How Does Accounting Work in a Nonprofit

Similar to a business, having accurate and up to date financial documents and an effective accounting cycle in place is vital to the success of a nonprofit organisation. As nonprofits exist with the sole purpose of helping people, they need constant funding to further their mission. 

Since public money is used to run operations, and implement new programs and campaigns, a nonprofit needs to be accurate, honest and transparent with their accounting. 

Therefore, to find donors for nonprofit funding, and attract individuals looking to find charity work or a volunteer opportunity, it’s essential to keep track of accounts through reports, statements and budgets. This is the best way to make sure that you comply with legal requirements while gaining credibility from your supporters and donors. 

What is Nonprofit Accounting? 

This refers to an efficient system of financial management that includes anything and everything, from documentation to record keeping. 

So how does accounting work in a nonprofit business? Here we look at essential nonprofit financial statements, nonprofit bookkeeping and nonprofit accounting best practices to help run a nonprofit organisation smoothly. 

Essential Nonprofit Financial Statements 

Statement of financial position: a clear indicator of your nonprofit organisation’s overall financial health, a statement of financial position is used to identify assets that could be reinvested into the mission and cause. 

Nonprofit budget: a simple way to work out your expenses and the projected annual revenue while allocating funding is through a nonprofit budget. It should be constantly reviewed and amended according to the needs and priorities of your charity. A budget must be realistic and measurable while also containing details on the spending of funds, timeframes for earning revenue, and expenses incurred. 

Statement of activities: as nonprofit organisations don’t focus on income and profit, a statement of activities is used to report the changes in net assets to identify potential revenue streams along with expenses.  

Statement of cash flow: understanding your cash flow is a clear contributor to the success and growth of a nonprofit organisation. Prepared once a month, this document helps nonprofit organisations and charities to determine the key factors that impact their revenue and expenses. 

Nonprofit Accounting Best Practices

To ensure that your nonprofit accounting is effective, here are some simple practices to put in place. 

• Avoid overspending on unnecessary inventory and labour by planning your overhead expenses in advance. As nonprofits and charities have limited funding, reduce your costs to spend more money improving your organisation’s campaigns and causes. 
• Review your budget constantly. Compare, analyse and evaluate your revenue and expenses regularly to ensure that your organisation is on the right path towards attaining its goals and objectives. 
• Make use of nonprofit accounting software. A quick search online for non profit startup help will show you an array of results ranging from how to run operations to the best nonprofit accounting software. Investing in accounting software that fits your organisation can help you save time and increase reporting accuracy while helping to accomplish accounting goals. 
• Establishing firm internal controls will help detect and prevent the chances of fraudulent activities and errors.  Sharing financial duties, needing authorised signatures on important documents, strengthening cybersecurity and regular inventory checks are great ways of implementing firm internal controls. 
• Conducting audits. An effective way to check the accuracy of a nonprofit organisation’s finances is through regular audits. These concise documents which are available for public viewing help provide insight into different opportunities that can be explored for improved financial stability and health.