6 common misconceptions about nonprofit accounting
1. Nonprofits shouldn’t make money
We’ve discussed this one before, and yet it comes up time and again. Nonprofits are like any other business, if they don’t make money they will be unable to sustain their mission or stay in business. As long as the profits are used to benefit the organization and further its mission, profit is not only allowed but essential for survival. Whether a non-profit makes a profit or not in any given year, there will still be financial activity. There are still bills to be paid, payrolls to process and, hopefully, a large amount of donation revenue to process.
A non-profit organization is run just like a for profit institution, there are just different guidelines for what you can do with the money that is raised. As a nonprofit, the goal isn’t to make money, but to further their cause and those that they help.
2. Overhead matters a great deal
This is another topic we’ve discussed a great deal in the past. The views on overhead hurt the nonprofit industry a great deal. As we discussed above, a nonprofit has to have overhead. Because they operate the same as a business, overhead is necessary for a nonprofit to function. They have to pay people to run their nonprofit, and have a space and website to reach the public. As a donor, you should judge a nonprofit based on the amount of impact they have on the community, not their administration and fundraising costs alone.
Some non-profits are scams, yes, but the majorities are trying to do real work to make an impact in the world, and to qualify as a nonprofit they have to meet certain IRS requirements. If they fail to maintain a certain percentage of revenue spent on programs, they lose their non-profit status – it’s better to let those who know be the judge of whether or not a company is a non-profit. If you have reservations about the nonprofit you’re donating to, speak with them directly about their financials.
3. Because you work for a nonprofit, you shouldn’t make money
In conjunction with the myth of overhead expenses, many believe that those that work in the nonprofit industry aren’t entitled to a salary. In some cases, non-profit employees, especially executive directors, are responsible for the financial health of the organization and making sure that the organization is running efficiently and effectively. When you pay someone well below their fair market wage, you’re going to have constant turnover in that position, which will be highly inefficient and mean little actual work gets done because the focus is always on training new employees. Employees often are the core of program spending, so instability in the workforce ultimately means instability of programs.
In the case of larger non-profits, management level employees are often responsible for the health of a multi-million dollar company, and to get someone with the know-how and experience to do that, you should expect to pay them fairly. In most cases the people at the top could actually make more if they jumped to the for-profit world. It may initially appear that a low six-figure salary is too high, but in reality that may actually be far less than they are worth. Take into account, too, that non-profits are less likely to offer benefits like retirement, health insurance coverage, etc., so it’s not an apples to apples comparison to what people in similar positions of a government or for-profit position are making. I’ve even seen non-profit employees defer their salaries for months when the cash flow gets tight, essentially giving the organization an interest-free loan.
This isn’t to say that in some cases employees aren’t paid exorbitant amounts. It is important that the board of directors regularly reviews the pay given
to the organization’s employees and ensures that there is not misuse of funds. The board should document their process for determining pay rates, and
be sure to compare to independently reported figures of other organizations. Keep in mind that the national average may not always be appropriate to
use. Someone in New York or Washington DC may need to be paid above the national average, although someone in Idaho may be fairly paid below the national
4. You don’t have to look at your budget throughout the year
Dummies.com states it excellently when they say, “A good budget is crumpled, coffee stained, and much scrutinized. A good budget guides and predicts.” You should check in with your budget monthly, comparing and evaluating your budget against your actuals. This will ensure that your organization is staying on track with their goals.
In addition, checking in one or more times a month will allow you to adapt to change. That way, if programs or projects are discontinued, or funding falls through, or your funding increases, you can address the issues and adapt right away. It is important to review and adjust the spending budget for the remainder of the year in order to cut back expenses if needed, or to further fund your mission if you get unexpected funding.
5. You don’t need internal controls if you’re a small nonprofit
This is absolutely untrue. Internal controls not only limit cases of fraud, but often aid in catching errors. Even if your nonprofit consists of only two employees, there should still be a checks and balances system in place. Nancy Church wrote a guest blog a few years ago pertaining to this very subject, with a specific focus on small nonprofits.
6. An audit is a bad thing
Not only is it NOT a bad thing, it can actually be a very good thing. An audit is meant to ensure the accuracy of a nonprofits financials, as well as the
financial health of an organization. In addition, an audit that is published for current and future donors aids in displaying your financial transparency.
As stated by the National Council for Nonprofits, in their article why a nonprofit might conduct an audit even when the law doesn’t require it, “Publishing an independent audit report on a nonprofit's
website or providing the report to those who request it are examples of transparent practices that donors and the public have come to expect from charitable
nonprofits.” No matter the nonprofit you run, financial accuracy and transparency are always good things.
Renata Poe Massie, Content Creator for Jitasa