employment law, collect the correct information, withhold taxes appropriately, and onboard and train new employees.
A knowledgeable HR professional should establish the policies and procedures for the human resources department, but many nonprofits can’t afford a full-time HR coordinator. That’s why many nonprofits choose to outsource their HR to external firms as well.
Even if you’re working with an external firm, the operations manager will probably need to be involved in many day-to-day items related to HR—like searching for employees to hire, interviewing, training, counseling, and terminating employees.
Manage Technology Integration
Technology is a massive part of the work that nonprofits do. Almost every person in your organization depends on technology. And the networks and systems that keep those people aligned take organization, security, and maintenance.
Depending on your mission, you may even be dealing with highly sensitive personal information that you have a legal responsibility to protect, even in digital form. As the operations manager, you’ve got to make sure the appropriate technology systems and controls are implemented throughout the business.
Not utilizing the proper systems could mean the loss of crucial data needed in the future. Or it could mean a crumbling IT infrastructure that can’t support the business model being implemented.
Nonprofits often don’t need, or can’t afford, an internal IT department. And relying on someone’s husband or nephew to fix problems isn’t an acceptable solution. Instead, many organizations outsource their IT department to a service provider. In this case, it’s the operations manager’s job to liaison with the IT provider to ensure the office gets the support it requires.
Ensure Compliance and Organization
Records need to be kept in order within any business. There are several reasons for this, but compliance is an important one for many nonprofits.
Your organization needs to comply with accounting regulations, legal restrictions, employment rules, and other industry-specific regulations. And the operations manager is ultimately responsible for ensuring that the company is prepared to prove its compliance when audited.
Not only does record organization help when something needs to be located, but it also speeds up business efficiency. Instead of wasting time hunting for something, it will be easy to access the record database. All you’ve got to do is type in some information and locate the data needed.
How to evaluate performance and further development
Whether you’re building the leadership team to include an operations roles, or you’re currently in an operational leadership role — it’s important to regularly evaluate performance as well as work on developing to further improve your work.
If you’re evaluating your ideal candidate, after they’ve been in the position for a certain period (a year, for example), it’s important to compare their achievements to the job description. For self-evaluations, read resources (like this one) to find usable knowledge to help improve your performance.
Key areas to concentrate your efforts include:
Purposeful communication: In operations, too much communication is nearly as problematic as not enough. What you say, how you say it, must be as useful as possible. That’s where developing purposeful communication tactics come in handy.
Organizational processes: As someone who ensures compliance and handles intricate areas of a nonprofit, the ability to develop processes takes precedence over nearly every other aspect of your role.
Continuing certifications: There are a number of nonprofit certificate programs available for leadership teams. Those instructing the programs often have robust experience in the sector. Taking these programs helps you find the additional knowledge to improve your performance.
A Note on Outsourcing Professional Services:
We’ve mentioned outsourcing a few times here, related explicitly to bookkeeping/accounting, human resources, and information technology. That’s because this is an emerging trend we see gaining steam in the industry.
Traditionally, many nonprofits had a scrappy, do-it-all mentality when it came to these areas. So, an operations manager or financial director frequently ended up having responsibility for everything— from making bank deposits and firing employees to troubleshooting network issues.
But this approach causes more problems than it solves. Having trained professionals handling complex tasks that are outside their area of expertise is hugely inefficient. And it’s just asking for mistakes.
Yet most organizations can’t afford a full-time accountant, HR coordinator, and IT professional. And that’s where the operations manager comes in.
When organizations outsource these 3 functions and have the operations manager work directly with each team, they can get the full professional support of each team without paying a full-time salary. Often, these teams are more talented and efficient than an internal team member would be.
We believe this is the operational business model of the future for successful mid-sized nonprofits in the $1M to $15M/year range. If you’d like to talk to us about outsourcing your bookkeeping and accounting to The Charity CFO, send us a message to set up a free consultation.
What Qualities Make a Good Operations Manager?
Let’s turn to Krysta again, to offer a first-hand perspective on what skills an operations manager needs:
What A Nonprofit Operations Manager Does: A Recap
A nonprofit operations manager has many responsibilities, but their primary role is to coordinate all the various departments to ensure that business runs smoothly.
The operations manager will oversee the finance department, human resources, information technology, programs, fundraising, and more. And they must grasp how each department impacts the other to ensure that the entire organization runs harmoniously.
By doing their job well and assuming responsibility, they free up each department to focus on what they do best, rather than overlapping tasks or getting tied up in work that’s unrelated to their department. They also help free up the directors to focus on strategy rather than the day-to-day minutiae of each department.
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If you know only one thing about 501(c)(3) nonprofit organizations, you probably know that they don’t pay federal taxes on their income.
But what if I told you that’s not always true?
It’s true that due to their uniquely valuable societal contributions, such as charitable actions or educational priorities, nonprofits receive tax exemption for income from activities substantially related to their primary purpose.
However, as detailed in Publication 598 of the Internal Revenue Service, income not directly related to their declared charitable purpose is subject to federal taxation. This is called the unrelated business income tax, or UBIT.
So how do you know if your nonprofit organization has taxable unrelated business income?
We’ll review the core principles of unrelated business income tax (UBIT) rules below, along with examples of income subject to taxation, to help you understand what it is and whether or not it applies to your organization.
What is Unrelated Business Income Tax (UBIT)?
Both federal tax exemption and the eligibility to receive tax-deductible contributions help your nonprofit achieve its charitable goals. But while these benefits have a positive impact on society, they can pose a temptation for some organizations looking to take financial advantage for personal gain.
As a result, Congress implemented the UBIT in 1950 to eliminate the unfair advantage tax exemption gave to nonprofits competing against for-profit entities in the same sector. The tax limits the advantage of nonprofits to their specified charitable purpose and prevents them from exploiting their benefits in the commercial sector.
For example, the UBIT prevents an entity such as a church from using its exempt status to open a store purely for profit with no charitable purpose. This is true even if the church uses those funds to fund programs in the community.
It is not, however, prohibited for your exempt organization to earn unrelated business income. If you receive gross income from an unrelated business reaching $1,000 or more, you simply need to complete and submit IRS Form 990-T and pay the required taxes.
If your organization expects it will need to pay $500 or more in tax for the year, then you must pay a quarterly estimated tax. The Form 990-W helps determine the required amount of estimated tax to pay.
Form 990-T and Form 990-W are in addition to your organization’s annual information return (Form 990, Form 990-EZ, or Form 990-PF).
IRS UBIT Requirements
UBIT rules apply to most organizations that gain tax exemption from section 501(a) of the Internal Revenue Code (IRC). The three main criteria for your tax-exempt entity’s activity to be considered an unrelated business are as follows:
Your activity is a trade or business that produces income via the selling of goods or services. Even if these activities occur under a greater umbrella of the organization’s tax-exempt purposes, they maintain their identity as unrelated trades or businesses as long as they generate gross incomes from distributing or producing goods or services.
The activity is regularly carried on, meaning that the organization pursues them with frequency and continuity, similarly to the manner in which non-exempt organizations pursue comparable commercial activities.
The activity is not substantially related to furthering the organization’s exempt, charitable purpose.
Special Cases & Exceptions
Most tax-exempt organizations must follow the UBIT requirements, including those in social welfare, advocacy, trade, veteran groups, labor organizations, and employee benefits.
However, some special cases fall under modifications, exclusions, or exceptions to unrelated business income, such as:
✔️ Volunteer labor ✔️ Convenience of members ✔️ Sale of donated merchandise or in-kind gifts ✔️ Corporations organized under Acts of Congress and are instrumentalities of the United States ✔️ Some charitable trusts not subject to private foundation taxes ✔️ Dividends ✔️ Interest ✔️ Certain investment income ✔️ Royalties ✔️ Certain rental income ✔️ Certain research activity income ✔️ Gains or losses from property disposition ✔️ Certain bingo games
It can get a bit complicated, but the Form 990-T Instructions give you more specifics on what constitutes an exception and what does not.
What Is Considered Excessive Unrelated Business Income?
Although nonprofits can earn profits from unrelated business activities, these profits can only make up a certain percentage of the nonprofit’s overall income.
This limit is not clearly defined, however. Instead, it is up to the IRS to determine if your percentage of total income coming from UBI is too high. In cases where the IRS is evaluating unrelated business income to determine adequacy, it considers various factors specific to the situation at hand.
Examples of Taxable and Non-Taxable Business Income
Example 1: Selling food and beverages
Related business income: If an organization sells food and beverages to its members, it would be considered part of the entity’s regular operations to further its purpose. The money earned goes towards paying back the expenses used to obtain the food for its members to work on their mission.
Unrelated business income: If the same organization sells food to non-members regularly to make additional profits without working towards its non-exempt purpose, then the income is unrelated and taxable.
Example 2: Charging for parking
Related business income: If an organization has a parking lot and it charges members to use during working hours, then this income is not taxable. The money earned goes toward paying the lot lease and provides a service to members who use their parked time for furthering the purpose of the organization.
Unrelated business income: However, if the entity decides to take advantage of its non-working hours by regularly opening the lot to non-members to turn a profit, then this income is subject to the UBIT. The money is no longer from and for members and is not necessary for furthering the organization’s purpose.
Example 3: Providing pay-for-entry entertainment
Related business income: Consider an organization such as a church that charges admission for a small fair or arcade in which themed games and activities educate the children of members on the church’s views and purpose. This activity specific to members and to the purpose of the church would not fall under UBIT rules.
Unrelated business income: If the same church ran a general arcade next door open to the public and with no educational aspect, then the resulting income would be subject to the UBIT.
Other forms of income which would be susceptible to the UBIT include proceeds from the liquidation of assets, the sale of resources found on the property of the exempt entity, income from paid advertising in the organization’s newsletter or publications, or the sale of unrelated merchandise to the public.
Each of these examples and those described above involve various factors that, if changed, could change the exempt status of the activity in question.
Not Sure If Your Nonprofit Income Is Taxable Or Not?
You should always consult your legal counsel or a qualified accounting professional before making decisions that could cost you a lot of money down the road.
But as a nonprofit, sometimes it’s not easy to find someone to answer your questions. We frequently hear stories of CPAs that don’t return their nonprofit clients’ phone calls or emails. Often, nonprofits get stuffed at the bottom of the pile.
If you’re tired of being the last priority of the financial professionals in your life, consider outsourcing your bookkeeping and accounting to The Charity CFO. We’ll modernize and optimize your accounting system to get you audit-ready financial reports every month.
And our team of former nonprofit CFOs and auditors are available to answer all your most challenging questions about tax liabilities, transparency, compliance, budgeting, and more.
Reach out to us today to see if outsourcing your bookkeeping and accounting can save you time, money, and stress.
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In this episode, Tosha will walk you through the most common misconceptions about nonprofit audits to let you know exactly what you can expect (and NOT expect) from a nonprofit audit before you commit.
Audits scare the daylights out of nonprofit founders.
But at The Charity CFO, Tosha and her team need to prepare 50+ nonprofit partners for audits every year. Thankfully, they’ve got 5 former nonprofit auditors on staff, which means they know all there is to know about audits.
Listen to this episode to make sure you’re fully prepared for your audit!
Here’s a preview on YouTube:
To watch the full episode, click on the Spotify player above or search it wherever you get your podcasts.
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In this episode, Tosha will walk you through the most common misconceptions about nonprofit audits to let you know exactly what you can expect (and NOT expect) from a nonprofit audit before you commit.
Audits scare the daylights out of nonprofit founders.
But at The Charity CFO, Tosha and her team need to prepare 50+ nonprofit partners for audits every year. Thankfully, they’ve got 5 former nonprofit auditors on staff, which means they know all there is to know about audits.
Listen to this episode to make sure you’re fully prepared for your audit!
Or watch it on Youtube here
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A lot of nonprofit leaders are asking us about how to prepare their organizations for the possibility of a recession.
