In the latest episode of A Modern Nonprofit podcast, host Tosha Anderson sat down with Sawyer Nyquist, a data expert who specializes in analytics and data management for nonprofits. Their conversation explored the strategic role of data in the nonprofit sector and how organizations can leverage it to achieve their goals more effectively.

The Data Dilemma

Tasha kicked off the discussion by highlighting a common issue in the nonprofit world: many organizations have an abundance of data but struggle to make sense of it or convert it into meaningful stories of impact. Sawyer agreed, noting that while there was once a push to collect as much data as possible, organizations now need to be more intentional about their data practices.

“Data by itself isn’t valuable,” Sawyer explained. “Data that is purposeful and thoughtful and designed with intention can be extremely valuable for an organization.”

See the full video here via Youtube:

From Data Warehouse to Decision Driver

The conversation touched on the evolution of data use in nonprofits. Sawyer shared an example of a camping organization that used data to optimize their bus deployment, saving staff time and reducing maintenance costs. This illustrates how data can serve a decision-making function within an organization.

Sawyer introduced the concept of “decision-driven data” – figuring out what decisions need to be made, then determining what data will provide the necessary context for more informed choices.

Understanding Data Maturity

Sawyer outlined a four-level scale of data maturity:

1. Descriptive: Answering “what happened?”
2. Diagnostic: Answering “why did it happen?”
3. Predictive: Forecasting “what will happen?”
4. Prescriptive: Determining “what should we do?”

He emphasized that organizations can’t jump straight to the highest level – it’s a process of building foundations and developing both technological capabilities and data literacy within the organization.

Measuring What Matters

When it comes to deciding what to measure, Sawyer cautioned against tracking too much. He suggested focusing on:

1. A North Star metric tied to the organization’s mission
2. 2-3 key progress metrics that indicate movement toward the main goal
3. Decision metrics with built-in action points

Tasha agreed, stressing the importance of customizing metrics to each organization’s unique mission and operational context.

Data Transformation in Action

Sawyer shared two case studies of how organizations have used data to improve their operations:

1. A nonprofit accounting team that streamlined their reporting process using Power BI, saving hours of work each month.
2. A child safety organization that gained crucial visibility into their child visitation program, allowing them to ensure more children were being checked on regularly.

These examples demonstrate how data can both increase operational efficiency and directly support an organization’s core mission.

The Data Journey: From Small to Large Nonprofits

Sawyer walked through what the data journey typically looks like for nonprofits of different sizes:

• Small organizations often have all their data in one system and may start by simply becoming aware of what data they have and giving it “a seat at the table” in decision-making.
• Medium-sized organizations might introduce business intelligence tools like Power BI or Tableau and have a part-time or full-time data analyst.
• Large organizations often have dedicated data teams and use data warehouses to centralize information from multiple systems.

Overcoming Data Overwhelm

Tasha noted that many nonprofits feel overwhelmed by their data and don’t know where to start. Sawyer’s work helps bridge this gap, assisting organizations in connecting their mission to measurable outcomes and making better decisions along the way.

He emphasized the importance of data in nonprofit work, stating, “Their mission is too important to ignore data and to waste their data.”

Key Takeaways for Nonprofit Leaders

1. Be intentional about data collection and use. Not all data is valuable – focus on what supports decision-making and mission achievement.
2. Start where you are. Even small organizations can begin to use data more effectively by simply becoming aware of what they have and incorporating it into decision processes.
3. Consider your data maturity level and work on building foundations before trying to jump to advanced analytics.
4. Focus on a few key metrics rather than trying to measure everything.
5. Look for opportunities to use data to improve both operational efficiency and mission impact.
6. Don’t be afraid to seek help. Experts like Sawyer can provide guidance on the journey to becoming a more data-driven organization.

As nonprofits continue to face pressure to demonstrate their impact, embracing data-driven decision-making becomes increasingly crucial. By understanding the strategic role of data and taking steps to mature their data practices, organizations can enhance their operations, tell more compelling stories, and ultimately make a greater impact in their communities.

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Does the idea of an audit from the IRS leave you with sweaty palms? Most nonprofit leaders aren’t accountants and the thought of getting audited is a sizable fear. Luckily, being prepared can help you avoid accounting mistakes that could come up in a nonprofit audit.

This guide will help you better understand the common mistakes nonprofits make in their accounting systems. We also break down how to avoid these mistakes, so you can spend less time worrying about an audit and more time making an impact.

Mistake #1: Missing or Inaccurate Financial Records

Regardless of the type of audit, one of the most common mistakes found in nonprofit audits is missing or inaccurate financial records. A missing record or inaccurate numbers make it difficult for the auditors to verify financial transactions.

During the audit, you’ll generally be asked to show:

• Receipts for purchases
• Invoices and revenue records
• Donation records
• Payroll and other recurring expense reports
• Supporting documents related to finances

With all of the records required, it can be easy to make a mistake. For example, receipts get misplaced or someone accidentally files tax documents incorrectly.

