How to Streamline Accounting Operations for Nonprofits

Nonprofit organizations do great work serving their communities and society as a whole. The Internal Revenue Service (IRS) rewards qualifying nonprofit organizations with tax-exempt status. Tax exemption provides numerous benefits for nonprofits, but it comes with strict financial documentation and reporting requirements.

Fulfilling IRS obligations is one of the greatest challenges nonprofits face. A nonprofit’s operational and upkeep expenses absorb its funds, tightening the accounting budget. Today’s nonprofits must implement robust strategies that correspond with their unique accounting needs.

A Sector Ripe With Unique Accounting Requirements

Like any business, nonprofits must consider accounting activities as daily necessities. However, nonprofit organizations differ from for-profit businesses in ways that complicate their accounting processes.

One difference is the balance between the organization’s accounting requirements and financial resources. Where for-profit businesses finance accounting needs with a consistent revenue stream, nonprofit cashflows are more sparse. A nonprofit organization’s accounting budget is often small after funding other essential activities.

Despite the resource disparity, nonprofit documentation and reporting requirements are some of the most complex. Nonprofit accounting departments must submit various intricate statements and forms.

There are four types of accounting statements to submit:

A statement of financial position
A statement of activities
A statement of cash flows
A statement of functional expenses

Nonprofits also submit IRS forms such as the IRS Form 990 or Form 990-EZ. Each state also has its own set of filing requirements.

Another reason nonprofits struggle to maintain accounting books is that documentation and reporting demand have evolved. Nonprofits must maintain grant activity reports, cash basis budget reports, accrual-based audited financials, cash flow projections, donor-restricted net asset reporting and so on.

Nonprofit Accounting Tips

If you operate a nonprofit organization, you must find cost-effective ways to fulfill accounting obligations. The following tips can help you optimize your nonprofit organization’s accounting processes.

1. Don’t Overthink Your Accounting Software

The first item on our list of financial tips for nonprofits involves accounting software. Any nonprofit’s accounting requirements are complex, but a simple accounting system can streamline the intricate processes. While accounting software is helpful, overthinking the choice of program can derail a nonprofit’s documentation and reporting.

A variety of effective accounting software options tailored for nonprofit accounting saturates the market. Many of the systems are not user-friendly, require additional training and lack integration with third-party business applications. All of these factors have real and hidden costs.

The simple choice is often the best one for a nonprofit organization. Cost-effective accounting software with general appeal, such as QuickBooks, is a perfectly good option. General accounting programs usually integrate well with other desirable low-cost specialized nonprofit software, like donor platforms. A bonus is that QuickBooks is very common. Therefore, it is easy to find cost-effective training or bookkeepers with QuickBooks experience.

2. Don’t Put Too Much Burden on Your Chart of Accounts

When you have a lot of different programs, grants and restrictions to track, it is tempting to just keep adding accounts to your chart of accounts. Resist this temptation!

Expanding your chart of accounts rarely makes accounting easier and often leads to errors and just more confusion. Keep your chart of accounts simple, and use subledgers or ‘horizontal’ accounting structures, such as classes in QuickBooks, to let your chart of accounts work smarter and not harder.

3. Leave the Accrual Accounting for the Auditors

The accrual accounting method streamlines year-end reporting, but it is more complicated on a day-to-day level. You can simplify bookkeeping by using the cash accounting method.

Cash-basis accounting records transactions when the money reaches its destination rather than when the transaction agreement occurs. This method is efficient and perfectly viable to use over the course of the year. Additionally, cash-basis bookkeeping usually aligns with a nonprofit organization’s cash-basis budget.

Choosing cash accounting doesn’t mean that you shouldn’t understand accrual-based accounting or not attempt to make year-end entries to make your audit go more smoothly. Cash accounting will supplement accrual-based methods and simplify your daily accounting processes.

Don’t unnecessarily complicate things by trying to achieve GAAP based monthly financial closings if it isn’t required.

4. Know How to Read Your Financial Statements

Prioritizing financial literacy is one of the best accounting practices a nonprofit organization can implement. As an executive director, you don’t have to be your organization’s accounting expert, but financial literacy is beneficial. Knowing how to read your financial statements can help you identify accounting errors and keep things on track. Encouraging executive directors to engage with the financial statements provides valuable oversight and support for a lean nonprofit accounting team.

Accounting Tips for Nonprofit Organizations