So I decided to change up the format of my A Modern Nonprofit Podcast this week to talk directly to you about the steps you can take to prepare your organization for a potential recession:
First, you must understand if your organization bringing in more money than it is spending to see if your business is sustainable in the face of recession. If you’re currently spending more than you’re bringing in, you’ll slowly start whittling down your savings accounts. And then you’re living on borrowed credit through operating loans, lines of credit, credit cards, and things of that nature. If that is your case, I strongly encourage you to staff and figure out how you can flip things around to be consistently bringing in more than you spend over a long-term period, possible over the course of a year. Having a grasp on your cash flow is ALWAYS important, but even more so in the face of economic and fundraising uncertainty brought on by a global or national recession.
2. Keep Your Debt to a Minimum
This is another everyday principle that becomes doubly important when the state of the economy is uncertain. You don’t want to head into a recession with a business that’s overly reliant on debt. And it’s not just a matter of the health of your balance sheet, it’s about understanding, “What is this debt costing me?” As in, how much of your much-needed cash are you tying up in debt payments every month? Every quarter? Every year? Take a hard look at which debt you can pay off or restructure now to reduce your monthly payments. Ensure that you’ve got the cash to meet your obligations every month even if your cash inflows take a downturn due to macroeconomic factors beyond your control.
3. Increase Liquidity
Increasing liquidity means increasing your ability to tap into cash when you need it in the short term. In times of recession and uncertainty, it’s important that you have as much of your cash available as possible, as opposed to being tied up in long-term investments or blocked by donor restrictions. You should have at least 30 to 90 days of cash on hand, and don’t be afraid to lean toward the 90-day end of the spectrum if the recession intensifies or you experience a decrease in donations. If you don’t have 30 days of cash on hand, design a savings plan to get your cash balance to at least 30 days. And I’m not talking about 30 days on your very best day, right before that payroll…
You should have 30 days’ worth of cash on hand on your worst day after the last payroll hits and before your funding comes in.
4. Revisit Your Investment Strategy
I’m NOT an investment advisor, but anytime there is a change in the economic environment, you should check with your investment advisor to be sure your strategy is still appropriate. The risk of certain investments will intensify during a recession, so just be sure to make that phone call and get the professional advice you need.
5. Lock in Your Funding Early
When there is a recession on the doorstep, it makes sense to lock in your fundraising plan earlier rather than later. So start talking to your longstanding donors right away, let them know your plans, and make the ask now rather than at the end of the year. Many of them will be glad to give now and be thrilled that you’re making a proactive plan to weather the storm. If these folks are supporters of your work, they’ll be happy to do their part in ensuring your mission survives an economic downturn.
6. Create a Detailed Fundraising Plan
I can’t tell you how many times we’ve worked with nonprofits that say, “Well, we raised a quarter of a million dollars last year. So we’ll plan a 10% increase for this year and budget based on that.” But if you don’t have a plan for matching last year’s donations AND getting growth, then you don’t really have a plan. You have a dream. And recessions are dream killers. So I encourage you to start looking at who gave you money last year and where you think your money will come from this year. And then strategize how you are going to come up with those dollars. Set goals and track your progress month-by-month. That way, if you’re $10,000 behind on your annual fundraising goal in June, you’ll know. And you can identify why you’re behind. Is it because you missed out on a grant you got last year? A major donor missed a payment? Or a shift in your special event schedule? All of this boils down to knowing your numbers. Because no business–including nonprofit businesses– can operate successfully without knowing their numbers.
Is Your Nonprofit Recession-Ready?
By now, you should have a pretty good idea of whether you’re already prepared for a recession or if you’ve got work to do.
So now is the time to start making measured steps to ensure your nonprofit can continue to serve your community in the case that an economic recession does arrive in the near future.
At The Charity CFO, we provide CFO-level financial guidance for nonprofit organizations, in addition to done-for-you bookkeeping and accounting services. So If you’re not confident in your numbers, or need some help optimizing your bookkeeping and accounting, check out our website to learn more: www.thecharitycfo.com.
Watch or listen to this episode on A Modern Nonprofit Podcast:
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Trust is the name of the game when it comes to fundraising. And charity watchdogs are a critical source of information for donors, grantmakers, and other funding sources when deciding who to trust with their money.
So if you want to do a better job of raising money for your cause, you’ll need to be in good standing with these organizations. But each of these charity watchdog organizations approaches the concept of “trust” differently.
This article will summarize the principal criteria the top 3 charity watchdogs use to evaluate your nonprofit organization. So you can understand where your organization needs to improve to boost your levels of public trust.
What are Charity Watchdogs?
Charity Watchdogs is a term used to describe various organizations attempting to measure the quality of a nonprofit organization. In this article, we’ll discuss the big 3 that your donors are most likely to rely on today: Charity Navigator, The Better Business Bureau (BBB), and GuideStar.
Each watchdog organization uses its own criteria to determine the trustworthiness of your organization, using some combination of financial, governance, and transparency. The ultimate goal is to ensure donors that as much of their money as possible will go directly toward accomplishing your stated mission.
The 3 Charity Watchdogs You Should Know
The Biggest Watchdog: Charity Navigator
Charity Navigator calls itself the world’s largest and most-trusted nonprofit evaluator, and it’s hard to argue with them. Over the past 23 years, Charity Navigator has become the go-to charity evaluator for informed donors and grantmakers throughout the USA.
Charity Navigator’s Star Rating System
Charity Navigator has issued ratings for over 9,000 nonprofits using an easy-to-understand star system. To qualify for a star rating, you have to meet the following rigorous criteria:
Generate at least $500k (and a minimum of 40% of total revenue) from public support
Allocate at least 1% of expenses to fundraising for 3 years
Allocate at least 1% of expenses to administration for 3 years
And these organizations are not eligible to be rated by Charity Navigator:
Land Trusts
Hospitals
Schools
Sororities/Fraternities
Donor-Advised Funds
Fiscal Sponsors
The Star Rating is based on a proprietary methodology that considers both Financial Health and Accountability/Transparency. Charity Navigator uses only publicly available data for its nonprofit evaluations, including the IRS 990 and the company website. Learn more about the criteria, methodology, and score calculator on their website.
Based on the resulting score, nonprofit organizations are given a rating of zero to four stars, as shown in the chart below.
Note: When Charity Navigator subjected their organization to their own review system, they ranked 4-stars with a score of 92.39 out of 100!
Charity Navigator’s Encompass Rating System
Because the standards for a star rating are so high, historically most nonprofits have not been eligible to be rated by Charity Navigator.
To help close this gap, Charity Navigator recently launched their new Encompass Rating System, which provides simpler ratings for over 200,000 organizations. It allows smaller and less-prominent nonprofits to have their basic information vetted and gain additional credibility with donors.
The Classic Watchdog: The Better Business Bureau (BBB)
Who did Charity Navigator turn to when they needed external evaluation of their own organization? The oldest name in the charity watchdog world: The Better Business Bureau.
You probably know the BBB for providing credibility for both for-profit and nonprofit businesses. They’ve been providing ratings for nonprofits in some form since the 1920s. And their brand is second-to-none when it comes to creating trust with the public.
BBB Wise Giving Alliance
Accreditation from the BBB’s Wise Giving Alliance is still the goal seal of success for many nonprofits. In fact, Charity Navigator was proud to announce its BBB accreditation when it received it in 2022.
Although the BBB has been rating nonprofits for nearly 100 years, The Wise Giving Alliance. was founded in 2001 when the National Charities Information Bureau merged with the Council of Better Business Bureaus Foundation.
Unlike Charity Navigator, there is no minimum revenue, and you only have to be in operation for 6 months prior to submitting an accreditation request. For this reason, BBB remains extremely popular with smaller and newer nonprofits and the donors that fund them.
Wise Giving Alliance evaluates nonprofit organizations based on 20 Standards divided into 4 main categories:
Governance and Oversight
Measuring Effectiveness
Finances
Solicitations and Informational Materials
After they complete your review process, Wise Giving Alliance posts the full report on their website, like this one:
To be accredited by the BBB, you must satisfy all 20 criteria (see those criteria here). If you don’t satisfy all 20 immediately, they will work with you to help you understand where you’re falling short and what you must do to be accredited.
To apply for BBB accreditation, visit Give.org to get started.
Is Wise Giving Alliance credible? Their #1 competitor, Charity Navigator, gives them a perfect score of 100/100 on their Encompass Rating System. That kind of praise from your top competition certainly helps build trust!
The Data-Driven Watchdog: Guidestar
GuideStar bills itself as “the most complete, up-to-date nonprofit data available,” with data on over 1,800,000 nonprofit organizations. But their approach is different than the other Charity Watchdogs on this list.
Rather than evaluating nonprofits and issuing a rating, GuideStar’s mission is to make complete and accurate financial data on nonprofits as available as possible. They’ve done such a great job of accumulating financial data on nonprofits that Charity Navigator has partnered with them to share information. It’s yet another example of how these charity monitoring organizations work together.
By increasing transparency and consolidating resources into one platform, they hope their platform can build trust and streamline the grant writing process to make giving and receiving money much more efficient.
So, while they don’t rate your organization, they do make your information public to 12M+ annual visitors. And they offer you opportunities to make granular details of your finances available to their users.
GuideStar’s Candid Transparency Ratings
Through their Candid program, you can claim your nonprofit’s profile and update it with detailed information about your programs, your management team, and the specific impact you’re making in your community. And send all that information to 200+ charitable sites, including AmazonSmile, Facebook, and Network for Good.
Accurate contact information will get you Bronze Seal. And by sharing your financial statements, strategic plan, and demographic makeup, you can earn the coveted Platinum Seal of Transparency.
So Which Charity Watchdog Should You Use?
The simple answer is all of them.
Each of these charity evaluating organizations has its areas of strength. By seeking out accreditation and updating profiles on all 3 platforms, you give your organization the best chance of gaining credibility with the donors you need most.
Some grantmakers and donors will look at all three of these resources before making a decision, so being as transparent as possible will reflect very well on your organization.
Never pass up any opportunity to build trust with your potential donors. And each of these Charity Watchdogs will help you build that trust.
Are Your Books And Internal Controls Not Ready for BBB Accreditation?
If you’re concerned that your bookkeeping, accounting, and internal controls aren’t ready for prime-time, it’s okay. You’re definitely not alone. But it might be time to look for help.
The Charity CFO provides expert bookkeeping, accounting, and financial consulting exclusively for 501(c)(3) organizations in the USA. We’ve helped dozens of our 200+ nonprofit clients get ready and achieve their BBB accreditation.
We can also help you modernize your accounting systems, digitize your bookkeeping, produce consistent financial statements, and keep you always audit-ready.
Reach out to us to discover how we can help you build more trust with your potential donors.
https://thecharitycfo.com/wp-content/uploads/2025/05/Blog-Featured-Image-5.png6751080Paul Cook/wp-content/uploads/2025/03/fileuploads_222926_8055634_252-8e05624973e20b5de823aebdbcfd37df_LogoLeftAligned.pngPaul Cook2022-07-13 07:17:122025-07-30 07:56:31What Do Charity Watchdogs Want From Your Nonprofit?
Your finance committee spends the most time analyzing and studying your nonprofit’s numbers, yet your entire board of directors is responsible for financial oversight.
So, as the executive director or financial manager of a nonprofit, it’s up to you to ensure you prepare both the finance committee and the entire board to understand their roles and what you expect of them. Doing so helps you ensure your team truly understands your finances and can help you do your job more effectively.
Here are some quick ways to ensure that your organization has the financial support it needs to carry out its mission:
Recruit board members with financial and accounting expertise
All board members are responsible for the financial health of a nonprofit organization. However, you will need some board members that can do more of the heavy lifting in the nonprofit financial management space.
The degree to which your nonprofit needs financial expertise depends on the size and complexity of your organization. For example, if your organization has complex investments, you may want to add board members with investing expertise.
And if you can find qualified candidates with nonprofit finance or accounting experience, even better. Nonprofits have specific accounting needs that differ from for-profit companies, so there will be a learning curve even for experienced financial professionals arriving from the for-profit business sector.
Include nonprofit financial training component in board orientation
Many board members lack confidence in the financial oversight role. And as discussed above, even experienced financial pros may be new to the specific details of nonprofit financials. A lack of confidence reduces the questions and conversations about the organization’s financial performance in board meetings.
Time after time, we see the board delegating the responsibility of financial management to solely the finance committee, leaving the remaining board members in the dark about the finances.
