Intuit Accountants News Central

Accounting Issues for Nonprofit Organizations

Article Post Date
February 23rd 2011 by Scott Cytron

Whether an organization is a small, local foundation offering grants to arts associations, or an international charity providing health services and food after a tsunami or hurricane, there are certain accounting issues particular to nonprofits that every accountant ought to know about – or at least that’s what Kathie deNobriga believes.

It all starts with something seemingly non-technical: staffing.

Kathie deNobriga

“A nonprofit, especially a small- and mid-sized one, often looks for people with multiple skillsets, and as well as knowledge of the organization’s program and commitment to the mission,” she says. “So when you find people who are perfect in every other respect, but do not have any extensive experience in keeping the books, it’s up to the external accountant to plug in and manage the numbers. It’s not a question of finding a square peg for a squarer hole; the challenge is to manage human resources in a way that serves the organization.”

Kathie thinks it is important for the staff and the board to run an organization that is not only fiscally responsible, but also makes a difference in the community – in fact, making a difference is why the IRS grants nonprofit status. This duality is one of the primary reasons accountants may, perhaps, shy away from working with nonprofits versus for-profit companies: there is not a single “bottom line.”

Kathie believes the rewards far outweigh the drawbacks, so anything an accountant can do to increase his or her knowledge of accounting for nonprofits will always be for the greater-good.

Five Specific Accounting Issues

Kathie is a nonprofit consultant specializing in strategic planning, board development and assessments for nonprofit organizations. Based in Atlanta, GA, she has worked with all kinds of nonprofits and has first-hand knowledge of accounting issues common to all nonprofits. Here are her top five issues.

#1: Tracking Grants – While it’s common knowledge that nonprofits receive grants from many sources, the way an organization tracks its receivables can be confusing for the grant provider and even for the nonprofit’s board members. Nonprofit grant providers are not required to adhere to any specific year-end; some are based on the 12-month calendar, and others use July 1, May 1 or practically every other month.

“Knowing what revenue you have in your account that is deferred, what grants are receivable and the total grants you have at any one time is problematic without good tracking,” says Kathie. “You may have many grants over many calendar years, and sometimes you get all the money at once. Any grant application will ask for an organization’s financials, so when it appears as if there is too much grant money coming in during a certain time period, this variance must be defined and explained.”

#2: Tracking Pledges – Kathie says statistics show that individuals account for about 80% of charitable giving, with larger donations from pledges often coming in over a multi-year timeframe. Tracking what’s paid and what’s outstanding are just two challenges, along with trying to get a system to automate and generate pledge reminders. “If you only have a handful of donations, you can keep track of them by hand, but if you’re fortunate to develop a solid donor base, you could be faced with a bookkeeping problem.”

#3: Managing Payroll – Who doesn’t like to get paid on a regular basis? While this may be a rhetorical question, many organizations often lack the expertise to handle payroll internally, especially if a staff member is only keeping the books on a part-time basis. As a result, outsourcing the payroll function is a good option because the technical aspects – electronic deposit, government forms, withholding and other matters – are handled by outside experts.

“If I weren’t in QuickBooks® noodling around with some regularity, I, too, would forget how to handle the payroll function,” says Kathie. “I truly think outsourced payroll is money well spent, but for a nonprofit, it’s money the organization may not have to spend.”

This begs the question: Should a small nonprofit with a limited budget and no small staff ask for pro bono help from volunteers or board members rather than pay for payroll and bookkeeping services?

“To me, pro bono is a bigger issue than just how it affects accounting; people often promise things they don’t deliver, so the larger issue is how to maintain a culture of accountability,” says Kathie. “You don’t want to run a sloppy shop! However, if I did have someone in a volunteer bookkeeping position who failed to deliver, I would sit down as quickly as possible with my board treasurer and try to fix the situation. You can’t jeopardize your whole enterprise because one person fell off the map.”

#4: Staffing Levels – This point goes back to the three previous ones in that a small organization must either figure out a way to make the bookkeeping tasks part of one person’s job or find the funds to outsource. Too often, allotting the function as a percentage of a person’s time just doesn’t work.

“They may dedicate four hours a week but are not in this the books on a daily basis; the fluency, comfort and ease suffers,” she says. “It’s not that this is beyond the intelligence of a staff member, but if you don’t practice your accounting skills daily, you can’t remember what to do with regard to technical matters.”

#5: Managing and Understanding Cash Flow – This final area, receivable income and encumbered expense, affects an agency’s program as well as the board’s ability to manage. Organizations must find a way to increase the skills of the staff and board to understand cash flow, read reports and maintain fiscal responsibility.

“How many times have you heard a smart board with good information say, ‘We have plenty of money in the bank, but we are spending all of it for an upcoming special event fundraiser?’ You also have to analyze the true costs of a program, and how you allocate staff time or a percentage of administrative costs across program areas.”

One resource Kathie recommends is the Nonprofit Finance Fund, a national initiative to increase the skills and sophistication of financial tools for nonprofits. In addition to a variety of resources, the Fund holds classes on accounting. Organizations are accepted into a class and work with the Fund for more than a year to increase their skill level.

Financial Literacy

Nonprofit boards are usually made up of a cross-section of volunteers who all have unique skills. Some may specialize in fundraising, while others are public relations’ pros. What’s often lacking, says Kathie, are volunteers who cannot read, let alone understand and analyze, financial statements.

“Often, board members have no accounting ability to interpret cash basis or read a P&L statement, so the challenge is how the nonprofit’s staff and accountant can generate financial reports that are useful, accurate and clear, as well as reports that do not overwhelm with so much data that the board members’ eyes glaze over. You can provide the information, but the board does may not know how to interpret it to make any kind of relevant business decisions.”

Training in all-things financial is the key. However, accountants who may be called upon to conduct the training sessions should realize that some board members may be too reluctant to admit they have little-to-no financial acuity.

“There’s a lot of shame in this country when it comes to talking about money. I’m on the city council and when I look at some of the financials, it’s sometimes embarrassing to admit that I don’t fully understand what I’m looking at. Every board should make an investment of time in learning more about accounting. After all, if the board is responsible for the fiscal health of the organization, how can they even begin to provide solutions?”

Training must be ongoing, but doesn’t always have to formalized. A new GAAP rule, for example, requires restricted funds to be recognized in the year they are received. The board should know about these kinds of rules and regulations in order to make more informed decisions.

“Volunteers who serve on more than one nonprofit will probably face many of the same issues from one to another. One exception is how the organization accounts for unrelated business income tax if it sells a product. Museum gift shops have can this situation. The bottom line is a nonprofit must do what it can to get its accounting processes in order, but the board must also perform its o

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  • About Scott Cytron

    Scott Cytron Scott H. Cytron, ABC, is editor of Intuit Accountants News Central, and brings more than 25 years' experience in accounting and financial services to the profession. An accredited consultant, Scott works with companies, organizations and individuals in professional services (medical, legal, accounting, engineering), high-tech and B2B/B2C product/service sales. Contact him at scott@cytronandcompany.com and visit his blog, www.absolutecytron.com. See all of Scott's articles…

    You can also visit Scott's Website

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