©2011-2023 Less Accounting
Nonprofits are in the business of acquiring money for a good cause. The responsibility to carefully and accurately manage those funds is felt by nonprofit organizations everywhere.
If you are internally managing your nonprofit accounting, be sure you understand the how, what, and why of GAAP (generally accepted accounting principles) to ensure that your nonprofit organization has the best chance at successfully achieving its goals.
Review these nine areas of focus of nonprofit accounting basics regularly to understand your organization’s financial health. You’ll be better prepared to effectively manage resources, improve fundraising, and increase donor confidence and support.
Cash flow is the movement of money in and out of your nonprofit organization. There are many ways to improve cash flow, so let’s take a look at some of these proven strategies and how you can implement them for your nonprofit.
Your cash flow statement is one of the financial statements that you want to familiarize yourself with as you do your nonprofit accounting. Nonprofits generally have to keep a critical eye on exactly where funds are coming from and how they are allocated.
Fortunately, accounting software (like LessAccounting) makes it very easy to generate cash flow statements and reports.
The cash flow forecast is one of the most important financial documents for your nonprofit organization. Unfortunately, it’s also one of the reports business owners tend to ignore.
A cash flow forecast is an estimate of the amount of money you expect to flow in and out of your business every week, month, or even year.
It’s particularly useful when you foresee a cash shortage coming up, so you can apply a corrective action before it’s too late.
You can build your own simple cash flow forecast template using a spreadsheet or find a free nonprofit cash flow forecast template online.
Do you really need to be paying for the most expensive customer relationship (CRM) software, or will a simple spreadsheet do the trick?
What about all those online courses and training that you’ve paid for that you’ve never even looked at?
We get it. Seriously, we’ve been there too.
Nonprofit organizations can be experts at operating on a shoestring budget, but really it comes down to only purchasing what you NEED and saying no to what you don’t.
Don’t assume that you can just write off everything as a tax deduction. Have a clear organization-wide policy on expenses. Everyone who has access to company funds (and that shouldn’t be very many people) should have a clear understanding of what can and should be purchased.
This doesn’t mean you have to lock up the company credit card. Instead, invest in things that will streamline processes and help drive revenue-producing tasks.
Whilst writing a 60-page business plan probably isn’t the best use of your time, having some kind of strategic plan and understanding your business model can be very useful for identifying opportunities to improve your cash position.
Some questions to get you thinking:
Naturally, getting paid is one of the most important parts of running a business, which is why we’ve included it early in this bookkeeping guide. If you want a successful business, you’ll need to make sure you’re paid accurately and timely.
It’s important to make it as easy as possible for your customers to pay you. If they have to jump through hoops to send you money, there’s a good chance it will fall to the bottom of their to-do list.
Check out these four key elements to keep money coming into your nonprofit organization.
The simplest way to get paid is with a clear and easy-to-read invoice.
There are hundreds of invoicing tools on the market. No matter which tool you decide to use, you need it to do four things:
Those four features are so important that we recommend using accounting software that includes an invoicing function.
Your customers should be able to click a “pay” link on the invoice to send a payment, and that payment should be recorded straight into your accounting software.
LessAccounting does all of the above.
Once you have a way to send invoices, you’ll need an account with a payment processor like Stripe, Square, or PayPal. These services let you process credit cards.
They’ll charge a fee of about 3% of your invoice amount. Our accounting software and payment processors are integrated and work well together.
LessAccounting lets you process payments at a discounted rate of approximately 2.5% for credit cards and 1% for bank transfers.
If you run a membership site or intend to charge for repeated services, you’ll also have to make sure your payment processor lets you charge recurring billing. Setting up recurring invoices in LessAccounting is just a matter of a few clicks.
Consider advance payments. A nonprofit is built on respect, trust, and mutual accountability.
If a client does not pay you or pays late, it’s a sign that one of these areas is lacking.
Consider billing upfront based on an agreed-upon scope of service written in a contract. By doing so, you ensure they’ll be covered for the time you spend on agreed-upon services while also maintaining a position to charge for “extra” hand-holding or uncharged work.
If you can’t bill upfront, make sure to stay on top of your accounts receivable. If you let your clients get away with late payments (or worse, failing to pay), your cash flow and growth will suffer.