Solution: Put a Record-Keeping System in Place

While inaccurate accounting records are a common mistake, they’re also easy to remedy going forward. If you don’t already, it’s time to put a record-keeping system in place. There are many software tools that offer low or discounted rates for nonprofits to help you accurately record your financials. 

Even with a system in place, however, it’s a good idea to carefully crosscheck your records before submitting them to an auditor.

Mistake #2: Lack of Internal Controls

A nonprofit without internal controls in place is a red flag for an auditor. This signals the auditor to take a closer look at financial records and documents. In many cases, a nonprofit without appropriate accounting processes and internal controls are more likely to have mistakes or inaccuracies in its financial records.

Solution: Create a Strong Accounting Process

Nonprofit leaders can solve this problem by creating and implementing strong internal controls for the organization. You’ll likely want to ask your nonprofit accountant to help you set up your accounting systems so you know they’re correct from the start.

Your accountant will often leverage technology to help you create policies and processes  that:

• Accurately records transactions
• Spells out who is responsible for which tasks
• Uses internal auditing to catch mistakes early
• Includes training and onboarding
• Follows compliance and regulatory requirements

Mistake #3: Misclassification of Revenues and Expenses

Unlike a for-profit business, nonprofits have to follow strict guidelines when recording revenue and expenses. Nonprofit leaders have to carefully consider the nuance of nonprofit accounting when entering expense receipts, donation payments, or grant funding. If you’re not an accountant, this process can get confusing–fast.

For example, your nonprofit receives a donation. You have to properly record the donation based on when and how the money will be used. There may also be donor restrictions that come into play and further complicate the record-keeping process.

Revenue recognition is even more complicated than ever thanks to the changes in how FASB (Financial Accounting Standards Board) now requires nonprofits to record donations. The biggest takeaway is making sure you appropriately classify the difference between earned revenue and donations. Grants can be tricky and fall into a gray area between earned and donated.

Solution: Work with a Trusted Accountant

The complicated nature of nonprofit accounting is best left to financially-minded individuals. If this is you, great! If not, that’s okay too!

Whether you trust your financial prowess or not, your nonprofit can benefit from a trusted accountant with nonprofit experience. A good nonprofit accountant can help double-check your work and keep your records in compliance.

Mistake #4: Mishandling Funding Restrictions

As a nonprofit, your organization has to consider funding restrictions when using funds. Funding restrictions are especially important to note when dealing with:

• Donations
• Grants
• Contracts

Many nonprofits make mistakes when classifying and using funds. While most accounting mistakes can be corrected, more serious mistakes could lead to accusations of fraud.

We have seen so many cases of nonprofits not only failing to track restrictions but finding themselves spending restricted dollars on general operations. Not only is this a risky business, but not spending money in accordance with donor wishes is a fast track to damaging donor relationships.

Solution: Create Fund Usage Guidelines

To avoid mishandling donations or other funds, you need to create usage guidelines for your employees. A good set of guidelines will set clear expectations on what to do any time the organization receives funds, including:

• Where the money is from
• What the money is intended for
• When the money is used
• How the money is used

Pro tip: you should be able to use accounting software to track restrictions, including tracking by grant.

Mistake #5: Misclassifying Workers

Volunteers? Independent contractors? Employees?

Your organization might have all of these working to help you meet your mission and goals. It’s imperative that you accurately classify workers within your organization. Unfortunately, many nonprofit leaders are unsure of which classification their workers fall under–leading to misclassified workers and a headache at tax time.

While the classification of employees typically falls under a human resource department task, it can have significant financial consequences. In fact, we often warn that nonprofits do not pay enough attention to their compliance with the Department of Labor and the IRS. These penalties can be crushing for nonprofits.

Solution: Educate Organizational Leaders on Worker Classification

Classifying workers can be confusing, but it’s worth taking the time to educate yourself and other organizational leaders on how to do it right.

Luckily, the IRS provides a Worker Classification 101 guide to help clear up the confusion. You can refer to this document as needed to accurately sort employees from independent contractors.

If you haven’t engaged with an employment law attorney or a human resource specialist, you should add this professional to your roster. The investment now will save you in the future.

Avoid the Risk of a Nonprofit Audit

Making accounting mistakes in your nonprofit can make the audit process longer and more complicated. In fact, we have seen audit firms charge 2-3 times what the original cost of the audit was quoted simply because the organization was prepared or their books were a mess. If your records have serious mistakes, you might even face fines or other consequences. When it comes to your organization’s accounting, it’s not worth the risk to do it all by yourself.

That’s where The Charity CFO can help. We provide expert accounting and bookkeeping services for nonprofits, including audit prep. By working with us, you can be sure your financial records are accurate and within compliance regulations.

Contact us today to learn how we can help your organization avoid audit mistakes and maintain accurate records.

