Five Crucial Elements for a Strong Nonprofit Accounting System

With the start of a
new year, many nonprofit organizations and churches are considering new
accounting systems. If you are working with a nonprofit organization you feel
passionate about, it is natural to focus on the mission and the programs. But
equally important is the need to accurately track the financial tasks. I’ll be
reviewing with you the five crucial elements necessary to maintain a strong
financial system to fund your nonprofit’s mission.

Internal accounting controls. Donors to
an organization want to know systems are in place to keep the money and other
assets safe and that they are being used as intended. No organization is too
small to develop a system of internal controls. Bookkeeping system. Whether this is
done with a simple checkbook and spreadsheet or on a computerized accounting
program, the system needs to be able to track money in and out by donor, program,
and account category. Checking accounts should be easy to reconcile. Money owed
by members or others must be tracked. Money owed to vendors and others must
also be accounted for. Donor acknowledgements. If the
organization is a 501(c)( 3), there are specific rules the nonprofit
organization must follow to acknowledge the donation in order for it to be tax
deductible for the donor. If your organization does not follow these rules,
your donors may lose their tax deduction.Management reporting. The Board,
executive director, and program directors need information from the financial
system to oversee operations and plan programming.These needs must be understood and designed
into the processes.External reporting. Donors, grantors, lenders,
auditors, and government agencies may require specialized reporting.Is your system designed to handle this?

First, we'll review
the basics of internal accounting controls and bookkeeping systems. Then we
will cover donor acknowledgements and the differences between management and
external reporting.

#1 Internal
Accounting Controls

Internal
accounting controls are the procedures you set in place to safeguard against
fraud, theft, and errors. If you are thinking, "We don't have to worry
about that. No one in our organization would steal," search the Internet
with the phrase "stealing from nonprofits."The stories of seemly nice people who stole
hundreds of thousands of dollars from nonprofits will shock you. By
implementing a few basic controls, it is fairly easy to prevent fraud.

When designing your
controls, remember this basic concept:

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In
a nutshell, this means that the person collecting the cash or signing the
checks should not be the person recording the transactions in the accounting
system. It also means the treasurer should not also be the bookkeeper.

I
can hear you say, "But wait.That
is what the treasurer does.Our
organization is too small to have a bookkeeper separate from the
treasurer."If that is the case,
you will simply need to rethink how you use your treasurer.

For
example, if you have a small association or civic group with members who pay
their dues at the meeting, have a second person sit next to the
treasurer/bookkeeper as the money is being collected. At the end of the
meeting, count up the checks and cash, record it on a piece of paper, and have
both people sign it. This signed paper is later reconciled to the bank deposit
to assure all the money received was deposited.

When
paying bills, have the treasurer/bookkeeper write the checks, but the check
signers would be the president, secretary, or board members and not the
treasurer. The check signers must review the invoices before signing to assure
themselves it is a legitimate expense of the organization. This allows the
treasurer to record the transactions but not be able to withdraw the money.

# 2 Bookkeeping Systems

Nonprofit
accounting is a bit different than for-profit accounting. Instead of profits
and retained earnings, a nonprofit has net assets. Money or items donated for a
specific purpose are tracked through restricted funds. So the bookkeeping
system you select must be able to handle these types of transactions.

Bookkeeping
systems can be very basic with simply a checkbook and a spreadsheet to track
the types of income and expenses. Or they can be quite elaborate with nonprofit
specific software which accounts for funds and restrictions on donations as
well as donor management databases. Often nonprofits take an off-the-shelf accounting
package geared towards for-profit businesses and try to make it work.

Which
you decide to use depends on the organization's budget, needs, and expertise of
the staff. If you are starting a small sports league with a dozen members and
very little money, a spreadsheet will probably be sufficient.If you have several million dollars of grants
with specific reporting requirements, you'll probably want to purchase a
nonprofit-specific accounting program. Many nonprofits use QuickBooks® as it is
easy to learn and, with some manipulation, can be utilized for the specifics of
nonprofit accounting.

When
selecting or upgrading your accounting system, you'll need to evaluate the
following:

How much
can I spend? Is it better to spend more on the system if it will save time?
Spreadsheets are cheap, but it takes time to set up the system and formulas and
errors are more likely.Are you going to
spend so much time working with it that your program work suffers?If so, you would be better off looking at a
computerized accounting system. Check out www.techsoup.org for discounts and free
software for nonprofit organizations.For example, a $300 QuickBooks package can be purchased by an eligible
nonprofit for only $45. How many
donors and transactions do I have? If the organization's money comes from thousands of donors, you'll want a system that can handle them.  If
you only have one or two sources of income, a simpler system will be adequate.Do I want
it cloud based on or on a computer in an office? Cloud-based (Internet-based)
accounting packages are very convenient, especially for organizations without a
physical location. But they tend to cost a bit more as you pay for them monthly
for as long as you use them instead of a one-time cost up front. Your internet
reliability is a major factor.If you
live in an area without consistent access, you will be very frustrated if you
can't get into the system when you want.Additionally, the internal controls have to be taken into
consideration.Does the package allow
for users to access reports only? You may want the board members to see the
data, but not to manipulate it.Is the
system intuitive? If the organization changes treasurers and bookkeepers on
a regular basis, the system has to be easy to learn. I wrote my first books, QuickBooks
for Churches and Other Religious Organizations  and Using QuickBooks for Nonprofit Organizations, Associations, & Clubs, after helping a church
try to reconcile their accounts on a large expensive system that was difficult
to use. I realized that churches (and other nonprofits) often have volunteers,
and so switching to an accounting system many people are familiar with (like
QuickBooks) makes training new treasurers and bookkeepers much easier. QuickBooks isn't designed for nonprofits, so
you have to learn a few tricks to make it work, but it is a user-friendly
program.Is it
easy to perform the daily/monthly tasks? Entering donations, writing
checks, and reconciling the bank account should be easy.