Nonprofits can conduct a crash course training session to bring new members up to speed.
Your financial training for board members should include at least these basic elements:
An overview of the principal sources of revenue (earned revenue from programs, key fundraising events, and other significant sources of funds),
An overview of the major expenses (explaining which expenses are largely fixed, such as salary and others that are variable/discretionary).
A basic understanding of the organization’s assets and liabilities, such as cash reserves, liquidity of assets, and the details of oustanding long-term and short-term liabilities.
A copy of the latest financial statements and an overview of the critical assumptions and the KPIs that matter most to your organization. A written summary of the financial performance accompanying the financial statements will help non-financial individuals better understand key points.
In addition to an initial financial training at orientation, you might consider adding a financial training component to your annual board retreat to keep your entire board actively engaged with your finances.
Activate the Finance Committee
A strong finance committee is one of the keys to effective financial oversight.
Finance committee members typically have the most experience in accounting and finance. Therefore, they can help your nonprofit establish policies, develop robust budgets, and improve internal processes.
PRO TIP: To get even more capacity from your finance committee, include them in your strategic plan!
Every nonprofit should periodically develop a strategic plan. As part of the strategic plan, your organization should set goals for financial oversight and the overall accounting function. Then, charge your finance committee and financial management team with executing the financial elements of the strategic plan.
If financial oversight is not currently part of your strategic plan, consider including it. Your finance committee will be more effective if they are tasked with achieving specific goals within a designated time frame.
Discuss Financial Statements As a Team
Each nonprofit should have regular board meetings. And your board should review and discuss the most recent financial statements at every board meeting.
Don’t leave the financial statement review to a consent agenda, given how significant financial oversight is to the overall board members’ job description.
Nonprofit financial statements will vary from organization to organization, based on the size and complexity. Consider developing a financial reporting package or financial dashboard that is both meaningful and easily understood by staff, leadership, and the board.
Your financial statement review should include at least these 3 reports:
Some organizations will even develop projections and cash flow forecasts to help anticipate financial challenges and drive conversations around how to overcome them.
Beyond the finance committee…
Business finances can easily overwhelm a nonprofit team. Building a solid finance committee can help you get the support you need.
But financial responsibility doesn’t start and end with the finance committee. To increase your chances of success, you should charge your entire board and management team with understanding and engaging with your financials.
If you want to carry out your mission successfully, you need to be sure you have the financial strength to get you there. And that means running your nonprofit like a business.
You can read financial statements like a CPA
If you or your team need help to understand your financial reports, check out this free guide we created to help directors and boad members read and understand nonprofit financial statements.
We’ll let you know what a CPA is looking for when they review your balance sheet and income statement, so you can read your reports with an expert’s eye.
It’s a myth that all stakeholders need to be experts in every aspect of nonprofit finances. Even on nonprofit financial committees, some members may be skilled in accounting, others in banking, and others in investing or financial analysis.
Yet all nonprofit leaders, including board members, directors, and finance committee members, should have at least a basic understanding of nonprofit finances.
But if you bring zero experience in accounting or financial management to your organization, that’s okay. Because the basics of nonprofit finances are easy to grasp.
In this article, we’ll walk you through the elements of nonprofit finance that every executive director, CFO, and accountant should know.
Step #1: Money In / Money Out
You can see how much revenue comes into an organization and how they spend that money by looking at the Statement of Activities (also called the Income Statement) or an updated Budget report (also referred to as the Budget vs. Actual report).
But you won’t understand a nonprofit’s finances based on financial statements alone. To start grasping a nonprofit’s finances, you should have in-depth conversations with staff to understand the various programs and major fundraising initiatives.
Money In: Revenue
Start by investigating how the organization earns money and who pays them.
For example, is the organization dependent upon special event fundraising? Or is it heavily funded by complex government grant funding? And are there seasonal trends in funding, like a school with revenue during the school year but zero income during the summer? Or a big once-per-year fundraising event?
Understanding the sources and seasonal flow of revenue into the organization will help you anticipate needs and set realistic expectations.
Money Out: Expenses
Once you understand the revenue side, familiarize yourself with how, why, and when the organization is spending its money.
Close to 60% of expenses go to staffing pay and benefits in most nonprofits. Is that the case here? If not, where is the money going instead?And what makes up the balance of expenses? Are they going toward occupancy costs? Does the organization make grants to other nonprofits? Or does it spend a lot of money on supplies needed to execute its programs?
Once you understand money in and money out, take a look at the assets the nonprofit owns and the liabilities that it owes to others to get a grasp of their financial health.
Step #2: What do they own? And what do they owe?
You can find a nonprofit’s assets and liabilities on the Statement of Financial Position (also called the Balance Sheet), which gives you a quick snapshot of the long-term position of the organization.
But, as with revenues and expenses, you can only learn so much from the reports. You’ll learn a lot more from intentional conversations with people inside the organization who can help you understand what those numbers mean. For instance…
Does the nonprofit have enough cash to fund its programs and meet payroll?
Are there complex investments or endowments restricted to specific purposes?
Has the nonprofit taken on significant debt or been slow to pay its creditors?
If a nonprofit has had long-term effective financial oversight, it should have enough cash, smart investments, and plenty of assets.
Well-managed nonprofits should also be collecting on pledges or accounts receivable on a timely basis. Similarly, healthy nonprofits should carry minimal debt and pay their vendors on time.On the other hand, a poorly managed nonprofit will have little money in the bank, few other assets, an accumulation of debt with no clear plan to repay it, and a ballooning accounts payable balance.
Step #3: Understand compliance
To fully grasp your nonprofit finances, you need to start to understand the major compliance requirements that impact your organization.
In most cases, these include an annual audit and federal tax return. While reviewing the audit or the tax return might seem overwhelming at first, sitting down with the finance committee while the auditors present the audit and 990 is a great way to accelerate your learning curve. The audit team will identify any deficiencies in the accounting, review the various reports and explain what they mean, and discuss major details of the financials.
By actively inserting yourself in this process and asking questions, you’ll quickly start to grasp financial concepts you thought were beyond your reach.
Step #4: Never stop learning
Understanding nonprofit finances is a core responsibility of board members and executives.
And in most organizations, others on your finance committee or accounting team are glad to help. So lean on them, ask questions, and be inquisitive. Plus, there are numerous free resources specific to nonprofit accounting and governance. Resources may include white papers, articles or blogs, and even online courses.
If you’d like to learn more, check out our free online course on nonprofit finances and financial reporting here: www.thecharitycfouniversity.com
https://thecharitycfo.com/wp-content/uploads/2025/05/Blog-Featured-Image-3.png6751080Paul Cook/wp-content/uploads/2025/03/fileuploads_222926_8055634_252-8e05624973e20b5de823aebdbcfd37df_LogoLeftAligned.pngPaul Cook2022-05-31 12:25:342025-07-30 07:56:32The 5-Minute Guide to Nonprofit Finances
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During the “Great Recession,” nonprofits have lost their accountants and financial directors at record rates. And finding new, qualified help that they can afford is nearly impossible…
At the same time, hundreds of nonprofits are waking up to realize that the financial structure they’ve always relied on doesn’t work as well any more. And they’re tired of the hamster wheel of hiring, re-hiring, training, and re-training bookkeepers and accountants.
So why do accountants leave nonprofit organizations? And what can nonprofits do to create consistency and predictability in the financial side of their operations?
Triná Owens is a former nonprofit financial director who left her job to become an Accounting Manager at The Charity CFO. In this episode, she and Tosha tell you the top reasons that your accountants don’t stick around. And show you how modern nonprofits are rethinking the way they handle specialized skills like HR and Accounting.
In this episode, you’ll discover:
The top 3 reasons nonprofit accountants walk out the door
Why turnover in the financial department is SO damaging for nonprofits
The reason your finance director spends just 25% of their time on finances
Why HR compliance issues are a bigger risk than tax compliance for most organizations (and why you shouldn’t trust your accountant with HR)
Thanks for watching. Be sure to subscribe for new episodes every week!
👇 Or scroll below to read the full transcript of our conversation
A Modern Nonprofit Podcast Why Do Nonprofit Accountants Quit?
4/15/2022
Tosha Anderson:
Hey friends. Welcome back to another episode of a modern nonprofit podcast. I, I say this every single episode, but I’m super excited to talk about this. Um, Sharon, a little bit about my story, but I brought along a friend of mine and also a fellow colleague at The Charity CFO. It’s we are going to talk about why nonprofits are quitting, their accountants. Yes. This sounds weird. Stay with us and we’ll help you explain. And maybe we’ll talk about why the accountants are quitting the nonprofits too. I don’t know. But, um, let’s just go ahead and dive right into the conversation. So some of you all probably know, or maybe you don’t know that when I started career, I started working in public accounting. I used to audit nonprofit organizations. Um, I, all of you that deal with auditors that come in on an annual basis, that’s essentially what I did.
Tosha Anderson:
So, um, it was at that time that I realized how vulnerable nonprofits are when they don’t have good financial management. And I thought I am going to commit my career to fix the, this problem. So that’s when I took a position as a CFO of a nonprofit organization, did that for four years. My official title was actually director of business and finance, which if anybody’s listening, you know what that means? I did all of the things I did accounting. I did HR. I did it. I did risk management. I did, um, quality insurance. Um, also the program side, like just making sure that everything was billed correctly and dealing with all of these things and was such a huge job. Now, my view, I only had a background in accounting. I was not prepared or equipped or skilled in any of these other things. And I’m not the only one that finds themselves in that situation. In fact, I think, what do we have? Like five or six people that has a similar story we have and Triná, you are absolutely one of those too. Trina, tell us a little bit about your background because you and I share kind of a similar path in terms of our career and what ended up leading us here.
Triná Owens:
Absolutely. And thank you for having me Tasha. This is absolutely cool. Um, so my background again is accounting, uh, over 10 years of accounting experience, but my last position held was the director of finance and administration, which again, as you just explained is finance and other things, finance and everything that’s not program. And so, um, that was the last position that I’ve held, um, which included payroll, HR, maybe of course it liaison duties because it’s usually outsourced. Um, so kind of that everything else position. So, um, yeah, definitely the same experience there
Tosha Anderson:
And just to put it in perspective, uh, Triná and I both worked for social service agencies that I would say were less than $10 million. So, uh, in the grand scheme of things, I think that’s probably in the same ballpark as as many nonprofit organizations tend to be, um, certainly smaller and have these hybrid roles. So we’re gonna craft this conversation around that, but Triná I’m super excited. Um, Triná is actually an accounting manager for us and she now helps co lead this firm to help us work with many, many nonprofit organizations. So we have some interesting, um, perspectives because we used to work for nonprofits. Um, Triná’s actually worked for a couple nonprofits, uh, in the similar capacity that you just described, Triná. Uh, and now we work with many, many nonprofits, I think right now we work close to 150 nonprofits every single month.
Tosha Anderson:
So, um, we talk to a lot of an individuals we help problem solve. Um, and more importantly, we talk about that transition plan for a lot of nonprofits that are dealing with, uh, the loss of their accountants. So, um, is that not even more clear in the last two years, uh, the, the need for transition, the need for succession plan, I’ve been hearing the consultants and the funders succession plan succession plan all of the years that I’ve been in this space, but it’s really been true, I think in the last two years, Trinity, I’m sure you would agree with that.
Triná Owens:
Absolutely, absolutely. It’s um, definitely time to, that’s the thing about nonprofits that I I’ve learned either. They have people that are there forever or people that are in and out in and out. Yeah. And so succession planning is very important. Um,
Tosha Anderson:
Yeah, yeah, yeah, totally. And there’s this concept, uh, that I find fascinating and I follow for a lot of reasons, not just because I lead this organization, but this concept of the great resignation, uh, nonprofits are not immune to this. Right. I mean, we see our clients constantly struggling, um, to find clinicians, uh, you know, educators, administrators, all sorts of backgrounds. Um, and they came across this article and this is not gonna come just a rise to anybody listening, but it says a recent article suggests that nonprofit staff are quitting for a number of reasons, including there’s limited growth for opportunity. They’re underpaid. The department is underfunded, the workplace isn’t modern or flexible and, or the workplace is toxic. All of those triggered me, uh, yeah. Which one resonated the most with you and why?