Use the tools in your accounting software to monitor unpaid invoices. LessAccounting allows you to automatically follow up on unpaid invoices and see who owes you money.
Don’t forget to follow up on late invoices. You may want to charge a fee for late payments. Too scared to ask for late payments? Read these helpful tips.
When you are doing nonprofit accounting, you won’t have as many expenses as a manufacturing or retail business. But you’ll still have plenty of expenses and your bookkeeping should account for them. Identifying, calculating, and analyzing your expenses is the only way to minimize them.
Poor expense management almost always creates cash flow problems. Without healthy cash flow, you’ll struggle to pay your operational costs and you’ll lack money to invest in growth.
LessAccounting uses advanced algorithms and data collected from thousands of banking institutions to properly categorize your expenses. Learn more in this one-minute video.
Tracking your expenses is simple with LessAccounting software and a bookkeeper. Make sure to keep your personal expenses separate and only pay for business items from your business bank account.
We recommend using receipt management software to manage and file copies of receipts and suppliers’ invoices.
LessAccounting software already comes with this feature.
As a nonprofit, you’ll undoubtedly pay some costs like software subscriptions via direct debit.
The bookkeeping for direct debits is reasonably straightforward. Create bank rules in your accounting software to classify those payments to the correct account code.
In a non-profit business, your regular expenses may be quite minimal, but there could still be larger projects like building a new website or developing an online course that requires additional financing.
Having proper bookkeeping and accounting will give you peace of mind when applying for loans with lenders.
Our parting advice regarding expenses is to be prepared for unexpected expenses.
One way to address this is to save up an emergency fund that can be used when unexpected expenses crop up.
Keep this in a separate bank account from your everyday business bank account.
We’ve mentioned the LessAccounting tool as our personal favorite, but we want to expand a little.
Your accounting software is a critical component of your business so make an informed decision about how you will manage your books.
If you take your business seriously, you need to be using cloud accounting software rather than a spreadsheet.
There are a lot of tools available, so choose the one that best fits your needs. Limit your search to tools that include these features:
Once you’ve chosen an accounting tool, we strongly recommend you have an accountant or bookkeeper look over the setup of your software before you get started doing your regular bookkeeping.
This can help your nonprofit bookkeeping run more smoothly and take up less time. You’ll preserve cash and precious resources.
One of the first decisions you’ll have to make when you start taking your nonprofit bookkeeping seriously is which type of business accounting you’ll use. There are two types: cash basis and accrual basis.
In cash basis accounting, revenue is recorded when you receive cash from customers/clients. Expenses are recorded when cash is paid out to suppliers and workers.
In accrual basis accounting, you record revenue when you earn it and expenses when you consume them, even if you haven’t collected or paid out yet.
Over time, both types of accounting produce the same results. What’s different is when you record transactions.
Example: In October, you send a $700 invoice to a customer for a month’s worth of consulting, but the customer doesn’t pay until November. On an accrual basis, you would record the revenue in October. On a cash basis, you wouldn’t record it until you receive the check in November.
You’ll probably prefer a cash basis. It’s simple and straightforward since you don’t use complex transactions like deferrals and accruals. The only challenge is that the random timing of income and expenses can make your cash flow fluctuate.
Most large businesses use accrual accounting, so if your business has significant growth, we recommend coming back to review this decision and discussing this with your accountant.
You may intend to do everything yourself to run your nonprofit organization, but you’ll be surprised how soon you need to hire contractors or employees to fulfill some function. You might not hire them full-time (or even for a consistent schedule), but you’ll probably need help.
For instance, you might need to pay a designer to create some art for your course pages. Or you might need to hire an editor to touch up your videos. You might also choose to outsource your bookkeeping!
In most places, you either pay employees as independent contractors or put them on the payroll. The rules around when you must treat someone as an employee rather than a contractor vary from region to region, but here are a couple of general examples (which may be different in your country):
In most places, this is generally an employee on the payroll.
In most places, this is generally an independent contractor.
If you need to hire someone and aren’t sure if they’re independent or should be placed on payroll, check into your local laws for clarification. If you still aren’t sure, ask your tax accountant.