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Is your nonprofit using 1099 best practices?

Nonprofits rely on the generosity of donors and volunteers to support their mission and achieve their goals. But, just like for-profit businesses, nonprofit organizations must also navigate complex tax laws and regulations to remain compliant. One of the key areas for nonprofit compliance is the correct use of 1099 forms. 

You see, in most cases, many nonprofits don’t have the resources, capacity, or even the need to have full-time employees. It is expensive and untenable since you have to deal with costly taxes and contribute to social security, unemployment insurance, and other benefits. In such cases, hiring independent contractors and vendors is always a great option for most nonprofits. This is where form 1099 comes in.

Form 1099 is a miscellaneous IRS information form used to report the payments you make to vendors, independent contractors, freelancers, and other non-employees. Nonprofits must understand various 1099 rules and be able to properly file these forms each year with the IRS to remain compliant.

But what are the 1099 rules for nonprofits, and what are some best practices when it comes to filing these forms? Here’s a comprehensive guide on everything you need to know.

Form 1099 Rules for Nonprofits: What You Need To Know About 1099s

What is form 1099 MISC?

Form 1099 MISC is an IRS tax form used to report income that is not salary, wages, and tips. It includes payments made to independent contractors, such as freelancers, subcontractors, and other individuals or businesses providing services or goods to a nonprofit organization.

Unlike form W-2 which is used to report an employee’s wages, 1099s are used for nonemployees who are not on the payroll and who ideally are considered independent from the nonprofit.

By independent, it means that while the nonprofit organization may have control over the work to be performed, it doesn’t control how or when it is done.

A nonprofit is therefore not required to withhold income tax, social security, medicare taxes, or federal unemployment tax from payments made to 1099 contractors.

When are 1099s required?

Nonprofits must file 1099-MISC forms for any individuals or businesses that they paid at least $600 in a calendar year so the IRS can track this income. This includes payments made for services, rent (apart from rent paid to an agency), interest, dividends, and prizes or awards.

What’s the deadline for filing 1099s?

Since you are the one paying, you’ll need to provide form 1099-MISC (Copy B) to the vendor or independent contractor by January 31, and then file a copy of form 1099 (Copy A) with the IRS by February 28 (for paper forms) or March 31 (if filing electronically) and keep a copy (Copy C) for your records.

When sending the 1099s, you’ll also need to file form 1096 with the government showing a list of all the 1099s sent out each year.

But what happens if I’m late?

Well, late filing and intentional disregard for filing 1099s will result in penalties from the IRS.

Here are the penalties:

• If filed less than 30 days late, the penalty is $30
• If filed more than 30 days late and before August 1, the penalty is $60
• If filed after August 1, the penalty is $100
• The fine is $250 for intentional failure to file

These penalties can quickly add up, especially if you are filing more than one 1099 form, so it is important to get the forms completed and filed on time.

When do nonprofits need to issue 1099 forms?

You’ll need to issue a form 1099 if the following 4 conditions are met:

• You made a payment to someone who is not your employee for services rendered.
• The payment was at least $600 during the year.
• You made the payment to a partnership, individual, vendor, or estate
• The payment was made in the course of your trade or business where services were performed and not subject to backup withholding taxes. These services include parts and materials

What information is required on a 1099 form?

When you begin working with an independent contractor or a vendor, you need to provide them with a form W-9 which normally collects the necessary personal and tax withholding information that you’ll need to generate your 1099. Be sure to keep these W-9s safe, organized, and easily accessible.

When filing your 1099s, you have to pull together the following information from the W-9s provided:

• The contractor’s name
•  Social security number (for sole proprietorships and individuals)
•  Address
•  An account number
• Type of payments made
• Total non-employee compensation
• Business entity name (if they are working as an LLC or corporation)
• Taxpayer identification number (TIN) for applicable business entities

When filing this information, you must ensure accuracy and provide all the necessary details or risk fines and penalties from the IRS if the information provided does not match what the contractor provides.

NOTE: If you don’t obtain an SSN or EIN before you pay the vendor or independent contractor, the IRS requires you to withhold 28% (backup withholding) from the payment and report it to IRS on a form Form 945 (Annual Return of Withheld Federal Income Tax).

Best Practices To Follow When Filing 1099s

To ensure that everything is filed on time and correctly, it’s important to follow the best practices for nonprofits when filing 1099s.