Triná Owens:
Um, so the most, uh, would be growth opportunities. I’ve left at least two organizations because of I had, I, I couldn’t go up anymore. Again, going back to, um, nonprofits, they have people that are in and out rotating doors and then they have people that have been there forever. And, you know, they’ve been there 20 plus years. And so if you wanna move up again, I’ve been financed trying to move up than the accounting departments. There’s nowhere else for me to go. So that’s the one that, um, resonates the most. The second one of course is the underfunded. Yeah. Um, you know, accounting and finance are pretty important to me, but from a mission standpoint and a program standpoint, it may not be the most important department right. To the nonprofit. So, um, underfunding also, you know, kind of strikes a nerve for me. You know,
Tosha Anderson:
You said something, um, that I talk about a lot, there’s nowhere else to go really when you are in these chief roles. Um, and when I said earlier, nonprofits are quitting, their accountants, what I really mean is they’re quitting their chief financial role. Um, and here’s what I’ve learned that 80% of the accounting done within a year for a nonprofit organization is a transactional input output. Um, some bookkeeping, some pretty basic accounting. Right, right. So this is, you know, I don’t wanna say entry level, but in many ways kind of entry level entry to mid-level. And when you have the CFO role, that is an, a player that you bring in that really loves so much more than just doing the 80% of the work. That’s 80% of their work they’re doing is likely things that aren’t gonna feed their soul. So what I’ve learned today, and you can speak to this too.
Tosha Anderson:
There’s actually two, probably more, but two main types of accountants. There’s the input outputs, the detail orientated, get things done, very consistent, thrives, and routine. And, and, and that’s amazing because 80% of the work, yeah. Those people though are not like the other 20% of accountants, which is more like strategy, problem solving exactly. Coming up with new solutions. And when we talk with nonprofits, you know, it’s, you know, I either have the 80% covered, but my person is limited in their skillset for that 20%. Or I have that a 20% person that loves the problem solving, but they’re bored out of their minds…
Triná Owens:
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80% of the work. And then when they’re in a place like you were just describing with nowhere else to go, when you sit and you think, is this it for me, if I’m spending 80% of my days doing things that are feeding my soul and there’s nowhere else to go, that I can get more into that strategy level. And I think that that’s the challenge that nonprofits are facing because they need both of these skill sets, but the budget, um, or the size or whatever, do justify the need to have two different people. Right, right, right. Would you, would you say that was your case too? It certainly was mine.
Triná Owens:
Definitely. I think in one position, again, not trying to name any names, um, but in one position, um, I did find myself stuck doing that, uh, day to day, those day to day operations. When I knew that I prefer to do more analytical work. Um right. But there was no time for that because of course it still had to be done. Um, and so maybe they couldn’t afford another hum, another person in that position. So, um, you do tend to get stuck in certain areas. And so it makes it very difficult to, uh, to advance really, you know, and as a, as a, as a professional, it’s important that I grow. And so that kind of stunt your growth as well as a professional, you know, as a professional you’re thinking, okay, I gotta make sure I’m, I’m getting better. I gotta make sure I’m learning more and doing more. But, um, when you get in some of those positions that the opportunity is just not there. The time is not there to do everything that’s required.
Tosha Anderson:
Well, and if was listening to this, like, you know, or whoever’s listening to this, you know, is an, a player you’re an, a player you wanna grow, you wanna develop, you wanna do
Triná Owens:
Absolutely
Tosha Anderson:
Any organizations would be thrilled to have you on board. But the challenge to me also goes back to the underfunded part of things where, um, you’re put in a role. So not just underfunded, but you’re put in a role where 80% of the accounting you’re doing, doesn’t be your soul then. And, and that’s only like 25% of your job is all the accounting combined. The other 75% are all of these other duties. And when you have an, a player, a top performer, somebody excited and interested in accounting and moving the needle and making the accounting to finance better, but they don’t have the ability to function, to focus solely on just the accounting. What they find in this is what, uh, I would say underfunded with mine. Um, and what led me to leave the organization and leave nonprofit. And the way that I worked with them was that I also like UTURN a, I’m an, a player I’m a top performer. I want to be really good at what I do, what I found myself. I was mediocre and everything at best. Yep. And at the end of the day, when you day after day, year after year are, you are a high performer. You wanna grow, you wanna enhance your skills, you wanna be creative and analytical and solve these big problems and move the needle for this organization. And yet you feel like you’re just failing every day, not at failing, but failing to be great, failing to be great.
Triná Owens:
You’re, you’re just getting things done. You’re just getting things done. You’re just getting it done. You’re be, you’re producing, you know, you, um, but you wanna do something greater. Right. And you know, you have the potential to do something greater. Um, absolutely. So that’s the, yeah, that’s definitely the thing. That’s
Tosha Anderson:
To me, how, whatever we would wanna call that into, uh, or call, call the call. That specific thing. I think that that’s why at least the former finance directors like said we have five or six now on our team that left organizations for similar reasons. And those are usually a lot of the reasons. Um, and you know, that’s an unfortunate thing for the nonprofits, but I think, Hey, knowledge is power and we can at least learn from absolutely understand. Absolutely. So switching gears a little bit, there are gonna be people that are listening to this, like, wait a minute, I’m gonna counting for a nonprofit. I’m just trying to keep my head above water. Yeah. So switching gears a bit, we both mentioned, we came with an accounting background. We accepted jobs that were accounting and all other things administrative. So what was the hardest part of your multi hat job? And then looking back, what advice would you give to those that have had this position? So kind of speaking to those, you know, unicorns, the Swiss army knife, the, you know, how did you learn, what was the hardest part of your job? We’ll start with that.
Triná Owens:
Um, the hardest part and again, in multiple positions is being that other, uh, anything outside of accounting and finance I say was difficult. I’ve done some operations, I’ve looked, looked into, um, uh, having to hire someone to fix boilers, you know? Right. Um, it looked into, uh, it, uh, companies outsourcing it. I don’t know anything about it. You know, what makes a good outsourced company? I don’t know. Um, I, somehow I made it to HR and payroll. Um, again, people assume that’s finance and accounting. It is not, um, right,
Tosha Anderson:
Right.
Triná Owens:
First organization, the HR wasn’t so bad, but when I go to the next organization, they really need a HR manager. They really need a HR director and I’m, you know, part of that. So I’m that per so that’s a totally different ballgame. Um, so I would say, you know, all of those, but I guess HR would be the hardest one because I feel like that’s a really a specialized field just like accounting and finance. And yes, I understand it, but I’m not a HR. I wasn’t, I wouldn’t consider myself having a HR back ground. Um, it just kinda landed on me. And of course, like you say, how did I learn it, Mr. Google, Mr. Uh, A society of human resource management. I, you know, became a member on my own dime. Again, I wouldn’t dare, you know, ask my employer to do it, you know, on my own dime. I became a member of that and, you know, looked at their resources. So just a bunch of research on my own time, on my own dime to again, make sure that I am successful because again, I can’t fail who, you know, it doesn’t matter that I don’t know anything about HR. I have to my department and I have to run it well. And I did that. So that’s the hard part is, you know, picking up this extra, um, area and then, you know, having that ownership, I’m gonna have ownership of it and I’m, I’m gonna try my best to do my best with it. So, um, HR was definitely the hardest
Tosha Anderson:
Me too. Me too. Me too.
Triná Owens:
Hiring. Firing.
Tosha Anderson:
Yeah. And it, wasn’t just the understanding of, I, I think why accountants inherit, inherit the HR function. We have an ability to decipher details and like read super boring contracts, I guess. I don’t know, there’s this perception that we have a high attention to detail, which PS remember, everybody has said there’s 80% of accountants that are super detail focused. And there’s the other 20% of us that really like financial modeling and yeah. Geeking out on Excel spreadsheets. Uh, I’m definitely that one.
Triná Owens:
I love a spreadsheet.
Tosha Anderson:
I’d be bored in tears, dealing with enrollment forms all day long. I did a lot of that though. Um, but one of the things that I think was a biggest struggle for me, it’s not just the paper pushing that is associated with HR. What I found is I am a trained accountant and yet I am now an HR director, but I’m also working through and with programmatic team members to deal with program staff, cuz that’s most of employees, right. That aren’t even my direct reports, nobody in the organization has any understanding of the true, like, uh, appropriate process to handle performance appraisals. So performance improvement plans, you know, having those difficult conversations up to and including, uh, you know, termination and hiring. Yes. And so it was almost like, well, you’re in HR, so you have to have the difficult conversations with people or you have to fire the people and say, wait a minute, these are your staff and Triná now, you know, I mean, we run this business and we have many staff people, we, as the managers direct supervisors, we have those direct difficult conversations with our team members. Yes. So I would say it, wasn’t just getting up to speed with the, with the HR staff, but it was also working through the program team and getting everybody else’s understand, cause I’m not a train HR person either.
Triná Owens:
Exactly, exactly.
Tosha Anderson:
Getting them to understand what their role is when I really don’t know what I’m talking about either. So, um, but one thing I did learn, one thing I did learn and the advice that I would give to someone else in that position is you have to understand the really big, big red flags that can end the organization and really help water.
Triná Owens:
Yes,
Tosha Anderson:
Yes. Know what those compliance needs are. And Triná, we tell clients this all the time, everybody freaks out and thinks that they count team is what’s going to get them in big trouble. No, it’s the personnel issues. Um, whether it’s wrongful termination discrimination, failure to investigate back payroll tax issues, failure to file your, your returns
Triná Owens:
Document, document, document.
Tosha Anderson:
All of those things will be far more significant from a liability than, than what accounting could ever do. And so I tell people this all the time, don’t take the risk of combining your accounting and your HR functions. You’re two entirely, two different skill sets.
Triná Owens:
They are. They are.
Tosha Anderson:
Two different different bodies of regulatory information, two different sets of laws. Like it’s not even in the same space yet. So oftentimes it’s coupled. Um, Yeah. And that became, I would say I probably did 25% of my work in, or in accounting. Probably 50% of my work was HR.
Triná Owens:
Yep. Yep. Same. I was, I was 50, 50, well, not really 50 50, but yeah, a, a huge chunk, more HR than I was accounting at the time at, uh, when I left that position. Um, but you know, one thing, again, what I’m learning is, um, in every position I get added on a little bit, you know, you go in as one individual. Mm. And then by the time I leave, I’m three or four people and what I’m learning now, like it’s okay to say no, it’s okay to say, you know what? I can’t, I can’t do that. Or, um, not even because I can’t because I’ve succeeded. Right. I’ve figured it out. I’ve gotten it done. I’ve made sure employee files were in order. You know, I can, but I don’t feel comfortable taking on that additional responsibility. Maybe we need to figure out how to get someone and hired. Maybe we do need to outsource HR. Maybe we need, you need to outsource, you know, an additional accounting person. Right. Um, so yeah, I definitely I’m learning that. Like it, we, I have to say no, sometimes
Tosha Anderson:
Triná it’s funny. I think that the trauma that comes from this multi hat, um, I, I think speaks within our culture as a company, we are obsessive about streamlining and carving out very specific because I think we, so many of us were in roles where we had 10 different jobs and quite literal when I left my organization, um, there were at least two or three full-time hires that replace functions. So the HR, the, the actually accounting, we hired just a controller. That’s all she was doing, you know, was the accounting side. Um, but I think it’s so important and I’ve seen, and Trina you with me and seen how faster the, and, and further the business can move by streamlining these things. I, I know what many people probably thinking, oh, we use are for-profit that doesn’t make sense. And when you’re a startup business, whether you’re for-profit or non-profit, you have to be lean, you have to be resourceful.
Tosha Anderson:
I mean, the challenges are still very similar. Um, but this sooner that you pair those responsibilities down and to let people focus on the area they’re experienced in the area that feeds their soul and giving them the bandwidth and the capacity to not only do their day to day stuff, but Triná, like you were saying, like the opportunity to be creative and refine and improve what they’re already doing. I never had a moment to do that ever, uh, in you you’ve said the same thing. So yeah. So I’ve seen this trend, as I mentioned earlier of nonprofits that are quitting their accountant. So I talk with a lot of nonprofit organizations that are interested in working with us, or I’m asked to speak on different panels about, um, you know, accounting, financial management within nonprofits. So what I meant by, and I alluded to it a little bit earlier, they’re moving away from this full-time CFO role or the accountants that happens to do accounting and all other things.
