6 Things You and Your Board Should Know About Nonprofit Accounting
1. How to provide a clear line of communication with your accountant
Whether you utilize a firm like Jitasa or have an accountant on board at your nonprofit, your line of communication must be clear to allow for the best financial decisions. Remember that your board can be held accountable for the financial decisions they make, ensuring they are informed decisions cannot be reiterated enough.
If you struggle with communicating at work, here’s an article from Forbes to get you started.
2. How to read non-profit financial statements
Financial reports are essentially the same in the nonprofit world as they are in the for profit sector…the main difference residing in the wording
of titles and certain accounts. This webinar is a few years old, but features one of our talented team covering exactly what you and your board should know when reviewing financial statements.
3. How to provide Expense Allocations and why it’s important
Expense Allocation, or Cost Allocation is a detailed account of how you spend your organizations’ funds. It is important to provide Expense Allocation for many reasons:
- You are required to show details of Expense Allocations on the IRS Tax Form 990 – the Statement of Functional Expenses.
- Your donors and grantors may ask for your Expense Allocations when determining whether or not to grant your organization money.
- In addition, to comply with 501c3 status a nonprofit must maintain a certain percentage of net income.
Recommended percentages for Expense Allocations are:
- Programs – 70%
- Admin – 15-20%
- Fundraising 10-15%
These percentages should reflect the purpose and cause of your organization, in that the majority of expenses should be Program Expenses. Donors and grantors want to know that any money they give you is being used to advance your purpose and to do good for the community and society.
If you fail to allocate your expenses, you may lose out on valuable grants and other essential funding. If you apply for Federal or State grants, they usually require that you Allocate Expenses as part of their agreement.
4. The difference between a contractor and employee
Not knowing this difference and intentionally or unintentionally misclassifying an employee can result in serious dings from the IRS. Luckily they provide some guidelines…if you can answer yes to these questions you have an employee, not a contractor.
Behavioral. Do you have the right to control what the worker does and how the worker does his or her job?
Financial. Do you control how the worker is paid, whether expenses are reimbursed? Do you provide tools or supplies for the job?
Type of Relationship. Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation, pay, etc.)?
5. That internal controls matter
Internal controls are one of the most important accounting functions you can have. They prevent fraud and safeguard against errors.
6. A “nonprofit” is still a business
Just because you’re a “non-profit” doesn’t mean you can’t make money at the end of the year. If you’re constantly in the red, you’re not going to last
very long as a nonprofit…or have much of an impact on your community. In “Why and how you should run your nonprofit like a for profit organization,” Mohan Sivaloganathan explains why thinking of your
nonprofit like a business will help it in the long run.
Renata Massie, Content Creator for Jitasa