In many ways, new nonprofits can figure things out as they go, learning from their mistakes and making adjustments.
However, that’s not the case with an organization’s accounting systems. It’s vital to get these right from the beginning or risk serious consequences in the future. Unfortunately, there are plenty of ways for relatively inexperienced leaders to make small but critical errors.
Let’s take a closer look at nonprofit accounting systems, the most frequent mistakes, and how to avoid trouble down the road.
Understanding the Role of Accounting Setup for a Nonprofit Organization
Accounting systems are a vital part of every business or organization, from the largest for-profit corporations to the smallest local charities. At their core, they’re simply a way of keeping track of an organization’s financial standing, including:
Typical income includes donations, grants, interest income from endowments, ticket sales to charity events, and any other source of positive funds into your coffers.
Expenses range from program-related spending aimed at accomplishing the organization’s goals and mission to fundraising expenses (which support income-generating activities) to everyday administrative costs for rent, salaries, office supplies, and other requirements for keeping the nonprofit running.
Well-functioning accounting systems can have a massive impact on how an organization runs outside of conventional financial ways, as well. In the best situations, they provide not only accurate data but timely data, helping make better decisions and solve small problems before they become large ones.
Systems also allow improved forecasting and future planning, as well as making compliance and tax considerations far more straightforward. They’re an underrated pillar of financial stability, which is why it’s so crucial to get them set up correctly.
Common Mistakes in Accounting Setup for Nonprofits
While every nonprofit is different, many organizations tend to make the same kinds of errors when it comes to their accounting systems. Some of the most common and most significant include:
Lack of proper training and expertise
It’s not uncommon for folks in the nonprofit world to lack the financial background and experience necessary to set up their books properly. Those responsible for creating accounting systems might not be aware of industry best practices or make small but significant mistakes that can go unnoticed for months or years.
Poor choice of accounting software
Nonprofit accounting and financial management aren’t the same as for-profit, and the software you use should reflect this.
Luckily, numerous top choices are geared toward charities and nonprofits, like QuickBooks for Nonprofits, ACCOUNTS from Software4Nonprofits, and Financial Edge by Blackbaud.
Inadequate data entry and record-keeping
Old-school accounting systems that rely on manual data entry can introduce many different problems into accounting systems. Human error can lead to some data never making it into the system, while others could be entered incorrectly in ways that are difficult to notice.
Successful organizations design their accounting systems to limit the potential for mistakes and help quickly fix them when they happen.
Ignoring compliance and regulatory requirements
It’s always worth remembering that nonprofit accounting is about more than just internal operations. Nonprofits must meet specific rules and regulations to satisfy federal and state tax authorities and others.
Accounting systems sometimes fail to account for these requirements, leading to extra work or possible penalties.
Long-Term Consequences of Nonprofit Accounting Setup Errors
Improperly setting up accounting systems can lead to major problems that often don’t show up until long after the errors are made.
The most direct of these are financial inaccuracies and misreporting, which can create a host of related problems. At the most serious level, these can lead to legal or compliance issues that may result in tax penalties or even the loss of nonprofit status.
Internally, nonprofit accounting system errors can also create inefficiencies in how the organization is run, wasting precious resources and missing other valuable opportunities. Meanwhile, if word gets out about financial issues or misreporting, it can seriously harm the organization’s reputation and damage trust with donors large and small.
Even organizations that correct their errors before severe consequences present themselves will have to waste valuable time and effort on something that could have been avoided by following best practices from the start.
Preventing and Mitigating Nonprofit Accounting System Setup Errors
Whether you’re a new nonprofit or have been operating for years, it’s important to be proactive about accounting system setup errors. Don’t wait for a problem to show up and end up dealing with it urgently – take the time to work with professionals now to set up your accounting systems properly or check out your current systems for any remaining mistakes.
The Charity CFO can help with skilled and experienced financial professionals who comprehensively understand the needs and unique requirements of nonprofit accounting. Reach out to us today to learn more and get started.