Here are some tips to keep in mind:

• Require all vendors to fill out form W-9 before doing business with them. You’ll use this information when filling out form 1099.
• Verify that the vendor or contractor has provided accurate tax identification information.
• Keep accurate records of payments made to vendors and contractors. This can be done by collecting invoices, receipts, and other documents which can be organized in a physical or digital filing system.
• Verify that you’ve paid more than $600 within that calendar year
• Review the vendors to determine if they qualify for form 1099
• Use an electronic filing system to ensure timely and accurate filing of 1099 forms. This avoids the need for mailing or printing and filing by hand.
• Provide vendors and contractors with their 1099 forms (Copy B) on time, as failing to do so will result in penalties from the IRS. Consider asking for their email addresses to speed up the process since you can file electronically and send out the forms via email.
• File your form 1099 (Copy A), ensuring that all required information is included on the forms
• File Form 1096, which summarizes all the 1099s sent out each year
• Always keep a record of copies of the 1099s (Copy C) that were sent to vendors and contractors. These will come in handy if the IRS ever asks for proof of filing or if there is any discrepancy.
• File on time and ensure the accuracy of the forms to avoid penalties.
• If you need to pay someone who is a 1099 vendor, it is advisable to pay via a debit card, credit card, or PayPal since the onus is on the card issuer or PayPal to issue the 1099 form. 

What You Need To Do Now

• Review your potential 1099 vendors and contractors to see if they meet the criteria to receive a Form 1099.
• If yes, make sure you have accurate records of payments made to them and verify that their tax information is correct. You will also need to provide them with a Form W-9. Finally, when you file your taxes, make sure to include all Forms 1099 in your tax documents.
• Take the time to review and understand the 1099 requirements and process from start to finish. This will save you time and help you stay compliant with IRS regulations.
• If you need further assistance, please don’t hesitate to reach out to a nonprofit finance and accounting professional such as TheCharityCFO.

Work With Professionals For 1099 Best Practices

We understand that tax season can be complicated for nonprofits. With so many different forms and regulations to consider, and limited resources to do so, it can be overwhelming to stay on top of everything.

That’s why we at TheCharityCFO strive to make nonprofit tax returns as easy and straightforward as possible. We give expert bookkeeping and accounting support to help nonprofits just like yours take care of their tax returns and stay compliant with IRS regulations.

With over 150+ nonprofit clients, we have the knowledge and experience to help you make sense of your nonprofit’s tax situation. Contact us today to learn more about how we can help your nonprofit make tax season a breeze. 

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Likely to the dismay of many nonprofit leaders, nonprofit organizations must practically live and breathe bureaucracy to maintain their tax-exempt status and ensure the continuation of their mission.

While the Form W-9 for nonprofits is just one more in the constant flow of forms, it has a bright side: it’s fairly straightforward and simple to complete.

It’s also not necessary for every organization or every tax season, so read on to find out if you need to fill it out and, if so, how. 

What is the Form W-9 for Nonprofits?

The Form W-9, also called the “Request for Taxpayer Identification Number and Certification” is a form used when your nonprofit needs to provide its taxpayer identification number (TIN) to another requesting organization. As a nonprofit, your TIN is the same as an Employee Identification Number (EIN), which you receive after filing IRS Form SS-4. Although it is the primary piece of information being transferred, the form includes all of the following:

• The name of your nonprofit organization
• The address of the organization
• The type of entity
• The organization’s TIN

Reasons Your Nonprofit Might Need to Fill the Form W-9

You will need to fill this form if your nonprofit must provide its TIN (and the accompanying information) to another requesting organization that needs to file an information return with the IRS using said number. There are several reasons that an organization may need the TIN of your organization, including the reporting of:

• You are receiving a payment from another organization
• Real estate transitions between the two organizations 
• Payment of a mortgage 
• The acquisition or abandonment of property
• Debt cancellation
• Contributions to an IRA

When Does Your Nonprofit Need to Fill Out a W-9?

The Form W-9 for nonprofits is typically only necessary if the transaction in question reached a total value of more than $600 over the year. When the requesting organization receives your filled Form W-9, it uses it to file the Form 1099-MISC documenting the total monetary amount paid. Thus, neither organization files the W-9 with the IRS; it is merely a tool for obtaining information in the grander process of tax filing.

What Happens If You Don’t Fill Out a W-9?

Given that the request is legitimate, refusing to provide your TIN via the Form W-9 can result in the requester withholding taxes from your pay at a rate of 24%. In addition, because the requester can face fines if they do not obtain the Form W-9 from you, they will be very motivated to do so.

Where to Find the Form W-9

The form is available on the IRS website. From there, you can either print it to fill out by hand or fill it out digitally.

Step-by-Step Instructions To Complete Form W-9 For Nonprofits: 

Step 1: Write the name associated with your EIN

In Box 1, you must enter the legal name of your nonprofit as registered with the IRS when receiving your EIN/TIN.

Step 2: Write the name associated with your entity

If your organization is legally operating under a name that is different from the name in Box 1, otherwise known as a DBA, or doing-business-as, enter that name in Box 2. Otherwise, leave Box 2 empty.

Step 3: Mark your entity type

In Box 3, nonprofits should check the box marked “other” and write “Nonprofit corporation exempt under IRS Code Section ___.” Fill in the blank with the code section number for the type of tax exemption your organization has, such as 501(c)(3).