Tosha Anderson:
You’re kind of moving away from that role and looking for a little bit more creative ways on, on, on handling the back office function right now. I think this is a couple different reasons. Number one, I saw a disproportionate shift in the amount of, um, uh, organizations that reached out to us that, Hey, I had a part-time CPA. This person’s no longer willing to do our work, cuz they have to scale back their work. Now the pandemic, certainly as we know, disproportionately affected women in the workforce and there were many of these women that did on nonprofit, accounting is a side gig that simply had to step away. So I saw several clients came to us for that reason. Um, then as we all know, there’s a huge talent shortage for any specialized skill accounting as no to that. So the cost of that talent has now gone up.
Tosha Anderson:
That’s now cost prohibitive to nonprofit organizations. Um, and then I think there’s also this area where people are realizing, Hey, there could be other ways we can do this to do this. Yes, yes. Trinity, what we’ve seen is a trend in organizations, instead of saying, we’re gonna hire an accountant and we’re gonna have the accountant do the accounting and all of the other things too, what we’ve seen is organizations looking for more of an operations role. So like a chief operating officer, an operations manager, um, someone that really, if you think of like, um, like a hub and spoke, like serves as the hub and then they deal with all of these spokes and get the spokes, the contract, what they need. So we’ve had clients that have now or outsourced their HR. They have now outsourced their accounting. Those really highly regulated, specialized technical skills they have contracted out. And then they have more of this operations person that’s serving as the liaison. And then they’re dealing with all the other issues that come up on site out related to facilities and those sort of things. So today, what are your thoughts on this initially? Um, I know we’ve had some clients that, that have gone this route and been successful,
Triná Owens:
Uh, abs- um, so, so far it’s been, it has been very different and I do enjoy it again, being on the other side, right. Because I’m, I’m on the other side now. And, and the path asked, I have had a negative experience with the outsource accounting and I was like, oh, you know, I don’t like it, but now that I’m on the other side so I can see, okay, how do I make this relationship successful? And so I do have a few clients that have that person that’s in the office, that operations person that’s doing the accounting and other things. And so, so one of the things that, uh, the charity CFO we pride ourselves in is becoming, is being this innovative assistant. You know what I mean? We come in with all these processes that make everything so much more efficient. Yeah. And when you talk to that person again, you’re liaison with the organization and say, you know what, we’re gonna come in here and we’re gonna help you with this.
Triná Owens:
And this is gonna make your job a million times easier, or we’re gonna handle take this off your plate. We’re gonna take this off your plate. And then you have time for that. You know, maybe you have time to do your fundraising. Maybe you have time to do more, uh, applying for more grants, you know? And so, so far I’ve seen it again, um, be very successful, very successful. And it’s, I think it’s the approach. It’s all about the approach and it’s all about again, um, letting them understand we’re there to help. We’re there to help where, you know, take those little things off their desk. And so far it’s been very, you know, um, the clients I’ve worked with have been very, very happy with this.
Tosha Anderson:
I think you bring up a good point. That reminds me of whenever I was, um, working for a nonprofit that time I ever even pondered the idea of changing something, for example, oh yeah. I wanna change payroll providers.
Tosha Anderson:
No way hard paths for me, because for me it was not just the time that I had to invest in changing the payroll provider and implementing the migrating and then yeah. And then it’s the, okay, we’re live. And then there’s gonna be the troubleshooting and the tweaking and fixing the stuff that will inevitably go wrong. Yeah. There was just no bandwidth to do that. And I think that some people think, oh, my gosh, outsourcing is creating so much work. Yeah. But where I think is outsourcing, um, which goes back to some of the things that we were talking about earlier, the very beginning of this conversation where nonprofits aren’t modern or flexible. Yes. What’s really interesting is we’ve seen organizations reach out to us, Hey, we need to be a paperless system. We wanna be a virtual team. We want something more modern. Our systems are old and outdated and, and antiquated.
Tosha Anderson:
So what contractors that we worked with, we use contractors internally ourselves too. Yes. That, and we have like a hub and spoke kind of model where we outsource different functions. And then we have people internally that deal with those contractors that you rely on the contractors to come in and say, we’ll do the updates for you. Yes. We will create the processes for you. We will even train your team members on exactly what they you need to do to get. So it removes that I don’t have time to do this implementation. I don’t have time to update things. I don’t, I don’t have the bandwidth to do that. You rely on these contractors to do that for you. And I think that that makes it a lot easier because I know that that’s one of the reasons why I just kept doing the same thing because I’ve always done it that way. I had no place to breathe when I was the CFO of a nonprofit that I wasn’t about to change anything. Cuz I can’t deal with anything breaking. No, you
Triná Owens:
Know? No. And especially once you get the people on board with a process, how hard it is to tell your organization, okay, we’re moving to this. I mean, that’s a part of it as well. And so again, we have to be very careful with how we come in in our delivery and you know, again, that’s why we’re, um, so big on assisting, like you said, we train, we will train if we need to, um, we will, you know, make this, we wanna make this process as easy as possible. And in the, in the end, I mean the organizations are usually more, a lot more efficient because we find out they’re doing things that they’ve just been doing for 20 years. Not necessarily because it’s the best way, but it’s just been done for 20 years. And so nobody thought to, um, improve it, the process at all.
Tosha Anderson:
Well, I’ll tell you, I don’t see this trend slowing down that nonprofits are quitting their accountants because of all the things that we talked about funding is always gonna be scarce and the talent is gonna continue to be expense of, um, we have an ongoing need to be modern and flexible. Yes. And technology is always changing. So, um, having a partner that you can work with, it constantly stays, uh, on the forefront of all of those emerging technologies and how things work and all those sorts of things. Um, and then just giving people space to grow and not have their departments underfunded because they’re trying to do too many things for too many people. I just don’t see this trend slowing down. No. Um, so it’s been, it’s been an interesting reflection when I saw this article and I knew you were the perfect person to talk to because I know we could share war stories back and forth.
Tosha Anderson:
Oh yes. All things were difficult for us. And I guess sadly kind of what led to us leaving, um, the industry in that way. But it’s been really cool to work with the organizations in a different way. And that’s where it’s um, I think both of us are relieved to say like, okay, we can, we can just do the accounting now. I think that’s what you said when you first came on board. You’re like, I’m just happy. I can just work on the accounting. Yes, yes. And not everything else. And so my hope is that this conversation just allows people to think about things a little bit differently and how can they be creative in solving their back office issues without facing so much of that burnout. So much of the underfunding, the so much of the we’re doing things, but I’m afraid. I don’t know what I don’t know.
Tosha Anderson:
And I’m gonna end up on the front page of the paper because I’m gonna do something wrong. That was a fear of mine. Um, yeah. Yeah. Then hire the people. There’s a lot of really great consultants out there. Not just certainly for accounting, but your HR, your it, and then consider what this hub and spoke model might look like for your organizations and how that might be helpful in succession planning and cross training. And we found it much easier to have those processes documenting and farming out these really key processes of the organization. Yes. So that when you do have turnover and you will, we all will that you’re not starting from scratch with all of these functions at
Triná Owens:
Every time. Yeah.
Tosha Anderson:
So important.
Triná Owens:
And I’ve seen that and you lose, you lose a lot when you do that. Um, that’s the other thing about having that person? That’s the Jack of all trades. Yeah. You don’t know what they did until it’s not done. And that is, you know, for a small nonprofit, a midsize nonprofit. Yeah. You know, that’s just, that’s, you know, the, I could be, have a very negative effect.
Tosha Anderson:
So Trina also part of her job, she takes on new clients and most of them are, um, transitioning away from full-time, uh, accounting hires. Um, and best scenario, we’re always transitioning from one firm to the next and that firm is still there and we can ping back and ask questions. But so often, you know, Triná, you’re dealing with situations where the finance director or whatever that role is or whatever that title is, has left. And I, I know that we go through our onboarding call and we start asking really detailed questions about four fundamental processes. Like how do we get paid from our funders? And it’s a little terrifying that they’re
Triná Owens:
They don’t know. They don’t know
Tosha Anderson:
We don’t know. Uh, we don’t know. And so diversifying those key processes, then I think the pandemic taught us that I don’t see that changing anywhere. And, and we practice what we’ve preach. We do the same thing here. I’m pretty much obsessed with it ever since I left, um, working for a nonprofit, uh, and it took a six month transition time, um, a couple hires wow. Months of training, uh, to make sure the organization can continue on without hiccups. So anyway, hopefully this was helpful for you all listening. Triná, thank you again. We’ll have you back. We’ll continue sharing some of our stories on if we know, if we knew then what we know now, how
Triná Owens:
Would we, that’s a good one. Yeah,
Tosha Anderson:
Yeah, yeah. Um, thank you again for joining me. And if you all are interested in hearing more about the work that we’re doing, go to thecharitycfo.com. We have a blog on there. We don’t just talk about accounting. In fact, I love talking about operations at the nonprofit in general. So we often have guests on there to speak about fundraising and grant writing and insurance and cyber security and all of the other areas, um, that you can possibly think of. So go check out our website until next time. Bye everybody.
https://thecharitycfo.com/wp-content/uploads/2025/05/PODCAST-Blog-1-2.png6751080Abstrakt Marketing/wp-content/uploads/2025/03/fileuploads_222926_8055634_252-8e05624973e20b5de823aebdbcfd37df_LogoLeftAligned.pngAbstrakt Marketing2022-04-15 13:37:002025-05-28 13:55:01Why Do Nonprofit Accountants Quit?
501(c)(3) donation rules are crucial for any nonprofit organization to understand.
Donations are the lifeline of any nonprofit organization. While some nonprofits depend more on government contracts or foundations, many rely on donations from individuals as their primary funding source.
One essential tool that you can use in your nonprofit is donation tracking software that can help you keep track of incoming gifts. Software helps ensure transparency and accuracy in keeping financial records and tracking restricted funds, crucial in maintaining your nonprofit.
In this guide, you’ll learn the rules nonprofits must follow when accepting and accounting for donations.
What is a tax-exempt status?
Most nonprofits have tax-exempt status with the Internal Revenue Service (IRS), which means their revenues, gross receipts, or income are exempt from the federal income tax rate. Tax-exempt status allows you to use your money to fulfill your mission instead of giving a significant chunk to the IRS as for-profit businesses must do.
The tax-exempt status can benefit charities, churches and religious organizations, schools, educational organizations, social welfare organizations, civic leagues, social clubs, labor organizations, business leagues, and political organizations.
What are the benefits of donating to a 501(c)3 organization?
501(c)(3) nonprofits are a specific class of nonprofit organizations recognized by the IRS, including most charitable organizations and churches.
Donations to 501(c))3) nonprofit organizations are tax-deductible. Individuals can deduct up to 100% of their income in qualified donations. Corporations are limited to a deduction equal to 25% of their taxable business income.
Large corporations actively seek the tax deduction, so they often will not give money to organizations that do not have a legitimate 501(c)3 status.
Donating to a nonprofit with the correct tax exemption status also helps ensure your money will be put to good use, as 501(c)3 organizations are held accountable to legal standards enforced by the federal government.
Can you donate to a nonprofit without a 501(c)3 designation?
A nonprofit organization doesn’t need to have a 501(c)3 designation to accept donations. But, as a donor, if you donate to an organization that doesn’t have the correct designation, you cannot claim the tax deduction when you file your tax return.
Nonprofits without the correct designation will often turn to crowdfund sources or GoFundMe programs to collect donations.
PRO TIP: If you donate to an organization that has applied for tax-exempt status but has not yet received a letter of determination from the IRS, your donation will be exempt from taxes only if their application is eventually approved.
Is my political contribution considered a donation?
One of the restrictions placed on 501(c)3’s is that they cannot use funds for political lobbying purposes.
Political nonprofits exist, but they fall under the 501(c)4 designation instead with specific tax exemptions and a different way of handling political contributions. A donation to any of the following is NOT tax-deductible according to the IRS:
A political candidate
A political party
A campaign committee
A newsletter fund
Advertisements in convention bulletins
Admission to dinners or programs that benefit a political party or political candidate
Political Action Committees (PACs)
As a donor, can I put a restriction on my donation?
