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The type of accounting your organization uses could be holding you back from getting the most out of your accounting system. While many nonprofits start with cash-basis accounting due to its simplicity, this method often falls short of providing a comprehensive view of a nonprofit’s financial health.

Transitioning to accrual-basis accounting can offer a more accurate representation of finances and enhance long-term planning. Let’s look at the differences between cash-basis and accrual accounting and why you might want to switch.

Understanding Cash-Basis vs. Accrual-Basis Accounting

Before we can know why to switch accounting systems, it’s important to understand how each system works. The main difference between cash-basis and accrual-basis accounting is when revenue and expenses are recorded.

In cash-basis accounting, revenue gets reported only when the cash is physically (or digitally) received. Likewise, expenses are recorded when money leaves the organization’s account. Cash-basis accounting is most common for smaller nonprofits, where financials tend to be less complicated.

Accrual-basis accounting, on the other hand, records revenue and expenses when they are incurred. The accrual-basis method records transactions with the assumption that the money will physically change hands in the future.

For example, a nonprofit provides a paid service to a community member and issues an invoice. The revenue from the service is recorded now, even though the invoice hasn’t yet been paid.

Limitations of Cash-Basis Accounting for Nonprofits

Cash-basis accounting is a simple method that’s great for new or small nonprofits. However, there are two major limitations to using the cash-basis method:

• It inaccurately represents financial health.
• It can cause challenges in long-term financial planning.

The timing of an organization’s income and expenses in cash-basis accounting can misrepresent the actual financial state of the nonprofit. Additionally, the cash-basis method can make accurate forecasting and budgeting difficult.

Say a nonprofit hosts a large fundraising event in the second quarter. The costs for the event are all paid in the first quarter, but donation funds and other revenue won’t come through until the second quarter.

By using the cash-basis method, this organization would look like it’s struggling financially in the first quarter but has a major surplus in the second. The reality is somewhere in the middle, but the organization may be tempted to under budget for the first quarter and over budget for the second.

Benefits of Accrual-Basis Accounting for Nonprofits

Switching to accrual-based accounting can have a lot of benefits for nonprofit organizations. Most importantly, making the switch can help your organization:

• Enhance the accuracy of financial data
• Increase transparency
• Improve financial decision-making

Enhanced Financial Accuracy

By recording revenue and expenses when they happen, instead of when cash is exchanged, helps provide a more accurate picture of the organization’s financial health at any given time. You’ll get a better view of long-term financial transactions, rather than just seeing what cash is currently in an account.

Accrual accounting also helps keep related revenues and expenses together. Matching revenues with the expenses incurred to generate them reflects the true cost of running programs and services.

Improved Financial Transparency

Accrual accounting provides stakeholders with a detailed view of your organization’s financial activities, improving trust and confidence. Transparent financial reporting can also improve donor relations. With increased transparency through accrual accounting, donors can see how their contributions are being used and the impact they’re making.

Better transparency also helps you stay compliant with regulations or grant requirements. Many regulatory bodies and grantors require accrual-basis financial statements. Adopting the accrual method ensures compliance with Generally Accepted Accounting Principles (GAAP) and other relevant standards. By making the switch, you could open your organization up to more grants and funding opportunities.

Facilitates Better Decision-Making

A more accurate understanding of your organization’s financial health means nonprofit leaders can make better strategic, data-driven decisions. Accrual accounting provides the data needed to forecast cash flow, budget more effectively, and allocate resources where needed most.

An accrual-based accounting system also gives you insights into the efficiency and effectiveness of programs and services. Detailed financial reports generated using the accrual method can highlight inefficiencies and areas for improvement within your organization. By analyzing the financial performance of programs, you can determine which initiatives are delivering the most value–and which may need adjustments or more support.

Get Support for Your Cash-Basis to Accrual-Basis Transition

The cash-basis accounting method is simple, but simplicity could be holding your organization back. Moving from cash-basis to accrual-basis accounting can help your nonprofit better manage its financial health and improve transparency. 

While switching to accrual-basis accounting can be daunting, the easiest way to make the switch is to work with a trusted nonprofit accounting firm, such as The Charity CFO.

Our dedicated team of accounting professionals specializes in nonprofit accounting–ensuring your organization gets advice from accountants who understand the unique needs of nonprofits. Get in touch today to see how we can help you transition accounting systems!