Step 4: Enter your exempt payee code, if applicable

Assuming you are a tax-exempt nonprofit under 501(c), you should leave this box blank. 

Steps 5 and 6: Write the street address of your organization

Box 5 provides a field for the organization’s street number, street name, and interior number.

Box 6 provides space for the entity’s city, state, and zip code. 

There is also an unnumbered box for optionally providing the requester’s name and address.

Step 7: If necessary, provide account numbers 

Box 7 provides the option of listing account numbers that your employer might need. However, listing these is optional. 

Step 8: Provide your TIN

Enter your IRS-issued EIN in Box 8. You cannot be a nonprofit organization without an EIN number, so you should always use the EIN section and leave the Social Security number box empty. 

Step 9: Provide certification

The section labeled “Part II” is for certifying that:

• The information you have provided is true 
• You are not subject to backup withholding
• You are a U.S. citizen (or U.S. person)
• Any codes entered are correct

All you need to do in this section is provide your signature and the date.

Step 10: Submit the Form W-9 to the requester (and not to the IRS!)

There’s no need to send the form to the IRS. You simply send it to the entity that requested your W-9, and then your work is done.

Further Questions on W-9’s for Nonprofit Organizations? 

The last several pages of the Form W-9 provide ample instructions and explanations about each section to be filled out. If unsure about some detail, check those sections for in-depth information on each requirement. It’s also a good idea to review what you have filled out to check for errors. 

Although the Form W-9 is on the simpler side, there can always be unforeseen obstacles requiring assistance. If you’re still unsure about something and feel that you could benefit from personal guidance for your unique situation, consider contacting the Charity CFO. With our expert bookkeeping and accounting support, you can focus more on your nonprofit’s mission while we worry about the paperwork. 

All US businesses, for-profit and nonprofit, were subject to new revenue recognition standards starting by 2019. These new standards are detailed in ASC 606 and impact all companies that contract with customers to transfer goods or services.

Nonprofit accounting departments often move slowly, so while hopefully you’ve already implemented these standards, you should ensure that you have. And if you’re having trouble understanding what they mean to you, this article is for you.

Note: While often referred to as the “new revenue recognition standards,” ASC 606 has been in force since 2019 for most nonprofits. ASC 606 is often confused with ASC 958 (which addresses nonprofit entities’ financial statements). Nonprofit entities should understand ASC 958 and ASC 606, but this article focuses solely on ASC 606. 

What Is ASC 606? And Does It Impact Nonprofits?

ASC 606 is a relatively new set of rules for revenue recognition. The Financial Accounting Standards Board (also known as the FASB) defines and codifies all nonprofit accounting regulations here in the United States, so this falls under FASB jurisdiction. 

By 2019, most nonprofit organizations were required to adopt and implement these new rules associated with revenue from “exchange transactions.” These rules are called “ASC 606,” in which “ASC” stands for Accounting Standards Certification, and “606” represents the portion of FASB’s guidance in which revenue from contracts with customers is covered. 

While the standards have been in effect for at least 2 years, you may still hear ASC 606 referred to as ‘“the new revenue recognition standards.” 

This article offers a refresher outlining ASC 606 for nonprofits and what the rules cover. For a more in-depth discussion of ASC 606, please see FASB Accounting Standards Update.

Exchange Revenue vs. Non-Exchange Revenue

Nonprofit entities deal with two primary types of revenue, so confusing exchange and non-exchange revenue is easy to do. To separate the two, consider exchange revenue first. 

Exchange revenue is revenue earned anytime you provide goods or services in exchange for money. It’s what we automatically think of when we consider traditional “for profit” scenarios. 

The key word here is “exchange” – so, when you think of exchange revenue, think of exchanging goods or services for money. 

On the other hand, non-exchange revenue (or contributed revenue) is unique to the nonprofit sector. Unlike traditional “for profit” scenarios, non-exchange revenue scenarios encompass any situation where a benefactor or donor contributes money or in-kind gifts expecting nothing in return.

Distinguishing these two is essential, especially since ASC 606 only encompasses exchange revenue, excluding non-exchange revenue entirely. ASC 958, a separate section of the Accounting Standards Codification, covers recognition standards associated with non-exchange or contributed revenue. 

So, while many nonprofit organizations earn exchange revenue, this isn’t the case for all. Because some nonprofits don’t earn exchange revenue, ASC 606 doesn’t apply to all nonprofit organizations. 

Does ASC 606 Apply To My Nonprofit?

ASC 606 might not apply to your nonprofit, but it’s easy to determine whether it affects your organization or not.

For example, if you sell goods or services at any point throughout the year, ASC 606 applies to your nonprofit. This includes organizations that:

• Sell services, merchandise, or other goods and products, as this falls under the purview of ASC 606. 
• Hosts galas or other fundraising events where guests are charged admission, resulting in exchange revenue, hence the adherence to ASC 606. 