Yes, donors can place restrictions on how a nonprofit may use its funds.
Nonprofits are required to adhere to these donor requests by creating accounts to track restricted funds separately from other funds and reporting restricted fund balances on their financial statements.
Can my 501(c)3 I donate to another 501(c)3?
Yes, you can. It’s quite common for nonprofits to support other nonprofit organizations, especially if they share a common mission or serve the same community.
Before donating, you should do your due diligence and ensure that the nonprofit you are giving money to is reliable and worthy of your funding– this could help you prevent potential damage to your reputation if that organization isn’t using their funding appropriately.
Can a 501(c)3 nonprofit organization donate to an individual?
Yes, 501(c)3 nonprofits can gift money to individuals, provided the individual falls under the primary demographic the nonprofit assists and the donation falls within your organization’s mission as declared to the IRS.
3 Tips For Boosting Your Donations
Getting more donations is vital in raising funds to keep your nonprofit going. Because of this, nonprofits are getting creative with fundraising events to entice more sponsors and donors. Here are some of the different trips on how you can increase donations to your nonprofits:
Partner up with a fellow nonprofit with a similar mission
Nonprofits love to partner with other nonprofits to multiply resources and help accomplish a common goal. Search for nonprofits that cater to the same audience as you and propose hosting joint events or fundraising ventures.
By partnering with other nonprofits, you are dividing the responsibilities, and both organizations can help achieve their goals which creates a win-win for both.
Host virtual or in-person events
Because of the COVID pandemic, most in-person events transitioned to virtual events. The good news is that virtual events are cost-effective and can reach a much wider audience. Just because you are holding a virtual event doesn’t mean that you can’t be creative and have fun with it!.
Tap into technology to reach a wider audience
Social media is a quick and easy way to reach your audience and bring awareness to your cause. It’s an instant way to reach thousands (or millions!) of people. And thanks to easy online payment options, people don’t even have to leave their phones to send money!
When posting to social media, be sure to always include a call-to-action. Don’t be afraid to ask for donations, and provide easy options for them to pay you now, like text-to-donate services or Live Donations through Instagram .
Still Confused About 501(c)3 Donations?
At some point, every nonprofit organization needs someone to turn to for answers. But too often, there’s nobody there.
The rules for nonprofit bookkeeping and accounting are complex and confusing. So having an expert financial partner on your side can help you sleep better at night and keep your organization out of trouble.
The Charity CFO provides full-service bookkeeping and accounting services for over 100 nonprofit organizations in the USA. We’re experts on everything from time-saving bookkeeping software to financial reports and audits.
Our team of experts can help answer your questions about donations, taxes, audits and more. Are you ready for on-demand support from a world-class nonprofit financial team?
No time to read this article now? Download it for later.
Do You Struggle to Make Sense of Your Financial Statements?
Get our FREE GUIDE to nonprofit financial reports, featuring illustrations, annotations, and insights to help you better understand your organization’s finances.
Do You Struggle to Make Sense of Your Financial Statements?
Get our FREE GUIDE to nonprofit financial reports, featuring illustrations, annotations, and insights to help you better understand your organization’s finances.
Cash flow isn’t just an issue for small nonprofits that depend on donations to meet payroll each month. A lack of cash on hand impacts nonprofit organizations of all sizes.
Take this example…
A few years ago, we were working with a fully-funded nonprofit.
This organization’s revenue was secured by government contracts and a few key foundations. Their budget projected a surplus, and they were hitting those numbers.
Everything was looking not just good, but great.
So when they came to us, they couldn’t understand why they didn’t have the cash flow to make payroll or pay the heating bill on time.
After all, their financial reports showed they had much more revenue than expenses. They were hitting their budget numbers month after month. And their revenue sources were 100% committed.
On paper, they were a flourishing organization— a model of nonprofit success. But behind the scenes, their management team was losing sleep.
Why did reality not match up with the numbers in their financial statements? We’ll tell you exactly what happened to them here below.
And then, we’ll give you 5 simple indicators that anyone can watch to see if nonprofit cash flow is becoming an issue for your organization.
Why does nonprofit cash flow matter?
Cash is king, as they say. But why, exactly?
In an accrual accounting system, financial reports are complex documents. And not every number on your financial statements reflects cash changing hands.
For instance, you may record donations or grant revenue this year but you will not receive the cash until next year. Or you might bill a funder for services provided but have to wait 2 months to get paid.
In those cases, your revenue numbers look great on the reports, but you haven’t received the cash that those revenue numbers appear to indicate.
And that’s exactly what happened to the nonprofit we talked about above. They delivered the agreed-upon services and were entitled to payment by their funders. But they weren’t doing the necessary legwork to actually get paid.
In fact, their team was billing their funders incorrectly and their payment requests kept getting kicked back for revisions. Nobody was taking charge of the situation to get the much-needed payments approved, so money stopped flowing into their bank account.
By the end, they had blown through nearly half of their operating reserves and were quickly running out of money, despite being quite profitable on paper.
If you want to avoid a similar situation, look out for these 5 signs that you’ve got a nonprofit cash flow problem on the horizon:
1. Accounts Receivable Keeps Climbing
Accounts receivable (AR) is the red flag that should have alerted our client above— if your AR keeps increasing and your cash decreases, you know you’re earning revenue but not collecting it.
You should jump into action to see if one of these issues is causing your incoming cash to dry up:
Failing to submit invoices to your donors and funders
Submitting invoices but not doing it accurately or timely
Key funders and donation sources are behind on payments, and your team isn’t following up (or isn’t letting you know)
It is easy to pinpoint if accounts receivable are becoming an issue. Simply compare your AR balance on your Statement of Financial Position to the balance from previous months. If you see a significant change from month to month, ask your financial team to investigate.
If you do this consistently, you’ll start to understand the seasonal flow of funds in your business. And that will help you identify and resolve nonprofit cash flow hiccups before they turn into major problems.
2. You’re Not Paying Your Bills
If you’re not paying your bills, it may be a sign that you don’t have the money to pay them.
So if you notice your accounts payable balance creeping up—or you’ve heard from vendors that your payment is late— it’s a big red flag you should investigate immediately.
It may be sloppy bookkeeping (which you should also address) causing the late payments. Or it could be that your cash flow balance is low and your team has to choose who to pay and who not to pay.
Regardless of the reasons, we’ve seen many nonprofits in desperate situations after tarnishing relationships with their key vendors. In today’s world of ACH transfers and credit card payments, vendors expect to be paid quickly, and the days of 30-day or 60-day remittance periods are mostly a thing of the past.
PRO TIP: AP is a big challenge for nonprofits running on a reimbursement grant funding cycle. You won’t get paid for 30 to 60 days in some cases, even if you do everything perfectly. But your vendors probably won’t be happy to wait 2 months to get paid. So we’d suggest either building a healthy operating reserve and/or opening a line of credit to help you fill that gap.
3. Operating Reserves are Drying Up
A nonprofit’s operating reserve is kind of like its savings account or rainy-day fund. It’s a reserve of cash (or highly-liquid assets) that you can use to get through periods with less cash coming in than you need to spend.
You build it the same way you create your personal savings account— by putting some money aside when cash flow is strong. If you don’t have a reserve, it tells donors that you haven’t historically been able to bring in more cash than you spend, which is a big red flag for them.
Nonprofit best practices suggest you should have 30 to 90 days worth of operating expenses on hand as a reserve. But not all of that has to be cash in your bank account. Use this formula to calculate your operating reserve, and then try to watch it each month.
The balance may decrease at times— that’s okay, it’s what it’s there for— but you should see it start to build back up once the short-term cash flow issue is resolved.
4. Decreasing Working Capital Ratio
Your Working Capital Ratio is an important indicator of whether your nonprofit has enough working capital to cover obligations. It calculates how long your organization could sustain its current programs without generating new revenue.
You can calculate you working capital ratio like this:
Working Capital Ratio = Working Capital ÷ Average Total Expenses
You primarily want to watch for changes in your working capital ratio from one period to the next. So you need to calculate it consistently (monthly, preferably) and be on the lookout for any significant increases or decreases.
5. Too Many Restricted Funds
In a nonprofit, not all “cash” is created equal.
Unrestricted cash that you can use for anything your organization needs is the most sought-after (and hardest to secure) type of funding.
Unfortunately, many nonprofits struggle to build large reserves of unrestricted funds. So it’s essential to know how much of your cash has restrictions at all times.
We’ve seen too many instances of nonprofits “robbing Peter to pay Paul” by using restricted funds to cover operations, intending to pay it back later.
And while this isn’t necessarily illegal, it is not a recommended financial practice. Because these same organizations inevitably find themselves in trouble when they fail to pay back the funds as intended.
So keep an eye on your restricted vs unrestricted assets each month to be sure that you can actually use the money you have for the things you need.
On-Time Accounting is the Key to Avoiding a Nonprofit Cash Flow Crisis
What do all five of these warning signs have in common?
You’ll never see ANY of them coming if you don’t have updated accounting information on a timely basis.
And THAT is where 9 out of 10 of nonprofits really drop the ball.
At The Charity CFO, we help 150+ nonprofits execute accurate bookkeeping and create timely financial reports while actively looking out for issues that may be looming on the horizon.
So if you want a financial partner that can give you accurate numbers and help you understand them too, look no further…
We can’t raise money for you, but we can help you see what’s happening in your business so that you can make critical informed decisions that move your organization forward.
If you’re like many people, you probably think that there is a single set of accounting rules that every company must follow.
But that’s not quite true—nonprofits face a decision between 2 different accounting methods for tracking their financial activity: cash accounting vs. accrual accounting.
Though both systems use the same numbers, looking at those numbers differently can give you a very different perspective on the state of your finances. And understanding the key differences between the two systems will help you minimize confusion when discussing your financial position with board members, funders, or other stakeholders.
So which accounting method is right for you? Is your nonprofit required to use accrual accounting? And is it time for you to switch to accrual from cash basis accounting?
If you’re searching for answers to these questions, you’ve come to the right place!
Cash vs. Accrual Accounting: What’s the difference?
The core difference between cash and accrual accounting systems is whenyou record financial transactions.
In a cash accounting system, you record and recognize revenue when money is received. And you record and recognize expenses when you spend money or pay bills. Cash accounting is the more straightforward option, since it follows the movement of cash into or out of your checking account similar to how you might manage your personal checkbook.
In accrual accounting, you record revenues when they are earned or pledged. And expenses are recorded when they are incurred. So the accrual accounting system doesn’t focus on when cash changes hands. Instead, it is concerned with when services are rendered, or a commitment is made.
Accrual basis accounting is the more accurate accounting method because it matches revenues with expenses in the same period in which they occurred.
PRO TIP: Most very small nonprofits operate on a cash basis because it is easier to understand and requires less accounting experience. As an organization grows, it will generally switch to accrual-basis accounting for reasons we explain below.
What is the Accrual Accounting Method?
When using the accrual method of accounting, your nonprofit records money when it is pledged (or earned), regardless of when the money is received. You also recognize expenses when they’re incurred rather than when the payment is made.
Under this method, pledges are recognized as revenue on the date the pledge is made, not when you receive the money. So, if today a donor pledges to donate $100 to you next year, you’ll record that donation today rather than next year when the money will arrive in your bank account.
Similarly, if you receive a $100 electric bill on December 30th, you’d record that expense when you receive the bill (this year), and not when you pay it 2 weeks later (next year).
Accrual accounting allows you to match your expenses with your revenue in the period in which they occurred. It also allows you to properly recognize the value of non-cash assets or liabilities that may offset revenue or expenses in that period (like when you sell inventory or receive in-kind gifts).
Furthermore, accrual accounting is required by Generally Accepted Accounting Principles (GAAP) because it gives you a more accurate picture of your organization’s fiscal situation and allows for easier side-by-side comparison with financial statements of other organizations. And many large grantmakers, foundations, and banks may insist on accrual-based financials to give you funds.