Once
you have found a system in your price range that will easily keep your books,
take the time to learn the system. Ask for advice from a CPA or members and
supporters with accounting experience. If you set up your accounting system
correctly from the beginning, it will run so much smoother, leaving you more
time to focus on your nonprofit’s mission.

#3 Donor Acknowledgements

The
third crucial element in my list is donor acknowledgements. The IRS requires the
donor to keep a written record of any gift over $250 in order maintain the
deductibility.

From the IRS website:

A donor can deduct a
charitable contribution of $250 or more only if the donor has a written
acknowledgment from the charitable organization. The donor must get the
acknowledgement by the earlier of:

1. The date the donor files the original
return for the year the contribution is made,
or

2. The due date, including extensions, for
filing the return.

The donor is
responsible for requesting and obtaining the written acknowledgement from the
donee.

A donor cannot claim
a deduction for any contribution of cash, a check or other monetary gift made
on or after January 1, 2007, unless the donor maintains a written record of the contribution.

From Church
Accounting: The How-To Guide to Small & Growing Churches, the
written acknowledgment must contain the following information:

Name of the organizationAmount of cash contributionDescription (but not value) of non-cash
contributionStatement that no goods or services
were provided by the organization, if that is the caseDescription and good faith estimate of
the value of goods or services, if any, that the organization provided in
return for the contribution.

An organization
should have procedures in place to thank donors as soon as possible after
receipt of the donation. Some accounting programs will allow you to email the
donor directly from the donation receipt screen. There is a free video at my
website, www.accountantbesideyou.com
showing how to do this in a QuickBooks program.

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Accounting packages
frequently do not have strong donor management functions. You may want to
investigate donor management programs that will interface with your accounting
system. The interface is important as you do not want to have to enter data
twice.

#4 Management Reporting

If
you speak to an accountant, you may hear a strange language that references words
like GAAP or FASB. These are not science fiction terms, but relate to the accounting
rules financial reports need to follow if being reported to the public.The management of a nonprofit may need to
look at things differently than these rules require. For example, one of the
accounting rules requires pledges to be recorded as income when the pledge is
received, not when the cash is received. If it is a multi-year pledge, this can make
the financial statements look very good, but it does not show the management
when to expect the cash.

A
few of the reports the board, the executive director, development director, or
the program directors may need include:

Budget vs Actual Statement of Activities (income
and expenses) for the organization Budget vs Actual Statement of Activities for
each program/grantDonor/Grant report to summarize the related
income and expenses for a grantStatement of Financial Position (Balance Sheet)Cash reports including restricted vs
unrestricted cash and cash projectionsList of largest donors or grants

These
reports provide the management an overall view of how the programs are raising
and spending money related to expectations and donor wishes, if cash will be
available for the expected expenses, and the overall financial health of the
organizations.

Most
importantly, talk to the staff and board about what information they need to do
their jobs well and design the reports around these needs. Ask if the reports
should be on a cash basis (i.e. income and expenses are recorded only when
received or paid) or on an accrual basis (recorded when pledge is received and
when expenses are incurred regardless of when the cash is received or
paid). How detailed should the expense
line items be? How often should a new
forecast be prepared? Is the system capable of doing the necessary reporting
without having to use too many spreadsheets?

#5 Outside Reporting

Besides
management, other groups may have reporting requirements for your organization.
These are usually required to follow the stringent financial reporting rules. Reports
are required for outside auditors or an audit committee, any lenders,
foundations from which you have received or are requesting grants, etc.

Each
group will have their own requirements, but the basic financial statements are:

Statement of Activities (Income Statement) for
the entire organizationStatement of Financial Position (Balance Sheet)Statement of Cash FlowsStatement of Functional Expenses (report showing
expenses by major programs, administrative costs and fundraising costs). Required
for larger organizations filing Form 990.

Make
certain your accounting system can handle the required reports in an
easily-accessible manner to keep your life easier.

An
accounting system which addresses these five major areas -- internal controls,
bookkeeping, donor acknowledgements, management reporting, and outside
reporting -- will give you the tools you
need to better focus on the mission of the organization.