Easy accounting for nonprofit organizations

from Unit4 Communications January 25, 2023 | 4 min read

Across the world, nonprofits extend their influence across various sectors, including environmental, educational, sports, science, religious, and business activities. Nonprofits focus on operations that benefit their service users, not on making money. The laws governing tax-exempt organizations such as nonprofits create the need for specific accounting software. Nonprofit accounting software focuses on funding and helps organizations manage their finances transparently, so donors understand how their contributions are used. Special accounting reporting is also needed to ensure compliance with regulations.

Many nonprofit organizations don’t allocate resources for a professional accountant to manage their finances. Instead, they assign the task to an untrained staff member or volunteer. They can then run the risk of fraudulent activity if the bookkeeping and accounting are not carefully managed. This is often unintentional through a lack of oversight or experience. Volunteers, who often make up a large part of a nonprofit’s staff, may leave an organization on short notice, which can cause gaps in recordkeeping.

So, what is the best way for nonprofit organizations to simplify their accounting while also making sure they are compliant in all areas? Here we look at the basics of accounting for nonprofits and how using smart, cloud-based financial planning and analysis software can take away the pain of accounts management.

It doesn’t matter who manages the books; all nonprofits will need to use an accounting program to keep track of everything and to make sure they are prepared when tax season rolls around. Nonprofits should look for accounting software that covers general bookkeeping and accounting, as well as specific not-for-profit needs such as donor management, compliance management, and grant management.

For the basics of nonprofit accounting, which will differ slightly from country to country, general processes need to include activities such as setting a budget, analyzing financial records and statements, recording transactions such as in-kind donations, managing various bank accounts, bank reconciliations, and fund accounting and bookkeeping.

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Budgets

For-profit organizations set a budget to help determine how profits will be used to achieve business goals and how the money will be allocated. A budget may look a bit different for nonprofits, as they generate income from donations and grants. A budget is a guide that can help a nonprofit plan for the future and assess its current financial health.

The budget will be reviewed and compared to the actual cash flow and expenses to determine whether they are playing out as expected during the year, and it may be necessary to amend the budget during the year. Budgets may even be requested by parties involved in financial transactions with the nonprofits, such as banks, or by donors or grantmakers considering a gift to the nonprofit. The expected income and expenses will outline where money will come from, whether through corporate contributions, in-kind donations, voluntary work, or other programs. At the same time, expenses will help keep track of where nonprofits spend money, including payroll, programs, and events.

Financial records and statements

As with regular businesses, financial records and statements help to keep track of all income generated by the organization, where it was spent, and how it got there. Financial statements might seem like just numbers in spreadsheets or complex nonprofit accounting data, but the information that goes into these documents is what makes it possible for a nonprofit to thrive. They consist of donations, supplies, and grants that enable a nonprofit to keep changing the world!

The statements are essential for ongoing financial compliance. For the sake of accounting and taxation purposes, nonprofits should use digital tools that will help them manage and control their financial statements more seamlessly. Ultimately, these statements act to keep a record of all accounts and expenses generated over time.

Balance sheet

For tax-exempt organizations, the balance sheet is also known as the statement of financial position. This statement shows what the company owns and owes at a specific date. Think of it as a picture of the financial situation at one point in time

Income Statement

An income statement is also a statement of activities for nonprofit organizations. It will show all the financial activity of the organization and the financial result of its work. Unlike the balance sheet, which is a picture at a single point in time, an income statement shows what happens over a period of time (the accounting year). The basic equation used for this statement is revenues - expenses = change in net assets.
Essentially: Funds coming in - the cost of operating the nonprofit = funds available to continue operations.

Statement of cash flows

The statement of cash flows tracks cash going in and out of the organization. It is helpful because it will explain the revenue and expenses recorded in the previous statements. It is divided into operating, investing, and financing activities.

Statement of Functional Expenses

The statement of functional expenses is exclusive to nonprofit organizations and shows expenses of each functional area of the organization, such as programs, fundraising, and management. Expenses listed in this statement are broken down further to list exact expenses. Some examples include salaries, events, and administrative costs.

Managing bank accounts

Many nonprofits may have one or two bank accounts when they start out, but over time, as the organization grows, different bank accounts will be required for different activities. Some will have a basic account as well as a savings account for emergencies. Financial institutions often offer tailored accounts for nonprofits that act as regular business accounts but have been customized for nonprofits. Having different bank accounts for different transactions minimizes the complexity of accounting for nonprofits.

Bank reconciliations

A bank reconciliation is simply the process of checking to see whether transactions completed on a specific bank account line up with those recorded on the financial statements. This helps to keep track of purchases and expenses that may be exempt from tax or which are filed and accounted for differently.

Fund accounting and bookkeeping

Fund accounting and bookkeeping are where most nonprofits organize their financial and monetary statements or transactions in one place. Instead of having different ledgers that help to keep track of the various transactions completed by the nonprofit, some organizations use automated software and computerized programs to help keep all their financial proceedings in one secure place.

Technology

Many nonprofit organizations use technology for their bookkeeping and accounting with solutions tailored to their specific needs and tax-exempt status. Not only does it help them ensure more financial credibility, but it enables them to align their financial proceedings with their missions and regulatory factors.

Intelligent financial planning and analysis software solutions can free up nonprofit teams to spend more time delivering insights and creating value for the organization. They will help the business understand the numbers more deeply and turn that insight into action for better business results. The best solutions combine automated, AI-infused financial planning and analysis, budget management, and financial forecasting with highly interactive dashboards and powerful, pre-configured models.

How Unit4 can help your organization

Unit4 next-generation, smart, cloud-based solutions for nonprofit organizations focus on People Experience to help free your teams to do more of what matters: making a positive impact in the world. Our purpose-built solutions transform work, so your people gain the time and flexibility to focus on achieving your mission.

It’s vital to make the best use of your people’s precious time and to maximize the impact you can deliver with available funding. You also need to satisfy the rising demands of regulators and tech-savvy donors. Conventional, labor-intensive legacy systems and disjointed manual processes no longer meet these needs. So why let them hold you back?

Make your teams more productive while increasing the visibility and control they need to achieve your mission. Click here to book a demo of our FP&A solution or check out the Unit4 People Experience Suite here.