A note about accruals and accrual accounts:
‘Accruals’ are the basis of accrual accounting. An accrual is an adjustment made to your book without cash being exchanged. So when you record a pledged donation that you haven’t yet received, that is an accrual entry.
Accrual accounts exist to track your accrual transactions and their balances, according to the type of transaction. Common accrual accounts include:
Accounts receivable
Prepaid expenses
Inventory
Fixed assets
Investments
Accounts payable
Accrued expenses
Notes payable
What is the Cash Accounting Method?
The cash accounting method requires companies to report money when it is received, which means nonprofits will record cash as revenue the moment they deposit it in their bank account. It’s easier than accrual accounting because it mostly tracks the flow of cash in or out of your bank accounts.
Consider the same example as above: A donor promises today to donate $100 but they won’t give you the money until next year. If you run a cash accounting system, you would only record that donation in your books next year when you receive the money in your bank account.
The scenario is similar for expenses–imagine you receive a $100 electric bill on December 30th and pay it 2 weeks later. Under the accrual accounting you had to record the expense in December, when you received the bill. But under cash accounting, you would record the $100 expense in January, when you paid the bill.
Cash accounting is less complex than accrual accounting. And it may be the right choice for small nonprofits that don’t have experience with accounting, the budget to hire help, or time to learn.
In a cash system, the permanent accounts consist exclusively of cash and equity accounts, so there are no accounts payable, receivable or fixed asset accounts. And cash basis reporting may be used for some tax purposes, even for accrual-based organizations. (Fortunately, most accounting software makes it easy to switch between cash and accrual-based reports with the push of a button.)
Cash accounting does not comply with Generally Accepted Accounting Principles (GAAP) for nonprofit organizations. So if you expect to grow or search for new sources of funding, you’ll probably need to graduate to accrual-basis accounting.
PRO TIP: Only organizations with less than $26M in gross receipts over a 3-year period are eligible to use cash accounting, per the IRS. Also, revenue must be recorded when it is actually or “constructively” received. Income is constructively received when an amount is credited to your account or made available to you without restriction, regardless of whether or not it’s been deposited in your bank account.
What is Modified Cash Basis Accounting?
Some nonprofits use a hybrid accounting system called modified cash basis accounting. In this system, you generally recognize revenues and expenses as you would in cash-basis accounting (when money enters or leaves your account).
But modified cash accounting also allows you to record long-term assets according to the matching principle. This means that you may have accounts for things like fixed assets, investments, and notes payable that you would track using accrual accounting methodology.
Which accounting method is more effective?
When deciding between cash vs. accrual accounting for nonprofits, there are a few things you should keep in mind.
Amount of accounts payable and receivable – If you only have significant unpaid invoices or pending gifts, accrual basis accounting is probably a must to help you accurately understand what you owe to others and what is owed to you.
Bookkeeping staff/volunteer expertise — Accrual accounting is more sophisticated and time-consuming. When determining which approach to utilize, consider the expertise level of the person who will be doing your books.
Cash flow situation – When cash flow is a concern, accrual accounting can help you see upcoming revenue and expenses to better understand what your future holds.
Your organization’s size – A small nonprofit can continue to operate on a cash basis relatively smoothly. As increasingly complicated transactions develop, a firm that seeks to grow will almost certainly switch to accrual accounting.
Financial statement audit or review – if you are required to undergo a financial statement audit or assessment, using the accrual method to be in accordance with GAAP will make the process much smoother and less expensive.
Is Accrual Accounting a Requirement For You?
Here are some additional reasons why organizations should utilize accrual accounting:
Do you need to undergo an audit?
If your bank, funders, or state of legal domicile require an annual audit of your financial statements then you’ll need to use the accrual basis of accounting.
✔️ You receive over $750,000 per year in federal funds ✔️ You are in one of 26 states that require an audit of all nonprofits ✔️ An annual audit is required by your organization’s bylaws ✔️ You spend over $500,000 per year (in most states) ✔️ You want to get serious about grant funding ✔️ You want to apply for a loan
This is not a comprehensive list, so speak to your lawyer or financial professional to be sure whether or not you require an audit.
Accurate Budgeting for Your Nonprofit
Cash accounting is simpler and faster but it’s not ideal for creating accurate and actionable financial plans. By matching revenues and expenses in the period they occurred, accrual-based accounting gives you a more accurate picture of when you’re making or losing money.
And when you use your financial reports to create plans and budgets, having that accurate month-by-month data will help you develop more accurate projections to use your resources more effectively.
For these reasons, accrual accounting is preferable for organizations planning for growth. But whether you start with accrual accounting now or make the switch later depends on the day-to-day reality of your nonprofit today.
Need to get Your Accounting in Order?
Whether you’re running an accrual or cash-based accounting system, at some point most nonprofits need to turn to outside help to get their financial house in order.
The Charity CFO helps over 150 nonprofits nationwide modernize, optimize and digitize their bookkeeping and accounting to save thousands of hours every year.
Outsourced accounting from expert nonprofit accountants could be the secret sauce your organization needs to finally create the time, space, and resources to pursue the growth you’ve dreamed of.
If you’re struggling to build the right team to get your finances on track, maybe it’s time to stop struggling…
Nonprofit fraud makes for great headlines— like the Minnesota nonprofit Feeding Our Future accused this year of squandering $48 million of federal funding on luxurious trips, fancy mansions, and other personal costs.
Fraud losses in the charitable industry destroy an organization’s reputation, future financing opportunities, and capacity to carry out its mission. According to The New York Times, the value of nonprofit fraud is approximately $40-50 Billion each year. Nonprofit fraud impacts nearly one in five nonprofit organizations, according to some estimates.
While most nonprofits work tirelessly to make a difference in the community with a shoestring budget and tiny workforce, these highly-publicized cases of nonprofit fraud erode public trust and cause people to hesitate to give their money to worthy organizations.
So let’s take a look at what nonprofit fraud looks like so you can know what to look for and help keep your organization out of trouble.
The Case of the Missing $48 Million
On January 20, 2022, the FBI raided the offices of Feeding Our Future in Minneapolis and the home of its founder. Feeding Our Future received funding from the United States Department of Agriculture through the Child and Adult Care Food Program and the Summer Food Service Program—money intended to provide meals to children. But investigators allege the organization used most of that money to fund personal costs, like luxury cars and lakefront homes.
How was this fraud uncovered?
The education first department reported Inconsistencies to the USDA in 2020. They lacked evidence to explain a significant spike in the number of community locations Feeding Our Future claimed to support.
And in early 2021, the department labeled Feeding Our Future “seriously defective” due to incomplete financial audits and lapsed IRS nonprofit registration. As a result, they suspended all payments to the organization.
Now, the BIG question— how did this happen?
Officials from the Minnesota Department of Education told FBI agents that the USDA’s loosening of restrictions during the COVID-19 outbreak rendered these programs more prone to exploitation.
The USDA relaxed the rules for those who can participate in the programs, allowing for-profit restaurants to join and allowing meals to be packaged and consumed off-site.
Moreover, the USDA dropped in-person surveillance restrictions due to the pandemic, making it easier to cover up potential deceit.
The Feeding our Future case is unusual in the scale of the alleged fraud, but assuming criminal activity took place, it must have required collusion between multiple parties. Proper accountability, oversight, and separation of duties in nonprofits would prevent grift on this scale from taking place.
Let’s look at the 3 types of fraud impacting nonprofits most frequently today.
3 Common Types of Fraud in Non-profits
Fraud committed by nonprofits organizations frequently follows a similar pattern. The three typical fraud schemes include:
#1: Corruption
Corruption is the improper use of influence in a business transaction to obtain benefits for oneself or others at the expense of one’s employer. Corruption is involved in 43% of occupational fraud cases across all industries.
According to Merriam-Webster, corruption is “dishonest or illegal behavior especially, by powerful people.” In this case, nonprofit corruption generally involves the senior leadership of a nonprofit organization.
Corruption can include:
Bribery occurs when cash or another asset is taken or offered in exchange for assistance in the scam. This often takes the form of invoice fraud and vendor kickbacks or bid-rigging schemes.
Extortion is obtaining an asset via the use of force or threat of force.
Conflict of Interest corruptionmay involve purchasing schemes with related parties (i.e., paying too much for services or goods and not getting competitive bidding beforehand), fictitious vendor schemes, or billing schemes.
The most common type of corruption found was conflict of interest, which resulted in a median loss of $200,000 per event. Bribes were the second most common form of corruption, accounting for one-third of individuals reporting fraud. Cases involving improper gifts resulted in the highest corruption losses, with a median cost of around $3 million per instance.
How Can You Avoid Corruption In Your Nonprofit?
✔️ Board Oversight – The board needs to understand where the funds are coming from and our significant expenses. And then ask the right questions to understand the organization’s financial position.
✔️ Annual conflict of interest statement – All senior leadership and board members should fill this out and must disclose any related party.
✔️ Annual independent financial audit – An auditor can find numbers that don’t make sense and may help head off schemes before losses are too large. It’s also an excellent deterrent to would-be offenders.
✔️ Segregation of duties – Ensure that no senior leadership member is driving critical processes in the organization. Have a whistleblower policy, and individuals within the organization share the responsibility.
Check Tampering
Check tampering is essentially forging or manipulating checks written. Check tampering is one way of “asset misappropriation,” which is the theft of tangible assets— in this case, stealing money.
Check tampering usually happens when:
Checks are altered after they are signed by the appropriate person (changed amounts, vendor name, mailing address, etc.)
An unauthorized person forges checks.
Unauthorized people make transfers or bill payments that are not approved. This can also include inappropriate charges or cash advances on credit cards.
Other examples of asset misappropriation include theft of cash on hand, theft of cash receipts (posting payments received in the accounting system without depositing them), expense reimbursement fraud, and vendor payment schemes.
How Can You Avoid Check Tempering?
✔️ Create a check-signing policy that ensures multiple layers of review
✔️ Implement segregation of duties so that the person who prepares checks is not the same person who initiates the payment request
✔️ Use a 3rd party check paying system, like Bill.com, to ensure physical checks cannot be tampered with
✔️ Strictly limit access to check stock to authorized employees
✔️ Review checks carefully to ensure the vendor’s name on the invoice matches the vendor’s name on the check
✔️ Review bank statements carefully to ensure that all checks cleared are to familiar vendors.
✔️ Review online bank and credit card activity to be sure electronic withdrawals and charges are appropriate and reasonable
Billing Fraud
Billing fraud typically happens when services are paid for by funders but not delivered.
Billing fraud is so common because many medium to large-sized nonprofits have government contracts. And many government grants pay for services on a cost-per-unit basis rather than issuing a large one-time check.
Each month, a nonprofit must tally up the services rendered and bill funders based on the agreed-upon rate. If they simply say they’ve delivered more units of service than they did, they can secure extra funding. And it can be very hard to detect.
Several factors cause the incentive to inflate their billing numbers:
Pressure from upper management on programmatic staff to increase impact and number of people served. By inflating billing numbers, it appears they had a more significant effect.
Financial struggles. The organization will receive additional funds that they may feel they “need” to stay operational by billing more units.
Dishonest staff. In some cases, a staff member is expected to deliver a specific number of services. By falling short, they may fear their job is at risk. The team may be motivated to exaggerate the volume of services and clients they are working with to stay in good standing with their supervisor.
Pressure from funders. Funders make allocations to organizations with the understanding that all services included in the contract will be rendered. Organizations understand that failure to exhaust these contracts fully will result in reduced funding next year.
How Can You Avoid Billing Fraud?
✔️ Oversight and management. Regularly review the volume of clients and participation records (attendance records, case notes, client files), periodically to ensure that your participants are real and are receiving services.
✔️ Develop expectations. Understand the status of grants and funding throughout the year. Understand any trends or seasonality in the delivery of services (i.e., the school-based program ends in summer; therefore, we expect fewer services). Monitor fluctuations regularly to ensure you are on track.
✔️ PTO policies and cross-training. Ensure that there is cross-training and forced PTO for those that compile billing numbers. Having a rotation will ensure a consistent process is followed.
✔️ Have a relationship with your funders; if there are any discrepancies or instances of inadequate or inappropriate documentation, have an open-door policy.
