Across the country, nonprofits are facing unprecedented financial challenges just when
I’ve seen outreach to my accounting and financial firm, which specializes in small to midsized nonprofits, skyrocket in recent months. There seems to be a renewed awareness of how important clean financial books are for a nonprofit’s overall viability. The folks who run nonprofits are experts in their missions, but don’t always have the business experience to guide their teams to a clean bill of financial health. That’s why their fiscal challenges often stem from their bookkeeping.
As organizations prepare to turn the page on what has been a challenging year, here are three reasons why they should prioritize clean accounting and finances in 2021.
The power of clean books
Financial hardships for nonprofits are not unique to 2020. Approximately 62 percent cited financial sustainability as a top challenge in 2018, according to Nonprofit Finance Fund’s annual
My firm recently engaged a client with a stagnant board. Their mission was worthy of support but a lack of fiscal transparency turned off potential recruits. If the books don’t tell a clear story, it makes it more difficult for boards to understand the financial health of the organization. We cleaned their books within six months and proved the financial stability of the organization. We soon saw board recruitment and charitable contributions increase as a result.
A bookkeeper is not a CFO
Clean books allow a nonprofit to be nimble and make necessary improvements. Accountants record the past while financial analysts plan ahead. Nonprofits need both skills to thrive. That is problematic for organizations with budgets that don’t always allow for a bookkeeper, let alone a CFO. The trend of nonprofits relying on volunteers as bookkeepers is slowly subsiding, but too often, nonprofits run into trouble by expecting their accountants to do the job of a CFO.
There are three tiers that support an organization’s finances: a bookkeeper, a controller and CFO. Just one or two of those means only half the financial story is told. Nonprofits must make strategic decisions to get a full and accurate picture of their past expenses and an understanding of what those mean going forward. If bringing in both a bookkeeper and a financial manager isn’t feasible for an organization, an outside accounting firm specializing in nonprofits can efficiently fill in the gaps.
A nonprofit is not an ordinary corporation
What’s the difference between nonprofit and for-profit accounting? The answer lies in the name. In the nonprofit sector, success is measured by how funds are spent. Revenue streams are different and there are complex federal and state standards that must be followed to the letter. Abiding by those guidelines is challenging enough without forcing corporate accounting standards onto a nonprofit enterprise.
Whether you go with an in-house hire or an external firm, a financial manager must understand how nonprofits operate. The smallest nuances can mean the difference between success and failure. For example, one of our clients was awarded two restricted grants days before their fiscal year ended. Because revenue in the nonprofit sector isn’t matched against expenses and funds have to be paid down over time, they were set to begin the new year in a big hole. Knowing this, they were able to take the appropriate steps to make up for the loss.
I have never been more confident in the future of the nonprofit sector. That faith only grows as more nonprofits take a fresh look at their finances. I urge all nonprofit leaders to do the same. At a time when nonprofits are more important than ever, healthy finances can help them focus on the most important aspect of their nonprofit: its mission.