When it comes to paying contractors, it’s actually quite simple. Just have them submit invoices and pay them like any other expense.
Paying payroll employees is a little more complex. It’s your job to deduct taxes from payroll employees’ checks and send them to your tax agency. You’ll want to use the payroll feature in your accounting tool to calculate their tax liability.
Another option is to utilize a full-service solution like SurePayroll to handle the tax calculations and filings. LessAccounting integrates seamlessly with SurePayroll.
Inputting your expenses and payments into an accounting tool is just the beginning. You’ll realize the true value of bookkeeping for a nonprofit when you generate regular financial reports.
Reports are the financial representation or narrative of the impact of those business decisions you’ve made over a period of time.
Reports help you benchmark your business. They give you snapshots of your business at a point in time that you can compare to see how your business changes over time.
Your accounting tool can produce a variety of different reports. As a nonprofit organization, you should be looking at the following 3 reports at a minimum:
Furthermore, it’s critical that you perform a bank reconciliation at least quarterly (ideally monthly). This is a report that compares your bank account balance in your accounting tool with your bank statement balance.
It helps you identify errors in your accounting tool or expenses/income in your bank that you aren’t aware of.
An important piece of advice: Once you produce your reports, it’s important to actually use them. Make the time to sit down, read and understand them and create action items based on the insights you’ve gleaned. If you work with a bookkeeper, lean on them to help you understand your reports.
The best structure for your business depends on your needs and the country where you operate. Make sure to consult with a tax accountant to assess your individual needs.
When forming a nonprofit organization, there are several business structures to consider, but the most common structure is a nonprofit corporation. Here are some of the reasons why a nonprofit corporation might be the right choice:
It’s important to note that forming a nonprofit corporation involves complying with state and federal laws, including filing articles of incorporation and obtaining tax-exempt status. It’s a good idea to consult with an attorney or accountant who specializes in nonprofit law to ensure that the organization is set up correctly.
Part of structuring a business is separating its finances from your personal finances. This is as simple as opening a business bank account.
An important reason to separate your business and personal finances is to simplify your bookkeeping. In order for your bookkeeping software to track your transactions accurately, it’s best that the only transactions that flow through your account relate to your business.
Otherwise, you’ll have to categorize all of your personal transactions within the accounting software too.
Here are a few more reasons why having a bank account solely for your nonprofit organization benefits you:
Furthermore, use your business account to get yourself a credit card. Paying workers and suppliers with a credit card is much easier than using bank transfers. Plus you gain the benefits of a credit card company, like fraud protection and the ability to initiate chargebacks.
Whether you choose to manage your own books or hire a bookkeeper, it’s critical that you hire a CPA or equivalent to manage your tax returns and payments. This is not an area of finance you want to wade into by yourself.
Working with a tax expert who understands tax law can often result in tax savings. Gaining that level of intimacy with the tax law just isn’t feasible when you’re trying to grow your nonprofit organization.
The best way to find a good tax accountant is to ask people you trust who they use. Don’t be afraid to conduct several interviews until you find the CPA that’s right for you.
Now that you have reviewed nonprofit accounting basics, you can see how important it is to get things done correctly. It’s smart to reduce your expenses as much as possible, but proper bookkeeping is a specialized skill that takes time to learn and manage.
If you take one thing away from this bookkeeping playbook, let it be this: Sometimes it’s better to hire someone else to manage your books for you.
The bookkeeper’s role is to manage your day-to-day transactions within your accounting software. They’ll make sure each item is categorized properly in your chart of accounts.
If your payments and expenses aren’t organized accurately, it will create a ripple effect that will disrupt all of your finances.
You can also request that your bookkeeper works directly with your tax accountant, to reduce the time you need to spend on accounting tasks.
Bookkeeping is actually one of the most common services companies outsource. So when you are next doing your own bookkeeping think about whether this time would be better spent on growing your business. It can help nonprofits focus on what they do best: helping others.
The bookkeeper’s role is to handle the day-to-day transactions in the accounting software and ensure that each item is allocated correctly to the right account in the chart of accounts.
At LessAccounting, we specialize in bookkeeping and tax advisory for your nonprofit business. If you have any questions about LessAccounting or bookkeeping in general, feel free to get in touch.