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Choosing the right accounting services is crucial for the financial health of your nonprofit. The right nonprofit accountant helps your organization properly manage its finances, which improves trust and transparency with stakeholders and donors.

Let’s explore the key factors to consider when researching nonprofit accounting services–from the firm’s expertise to its technology recommendations–so you can be sure you’re getting the nonprofit accounting your organization needs.

1. Nonprofit Accounting Expertise and Experience

Nonprofit accounting isn’t the same as for-profit business accounting. Your organization needs a nonprofit accountant who understands the differences and has experience in nonprofit accounting. Look for accounting firms that specialize in nonprofit accounting when researching accounting services.

Specialized nonprofit accountants know the ins and outs of nonprofit accounting, so they can easily jump into managing your organization’s finances. Unlike a generalized accountant, nonprofit accountants already understand the unique challenges and regulations nonprofit organizations face. This can be especially important when it comes to reporting and filing requirements.

2. Services Offered

When selecting nonprofit accounting services, looking for a firm that offers a comprehensive suite of services tailored to your needs is important. There’s a wide range of accounting services your organization might need, including:

• Bookkeeping
• Financial reporting
• Tax preparation
• Audit support

These key services are vital to maintaining the financial health of your organization. Proper tax preparation, for example, can help your nonprofit stay compliant with financial regulations and maintain tax-exempt status. Likewise, an accountant who offers financial reporting services can help you choose and prepare the right financial reports for your board of directors, donors, or the general public.

Additionally, most nonprofit accounting services include specialized services for nonprofits, such as:

• Grant management
• Providing recommendations for best practices as your organization scales
• Financial goal setting

Specialized accounting services like grant management help your organization efficiently manage funds to help meet donor expectations and plan for growth and sustainability.

3. Technology and Tools

The modern world is built on technology, and nonprofits are no different. Technology is one of the most important tools in modern nonprofit accounting. When researching nonprofit accounting services, aim to work with a firm that embraces and encourages technology like accounting software or donor management systems.

A good nonprofit accounting firm will work with you to find the right technology tools to help you simplify your bookkeeping. For example, they might recommend tools that make it easier for employees to track expenses using a mobile app. This eliminates the need to collect paper receipts from employees and streamlines your accounting systems.

You should also choose nonprofit accounting services that prioritize nonprofit data privacy. Data breaches can plummet public trust in your organization, so it’s important to use secure technology and software.

4. Customization and Scalability

You may not need the full range of your accountant’s nonprofit accounting services right now. But what happens as your organization grows? You’ll likely need expanded accounting services.

Your nonprofit accounting services should be customized to fit your current needs. However, you also want to work with an accountant who can scale your services to fit your future needs. Consider the future of your organization as you look for nonprofit accounting services.

5. Transparency and Communication

Accountants often work with sensitive financial data. It’s no surprise that should look for nonprofit accounting services from a trustworthy firm.

However, you also want to take the firm’s transparency and communication skills into consideration. Does the firm respond quickly to messages? Are they open and honest about the state of your organization’s financials? These factors can help you narrow down the right accounting services for your nonprofit.

6. Cost and Affordability

The final thing to look for in nonprofit accounting services is the price. Unfortunately, financial sustainability is one of the biggest challenges facing many nonprofits. You need to be sure you can afford the nonprofit accounting services your organization needs.

On the other hand, it usually doesn’t make sense to choose nonprofit accounting services based solely on cost. The key is to find accounting services that balance the cost with the quality of services provided.

Luckily, many nonprofit accounting services can be tailored to fit your needs–including your budget. As you look for accounting services, be sure to let potential accountants know your budget so they can build an accounting plan that meets your financial constraints.

Find the Right Nonprofit Accounting Services

Your nonprofit accountant is an important decision for your organization. Focus on these six factors when researching accounting services to ensure you find the right fit for your organization. The right accounting services will help your organization streamline financial processes, build trust with donors and stakeholders, and ultimately contribute to expanding your mission.

At The Charity CFO, we understand the unique financial and accounting needs of nonprofits. Our team specializes in nonprofit accounting and we take pride in being able to accurately and efficiently help nonprofits streamline their accounting processes. We’re here to help you better understand the financial health of your organization–and discover ways to improve.

Get in touch today for a free consultation on our nonprofit accounting services!

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