In addition to these scenarios, ASC 606 rules apply to somewhat unconventional settings. For example, some organizations don’t charge participants for their services but bill a third party for the services rendered (including Medicaid or insurance companies). While it might not be a classic display of exchange revenue, this still classifies as such and falls under the ASC 606 regulations. 

Aside from this, other areas you might consider part of the ASC 606 might not fall under these regulations. For example, gifts, contributions, and grants paid to your organization aren’t considered exchange revenue, even if they’re restricted for specific purposes. Due to this classification, gifts, contributions, and grants are exempt from ASC 606. 

How Does ASC 606 Work?

ASC 606 outlines a 5-step process that accountants can use to analyze an organization’s exchange-based revenue stream. Using this process, accountants can determine when and how to recognize revenue on income statements or statements of activities. 

ASC 606 5-Step Process

Upon a first look, the five-step process, as outlined by AICPA, can seem quite intimidating. However, despite the overwhelming appearance, it’s based on a straightforward principle: revenue can only be recognized when (or as) goods or services are provided. 

So, it doesn’t matter when the customer actually pays. For example, the customer could pay you before receiving the goods or services, but you still recognize that payment as deferred revenue until meeting the performance obligation. 

Or, if a customer pays after you provide the goods or services, you can recognize revenue once you meet the obligation and record the transaction in accounts receivable until the customer makes the payment. 

Applying the five-step revenue recognition process varies from one organization to the next, but here’s what the base process entails. 

1. Identify The Contract With The Customer

The first step in this process involves identifying the contract with the customer. Any time the nonprofit has an agreement with a third party to exchange goods or services for anything of monetary value, there is a contract. 

For instance, when you buy a book from a local nonprofit bookstore, you enter into a contract. While the agreement isn’t explicitly written, this concept remains true from a technical standpoint. So, the first step in analyzing your organization’s revenue is to identify when your customers enter contracts with you. 

2. Identify The Performance Obligation(s) In The Contract

Secondly, you need to identify the performance obligations stipulated in the contract. The performance obligation is straightforward: it is what the customer pays for. 

In some cases, the contract may involve multiple performance obligations. For example, a nonprofit organization that is providing consulting services might outline multiple separate “milestones” throughout a 2-year contract. These milestones could include reports, presentations, or whitepapers that might be considered each a different performance obligation, making up parts of a larger contract.

Ultimately, a nonprofit can’t recognize this until a performance obligation is met. For example, suppose your nonprofit receives a payment of $5,000 in advance to perform consulting work at a future date. In that case, you cannot consider that money to be “revenue” until you begin to meet the performance obligations.

3. Determine The Transaction Price

Next, you need to determine the transaction price. In some contracts, this step is simple. For example, if you sell a book for $10, its transaction price is $10. 

However, if you engage in a contract for consulting services where your total contract price totals $10,000, but there are several separate performance obligations with numerous components and considerations, this becomes more complex. 

When you offer discounts, you must remove them from the total price if the discounts are considered likely to be exercised. 

4. Allocate The Transaction Price To Performance Obligations

In the fourth step, you must allocate the transaction price to the performance obligations. Circle back to the example of the $10 book – if you sell a distinct good or service and there is only a single performance obligation, this is simple. You sell the book for $10, so the performance obligation (the book) is directly associated with the $10 price tag. 

However, if you’re providing consulting services with a set of milestones (or performance obligations) for a single total transaction price, you need to estimate the relative value of each milestone. Consider the example of a $10,000 consulting contract. If you break this into milestones, it might look somewhat like this:

• $1,000 for the initial assessment and report
• $4,000 for the board presentation
• $5,000 for the whitepaper at the end of the engagement

Of course, the contract might not divide the pricing like this, so you may have to estimate the allocation of price to each separate performance obligation. 

5. Recognize Revenue When (Or As) The Entity Satisfies A Performance Obligation

The final step in the process is recognizing the revenue. Once you sell a book for $10 (or whatever the price), you can immediately acknowledge revenue once you hand the book to the customer, as the performance obligation is complete. 

Or, if you’re providing consulting services, you may only recognize revenue as each performance obligation is met based on the relative value you assign to each obligation. Based on the example above, you could recognize the first $1,000 in revenue after completing the initial assessment and report. Then, after completing the whitepaper, you can recognize the final $5,000 from the contract as revenue. 

What About Contributed/Non-Exchange Revenue?

ASC 606 and exchange revenue are entirely different from contributed or non-exchange revenue. Although we’ll cover contributed or non-exchange revenue in a future article, it’s essential to note these differences.

ASC 958, the section that covers contributed and non-exchange revenue, is entirely different from ASC 606, which we outlined in this article. Therefore, it’s essential you don’t confuse the two sets of regulations. Many nonprofits have exchange and non-exchange revenue, so understanding both sets of standards and how they impact your revenue streams is imperative. 

