Additional paperwork, however, is not all that sets these entities apart. NFPs must exhibit more financial transparency in exchange for their tax-exempt status. This transparency aims to ensure that funds are being used correctly to further charitable purposes. Reinvesting into the cause is the most salient example of what distinguishes NFPs. While for-profit companies aim to generate profits for owners and shareholders, NFPs strive to spread awareness and garner financial support to fund this mission sustainably.
Operating vernacular also varies from standard for-profit companies. In NFPs donors are considered the customers and volunteers are vendors. These small distinctions are not merely semantics, they speak to a broader difference in accounting needs for non-profit organizations.
While still following GAAP (Generally Accepted Accounting Principles), bookkeeping for nonprofits varies due to the types of revenue and expenses incurred and how metrics are tracked and reported.
Unlike for-profit businesses, which rely mainly on sales from products/services to drive revenue, NFPs have many different revenue streams. Non-profit organizations generate revenue through donations (both financial and in-kind donations), membership or program dues, proceeds from fundraisers, and merchandise sales. Donations may be matched by the organization through grants as well, which must be included in financial reporting to properly account for cash flow.
In-kind contributions are donated goods or services, which would have otherwise been purchased by the non-profit organization. From an accounting perspective, in-kind donations must be recorded using their retail cost to accurately reflect the value of the donation.
Both financial and in-kind donations require that disclosures be sent to donors to give them the information they need to file their personal taxes. Donors must be informed whether their contributions are tax-deductible, and if so, what that value of that contribution is as well.
For-profit and NFP organizations share similar expenses like payroll, rent, utilities, and office supplies. However, non-profit organizations tend to have fewer overall expenses due to volunteer hours and in-kind donations. The goal is to keep expenses as low as possible by soliciting time, products, and services from supporters to avoid restricting cash flow. NFPs that have corporate sponsorships are often able to reduce their ongoing expenses substantially, by having their for-profit supporters pay some of their bills.
Some NFPs request discounts on expenses from suppliers, and any issued discounts must be recorded as donations as well.
With varied revenue streams, cash flow management is more challenging for NFPs. Unlike a traditional for-profit business, cash flow can increase and decrease substantially throughout the year as expenses and revenue associated with donation drives and fundraising events cause cash to ebb and flow.
Further complicating cash flow is the presence of restricted donations. Any donations received must be categorized as unrestricted, temporarily restricted, or permanently restricted. Restricted donations are earmarked by donors for specific projects, which means they cannot be used to fund general operations. Consequently, any restricted donations should be separated to avoid cash flow issues.
Budget vs Actual Reports
A non-profit organization’s board should review the annual budget regularly and compare it to current information about ongoing expenses. While this is a best practice for all business types, NFPs should compile budget versus actual spend reports more frequently (semi-monthly, monthly, or bi-monthly) to overcome the added challenges that they face. Non-profit organizations inherently have more cash flow variations due to inconsistent expenses and revenue generation, which can conflict with even the best budgeting.
Analyzing spend against income in close intervals helps NFPs make necessary budget adjustments to operate sustainably. Without taking this step, NFPs run the risk of running out of the funds necessary to continue operations.
Net assets is calculated by subtracting liabilities from assets. In a for-profit business, a positive net assets value indicates that the business is making money to generate increased stockholder equity. However, for NFPs a positive value is an indicator of sustainability.
When a non-profit has positive net assets it can continue operations as is to maintain supporting the cause or expand operations to increase its efforts. Negative net assets may signal the need to make cutbacks to increase profitability.
While a for-profit business may be able to utilize the services of a bookkeeper, NFPs typically require an accountant to provide sound financial assistance. This distinction holds true for both in-house and outsourced personnel.
The nuances of non-profit financial needs are often a better fit for an accounting company than a freelancer. Seeking out a company that has experience specifically with NFPs is always a sound practice because they will be most adept to handle these unique challenges. Additionally, accountants that work with NFPs are typically more adaptable and better able to customize financial solutions to meet their individual needs rather than provide a cookie-cutter approach.
An accounting firm can also improve the quality of reporting, which is crucial for attracting and maintaining large donors. Financial transparency and accuracy are important for donors that wish to establish grants, make sizable restricted donations, or match fundraising efforts.
Furthermore, hiring an accounting company aids in establishing accounting controls by segregating duties and moving some externally to provide third-party accountability.
If your nonprofit needs bookkeeping support, please let us know! We are very familiar with nonprofit bookkeeping and happy to talk to you. Contact us here.
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