While it is critical to respond immediately to fraud, the best method is to avoid the scenario in the first place. It is impossible to expect a nonprofit organization’s governing body and leadership to eliminate the danger of fraud, but you can take practical actions to reduce it.
You can avoid putting your nonprofit’s hard-earned reputation at risk by creating an environment where ethical behavior is expected. And by creating robust internal controls a proactive fraud detection and response program.
And, of course, the cleaner and more accurate your accounting, the easier it will be to find numbers that don’t make sense. If you’d like help modernizing your accounting system and keeping a closer eye on what’s happening with your money, reach out to The Charity CFO for a free consultation.
We provide outsourced nonprofit bookkeeping and accounting services for over 150 US-based nonprofit 501(c)(3) charity organizations. Our team of financial experts include former nonprofit CFOs and auditors, so we can help you find and fix your biggest issues before the auditor comes knocking.
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What is a nonprofit Statement of Activities?
The Statement of Activities is the Income Statement of a nonprofit organization. It’s one of the core financial statements that all nonprofits need.
You may also hear it referred to as a profit and loss statement or income and expense report.
Simply, it reports your organization’s revenue and expenses during a specific period and the difference between them.
In the for-profit world, they call the difference between revenues and expenses net income (or profit).
But a nonprofit calls the difference between revenue and expenses change in net assets.
Like all nonprofit financial statements, the central role of the Statement of Activities is to provide transparency and accountability to your donors and board. But it’s also an excellent tool for understanding just how healthy your business is.
By starting with your revenues and subtracting your expenses, the report helps you answer the all-important question:
Did we bring in more money than we spent?
The Statement of Activities further breaks down your revenue and expenses according to any restrictions limiting how or when you may use them.
1. Revenue: How much money did you receive?
Revenue includes all flows of cash into your business. It includes donations, grants, fundraising, earned revenue, government funding, and special events.
If you use cash-based accounting, you’ll only record cash deposited into your bank during the reporting period.
But, since auditable nonprofit financial statements, we’ll talk about accrual accounting practices in this article. That means your revenue will also include any donations pledged in the period (whether you collected the cash or not) and any receivables (for services rendered but not yet paid).
Restricted Revenue shows funds with donor-placed restrictions on how or when you can spend the money. You can include all restricted funds together or segment them by donation type.
Unrestricted Revenue shows funds without donor-placed restrictions. You can use unrestricted funds for any mission-oriented purpose, including paying general operating expenses and salaries.
You may choose to break down your revenue into additional categories, such as:
Sources of Unrestricted Donations: Individuals versus organizations or foundations.
Federated Campaigns: Donations received indirectly from the public by a fundraising group, like United Way..
Government Funding: Funds from local, state, or federal government organizations
Earned Revenue: Income from the sale of goods, services rendered, or work performed Special Events: Revenue earned at fundraising events (You’re required to keep track of each event separately once it hits $5,000 in revenue.)
2. Expenses: How much money did you spend?
The expense section reports all cash that flows out of your organization, including pending expenses—those you know you’ve incurred but haven’t spent the money yet, such as payroll for hours worked the previous month.
NOTE: Nonprofit expenses include any outflow of assets, like in-kind donations and depreciation expenses (not only cash).
Since functional expenses are a big theme for many investors, particularly the percentage of money you’re spending on programs, most nonprofit Statement of Activities are organized according to functional expenses.
Expenses are shown by all significant or relevant categories. These are the most common:
Programs: expenses incurred while carrying out your mission through goods and services
Management and Administration: typically includes “overhead costs,” including operational expenses that don’t specifically relate to executing your mission or fundraising.
Fundraising: costs directly tied to raising money, including special event costs, advertising, and fundraising staff salaries.
3. Change in Net Assets: How much money did you make?
The Change in Net Assets is your bottom line– did you bring in more money than you gave out?
It shows you the “profit” of your nonprofit. But here, we call profit a “surplus” instead.
Yes, a nonprofit can make money. While the goal of a nonprofit isn’t to turn a profit, if you don’t bring in more than you spend, you won’t be able to survive. And a little “profit” helps build your operating reserves to help you survive a slow-fundraising quarter or unexpected expenses.
The Change in Net Assets section shows you how much money you made with a simple equation:
Net Revenue – Net Expenses = Change in Net Assets
Once you have the change in net assets, you can compare revenue and expenses by significant program activity (or function) to see exactly where you are making or losing money.
You should look at your Statement of Activities every month and compare to previous periods. Identify trends and changes in sources of revenue, expenses, and changes to net assets.
Almost all nonprofits will have deficits in specific periods. But those should be offset by surpluses in other periods.
But if you’re spending more than you bring in for several periods in a row, you’re headed for trouble. So you need to figure out what’s going on and fix it. Before you end up out of business.
What will your CPA look for on your Statement of Activities?
Your nonprofit Income Statement shows the year-over-year income and spending trends. And how those expenses relate to the work of carrying out your mission.
But, it also answers several questions about your organization’s overall financial health.
Here are just a few of the questions your CPA or auditor will be asking when reviewing your Statement of Activities:
Questions about Revenue
Where is the money coming from? Will we get it next year?
Is the revenue restricted in any way?
Do you have diverse revenue streams?
When you compare year-over-year, are you growing or shrinking?
Questions about Expenses
Are these expenses reasonable?
Are they going up or down? Can we understand why certain expenses are going up or down?
Is most of your money going to program activities (75% of each dollar should go to programming; 25% should go to management and fundraising)
The Difference Between an Income Statement and a Nonprofit Balance Sheet
A balance sheet is a term commonly known in profit businesses. In the nonprofit sector, there is a similar report known as a “Statement of Financial Position,” “Statement of Activities,” or a “Statement of Cash Flows.”
This type of report gives a quick look at the financial position of an organization. While very similar to an income statement, the balance sheet shows financial activities over a shorter period of time. The information is very similar including:
Assets: These include cash, cash equivalents, equipment, and property (among others).
Current Liabilities: Any accounts payables for the period covered by the balance sheet, debt payments, and other liabilities related to program expenses.
Net Assets: These are the remaining assets after liabilities, separated by general fund assets without donor restrictions and assets with donor restrictions. (Assets with donor restrictions meaning things like certain grant restrictions or even funds for a designated purpose by the individual or organization giving those funds.)
Need your Statement of Activities on time, every month?
At The Charity CFO, we help 150+ nonprofits get audit-ready financial reports monthly, like clockwork.
We can help you modernize and optimize your accounting systems while also taking the time-sucking bookkeeping tasks off of your hands. And be the trusted financial partner you can turn to for answers to your questions and expert financial advice.
If you’re ready for an accounting partner to ease the burden of monthly bookkeeping and accounting, reach out to us for a free consultation.
We’ll help you determine if outsourcing your accounting and bookkeeping is the right decision for your organization.
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Nonprofits often receive donations or grants designated for a specific purpose–like a donation to a specific program or grant you have to spend within a calendar year.
EXAMPLE: If you receive a donation that’s explicitly for purchasing computers for an afterschool program, you can’t use that money to buy office chairs.
We call revenue from these sources restricted funds because you’re not free to use them however you please.
To respond to those challenges, the nonprofit world uses a system of accounting called fund accounting. Fund accounting ensures you track restricted funds separately from unrestricted funds, so you can ensure you’re using funds correctly and demonstrate accountability to your donors.
Who’s Required to Use Fund Accounting?
Most not-for-profit organizations and entities–like 501(c)(3) charities, churches, religious institutions, government agencies, nonprofit nursing homes and hospitals, and educational institutions– are required to use fund accounting.
Both Generally Accepted Accounting Principles (GAAP) and Financial Accounting Standards Board (FASB) 116/117 require at least a minimum level of fund reporting, so you’ll need it in order to pass an audit.
If you’re a very small nonprofit, it’s possible you won’t have any restrictions on your donations. But once you start getting larger donations or grants, fund accounting quickly becomes a necessity.
What is fund accounting?
Fund accounting is a system of accounting created to help not-for-profit organizations and agencies manage streams of revenue designated for specific purposes.
Fund accounting differs from for-profit accounting in that it prioritizes accountability, though it does add some complexity to the bookkeeping and accounting process.
As a nonprofit, you have to share your profitability, revenue streams, expense reports, and net assets with many different people, including the general public. And fund accounting ensures that you’re maintaining the degree of transparency required of you.
How fund accounting works:
The core concept of fund accounting is the “funds.”
Think of each fund as a mini organization within your company, each with its own budget and financial statements that track revenue, expenses, liabilities, assets, and equity (net assets).
When a donation comes in, it’s assigned to a specific fund. Then you can track that money through your accounting system to see exactly how much is left, where it was spent, and how much value (net assets) it contributes to your organization.
The FASB requires that you set up at least 2 different “funds” within your accounts– one to track assets with donor-imposed restrictions, and one to track assets without donor-imposed restrictions. In many cases, though, you’re going to want to have more funds in order to optimize accuracy and transparency in your finances.
Common fund structures for nonprofits
The two main fund designations are “restricted” and “unrestricted” funds, as mentioned above. But you’ll often want to break those out by the type of restriction (temporary vs. permanent) or the funding source.
Beyond that, you may want to track grants, endowments, or large-money funders in funds of their own. That makes it easy for you to run fund-level reports to share with your benefactors.
Unrestricted funds often make up the majority of donations for small nonprofits. These funds have no donor-imposed restrictions. So you can use this money for any organizational need that aligns with your legally declared mission.
Examples of unrestricted funds:
Donations from general fundraising campaigns
Revenue from membership subscriptions
Revenue from an event or gala
Temporarily restricted net assets
Temporarily restricted funds must be used for a specific purpose or within a specific period. In some cases, the money becomes unrestricted when a timeline ends or the objective is met. In other cases, unspent restricted funds may need to be returned to the grant maker or donor.
Examples of temporarily restricted funds:
A grant that must be used by a certain date.
Donations received for a specific construction project (once the project is complete, those restricted funds may be able to be reclassified as unrestricted funds)
Permanently restricted net assets
Permanently restricted are typically large donations that function as investment accounts or an endowment fund. The money from the interest earned is designated for a specified purpose, and the principal cannot be touched.
Examples of permanently restricted funds:
An endowment whose capital can never be spent
Real estate that is donated for a specific use and can’t be sold for a capital gain
Other restricted net assets
If you have multiple endowments, grants or restricted large-dollar donations, it is recommended that you track them each in their own fund. Some organizations choose to track these funds outside of their official accounting structure (like in a spreadsheet), but setting up individual funds can help you establish transparency and accountability.
PRO TIP: The more exact and specific your accounting system, the more transparent it will be. And the more transparent your accounting system is, the more accountable you’ll be with the public and GAAP. Failure to accurately track restricted funds could jeopardize future contributions and your tax-exempt status.
Fund Accounting & Nonprofit Financial Statements
When you set up funds in your chart of accounts, they’ll show on your financial statements as well. This adds transparency to your finances, but it also makes them a bit harder to read.
So let’s take a look at where you’ll see restricted funds on your financial reports:
Statement of Activities
You’ll see restricted and unrestricted revenue segmented on your Statement of Activities. So you can see how much of the revenue you’ve generated in a certain timeframe as specific restrictions on its use:
Statement of Financial Position
On your Statement of Financial Position, your fund accounts will pop up in the Assets section (restricted cash balances, restricted fixed assets) and in the Net Assets section (restricted and unrestricted net assets).
The Easiest Way to Keep Tabs on Restricted Funds
The principles behind fund accounting for nonprofits and charities are pretty simple. But the execution is another story.
If you’re not recording every transaction, every month, as it comes in. Otherwise, going back and reclassifying a whole year’s worth of expenses will drive you crazy. And inevitably lead to mistakes.
As leaders in the nonprofit accounting industry, The Charity CFO manages fund accounting for 120+ nonprofits nationwide with precision and expertise.
We can handle your bookkeeping and accounting to deliver accurate financial statements every month that let you know which money you can spend, for which purpose, and when you can spend it.
Unlike most accounting firms, we work exclusively with nonprofit organizations like yours. So there’s nothing your organization can throw at us that we’re not prepared to handle.
Is it time to simplify your accounting process so you can finally focus on your mission?
Reach out to us today for a free consultation.
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