Understanding ASC 606 for Your Nonprofit

While we’ve referred to ASC 606 as the “new revenue recognition standards” for nearly a decade, they’re far from new. However, just because these rules have been around for a few years doesn’t mean everyone fully understands them. For your nonprofit to run smoothly and compliantly, you must understand how ASC 606 impacts your organization. 

Contact Our Accounting Team Of Former Nonprofit Auditors Today

If ASC 606 is foreign to you, or you haven’t implemented its standards, there’s a good chance your current accounting setup isn’t working as well as it could. 

There’s no need to worry—many CPAs and accounting firms don’t regularly work with nonprofits. Due to their lack of regularity working with these organizations, it’s easy for these standards to go unnoticed. However, this means that certain CPAs may not regularly be familiar with straightforward solutions for challenges your organization faces.

Here at The Charity CFO, our focus is exclusively on nonprofit organizations. We focus on these organizations to provide knowledgeable assistance with bookkeeping, accounting, and reporting needs. Our team, including five former nonprofit auditors, is well-versed in the specifics of nonprofit standards and can efficiently handle any financial challenge you face.

Interested to hear more about how we can help? Contact us today to schedule a free consultation.

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You know you’ve got a board meeting every 2nd Tuesday at 7:30 pm. And you probably know the quorum rules by heart. But when was the last time you analyzed the structure of your board of directors? 

More specifically, what board committees do you have? Are they the same ones that you need? 

Are your nonprofit board committees contributing to the effectiveness of your work or simply checking off the boxes someone gave you when your organization was set up years ago?

Nonprofit board committees can have an outsized and positive impact on your organization’s overall mission. But you have to be strategic about how you create and use them.

While there are no hard-and-fast rules for committee structure in nonprofits, we’ll share our thoughts and current trends for making sure your board committees are contributing to the organization and making your life easier.

What Are the Essential Nonprofit Board Committees?

There are a few guidelines you can reference when coming up with the committee structure that works best for your nonprofit. The traditional structure starts with a few core committees and adds additional committees as needed.

Traditional Nonprofit Board Committees

Historically, nonprofits have identified three core committees to support the CEO or Executive Director as they fulfill the organization’s mission. These three are common to most boards, with additional committees created to supplement the work on an as-needed basis:

• Nominating and Governance Committee
• Finance or Risk Management Committee
• Executive Committee

The Nominating and Governance Committee takes on the essential task of board development. Members of this committee recruit and welcome new members. They also educate the rest of the board on their duties and responsibilities to the organization. 

Meanwhile, audits, financial management, and risk mitigation fall under the purview of the Finance or Risk Management Committee. While the entire board is responsible for financial oversight, the finance committee researches the finances in more detail. It reviews financial statements in detail and makes recommendations to the full board on how to maximize resources while minimizing risk. 

And that brings us to the Executive Committee. The board’s officers and the CEO/ED typically serve on this board committee. The Executive Committee handles time-sensitive issues that come up between meetings and prioritizes the agendas for meetings of the full board of directors.

These core committees are often supported by other committees when necessary, including, but not limited to:

• Fundraising Committee
• Communication Committee
• Investment Committee
• Programs Committee
• Compensation Committee

This traditional model has worked well for many nonprofits for decades. But the world of nonprofits is ever-evolving, and some organizations have started to move in the direction of a three-committee model that can make it easier to meet their needs.

What is the Three Committee Model?

Many nonprofits are moving to a three-committee model that covers most essential tasks while giving the committees a wider breadth of responsibilities.

Organizations that deploy the three-committee model will generally still have an executive committee, so it’s technically a four-committee model. But the executive committee’s role is more restrained than that of the 3 main committees.

#1: Governance

These committee members take the lead in everything related to board development. Their specific tasks might include things like:

• Providing orientation for all new board members.
• Creating necessary and relevant materials to enhance board meetings.
• Evaluating the board’s overall performance.

An effective Governance Committee has the ability to maximize the board’s performance, which produces a ripple effect throughout the organization.

#2: Internal Affairs

The Internal Affairs Committee oversees all things operational and financial within the nonprofit. So they handle anything that directly influences the organization’s ability to fulfill its mission. 

For example, the board may charge this committee with things like:

• Overseeing financial details (including audits, investments, and acquisitions)
• Maintaining a positive climate in which personnel can thrive
• Managing the organization’s buildings and facilities

So, while an Internal Affairs Committee has the same financial responsibilities as a traditional Finance Committee, its obligations expand to take a more holistic look at the internal workings of the organization.

#3: External Affairs

The third committee in the model handles anything intended for people outside of the organization. Depending on the work of the nonprofit, this may include foundations, donors, and the media, among others.

Some of the tasks typically delegated to the external affairs committee are:

• Fundraising
• Marketing
• Communications
• Public relations

The External Affairs Committee presents a cohesive message to all constituents outside of the nonprofits, ensuring the organization presents a consistent message to the outside world in all communications, instead of fundraising and public relations talking about the organization in different ways or presenting competing agendas.

