In order to ensure that your organization is on top of its bookkeeping and accounting responsibilities, several policies and procedures should be implemented. Financial information should be kept up-to-date so you’re portraying an accurate and reliable snapshot of the organization’s financial position. This allows you to easily share information with employees, volunteers, and the board of directors. It also provides a level of transparency and fraud prevention your donors will value, which will help secure grants.
Below is a general outline of some of the concerns with nonprofit accounting and bookkeeping.
Accounting Policies and Procedures
The board of directors should develop and authorize a set of procedures for how the organization manages its finances, including how the accounting activities are carried out by the organization.
Chart of Accounts
The chart of accounts usually has five areas, including assets, liabilities, net assets, revenues, and expenses. Nonprofits have to report account activity according to classifications which include functional (program) and natural (general/supporting). Program transactions are those directly related to the programs or services related to the organization’s mission. General/Supporting transactions are those related to administrative functions. The chart of accounts should be designed to best suit the financial reporting needs of the organization. We will be providing additional content in June that discusses expense allocations.
Every organization should have an operating budget, which shows projected revenue and expenses for a specific period of time. Many nonprofits operate several programs. It’s critical to plan and track the financial costs for each program. As much as possible, nonprofits should strive to minimize overhead or administrative costs. On a monthly, quarterly, and/or annual basis the budget should be compared to actual revenue and expenses. This should be reviewed and updated by management and the board of directors to ensure that the organization is operating according to plan.
The organization should implement internal controls to confirm it is following accounting policies and procedures, minimize the likelihood of mistakes, avoid employee thefts, etc. The first step is to create strong physical controls. All cash and the means of transferring it – checks, bank account numbers, petty cash, and credit card numbers– should be locked up. In addition, organizations should back up important data regularly and store it off-site. Organizations should also maintain a separation of duties in all aspects of the financial process from authorizing, executing, and recording expenditures through receiving, recording, and depositing income. To create appropriate separation of duties, many organizations require board approval for expenditures above a certain amount, and may require two signatures on checks. Another form of financial control is an audit. An audit is a comprehensive analysis, by a third party professional, of your financial management procedures and activities. The auditor produces a report, with a variety of disclosures that indicates how well the organization is managing its resources. A nonprofit organization registered in California is required to have an audit if its revenue exceeds $2 million in any given year.
In order to know how your organization is doing, you should engage in ongoing financial planning and analysis. As part of this planning and analysis, you will use the accounting data to produce various financial statements, including a statement of financial position, a statement of activities and a statement of cash flows.
Statement of financial position: This summarizes the assets, liabilities and net assets of the organization at a specified date. It is a snapshot of the organization’s financial position on that date.
Statement of activities: This reports the organization’s financial activity over a period of time. It shows revenue minus expenses, which results in either a profit or a loss. It also shows changes in net assets. The statement of activities will have multiple columns in order to report the amounts for each of the following classes of net assets: unrestricted, temporarily restricted, and permanently restricted.
Statement of cash flows: This summarizes the resources that become available to the organization during the reporting period and the uses made of such resources. It’s especially useful in real-time because it reports income that has been received and expenses that have been paid. A statement of projected cash flow is helpful for the board and organization to be able to anticipate any shortfalls for planning purposes.
If you have any questions or concerns, please do not hesitate to contact our office.