Can Non-Board-Members Serve On Committees?

Many organizations mistakenly think that only board members can serve on committees, but that is NOT the case.

When we talked to Linda Lysakowsi on A Modern Nonprofit Podcast, she told us that appointing volunteers to serve on your committees alongside board members can take some pressure off your board while enriching your organization.

Here are 3 benefits of adding volunteers to your committees:

1. Relieve Pressure From Your Board Members

Board members work incredibly hard to further the mission of your organization. And no matter the length of their terms, it’s helpful to spread the work around when possible.

Volunteers can lighten the load significantly. And that support can go a long way in preventing board burnout.

2. Expand the Pool of Potential Board Members

Organizations ask board members to make quite a big commitment, often off at least three years. But your organization is also making a big commitment to work under that person’s leadership for a few years.

Offering a volunteer a limited role on one of your nonprofit board committees can help you identify people whole are passionate about the cause and work well within your structure. It can be a way to identify and vet potential future board members.

3. Infuse Fresh Ideas

As humans, we naturally gravitate toward others who are like us. And, since current board members typically nominate new board members, nonprofit boards can suffer from a lack of diverse experiences and perspectives.

Inviting a volunteer to serve on a board committee can be likened to opening the windows to welcome the fresh breeze of new ideas and personalities.

Diversity can present itself in several ways:

• Cultural perspectives
• Life experiences
• Professional expertise
• Relationships and connection

Want to Get More From Your Nonprofit Board Committees?

Board committees can be a powerful tool for getting things done in your nonprofit. Yet many nonprofits simply accept the way things have always been or copy what they have seen other organizations do.

Your committees will provide much more value if you think strategically about how to deploy them to spread the work evenly and cover the areas where you need help most.

If you’d like to learn more about building and utilizing your Board of Directors, check our podcast with Linda Lysakowski.

Lynda has trained over 30,000 nonprofit professionals worldwide and holds the prestigious Advanced Certified Fund Raising Executive (ACFRE) title. And in this episode, she shares her best advice for creating a more successful board of directors.

Today we’re very proud to announce that Zack Meyer is joining our team in the newly-created role of Director of Quality Assurance.

Zack joins us after two decades as a not-for-profit accountant in both public accounting and the nonprofit industry. In this new role, he will serve as one of our in-house experts on existing and emerging nonprofit accounting standards and auditing best practices.

His primary role will be to lead the organization’s quality control and training programs. In doing so, Zack will help ensure that our clients’ financials are prepared in accordance with general accepted accounting principles (GAAP) and their 990s meet IRS guidelines.

In an ever-evolving world of accounting and tax regulations, Zack will be the primary resource to the Charity CFO team and lead company-wide accounting training and technical updates.

Zack is a CPA and graduate of one of the nation’s top 3 accounting programs at the University of Illinois. And he began his career in public accounting focusing on audits of local and national nonprofit and governmental organizations.

In 2015, Zack moved across the desk and joined the finance team of a $100 million national not-for-profit organization based in Missouri. During his time there, he led the organization’s migration from a 15-year old legacy accounting system to a cloud-based solution, changed its basis of accounting, and implemented their first cloud and app-based expense reporting and time entry systems.

Zack has served as a volunteer and advisor to numerous local nonprofits. He looks forward to continuing to work with nonprofits both in St. Louis and nationwide.

Please join us in welcoming Zack Meyer to The Charity CFO!

We’re very happy to announce that Isabel Sippo has joined our growing team in the role of Onboarding Specialist.

Isabel’s philanthropic passion started at St. Louis University where received a Service Leadership certificate after completing workshops, classes, and over 300 hours of community service.

She gave volunteer accounting assistance to the YWCA and instructed exercise classes to retired priests at Jesuit Hall, all while earning Business Administration degrees in Accounting and International Business!

Isabel then went on to receive her Master’s in Business Administration from Fontbonne University.

After over a decade of accounting experience, including over 4 years of auditing non-profits, school districts, and healthcare facilities, and 5+ years working as the Finance Director of a large non-profit, she is happily transitioning to The Charity CFO as an Onboarding Specialist.

Her experience, experience, knowledge, and appreciation of the nonprofit sector will bring so much value to our clients. Especially since the onboarding process is so critical to their success.

Isabel will work exclusively with our newest clients to both catch up on backlogged bookkeeping needs and clean up any existing accounting issues. At the same time, she’ll help our nonprofit clients implement best practices and processes that optimize their back-office, save them countless hours, and give them the clarity they need to move their mission forward.

In her free time, Isabel values her family time, donates enthusiastically to American Red Cross: Heroes for Babies, volunteers at local charities during the holidays, and finds creative ways to use her hobbies to fundraise for charities dear to heart.

Please join us in welcoming Isabel to our team. Our new clients can rest assured that they’ve got the perfect partner to help them modernize and optimize their accounting department!