Working With a Nonprofit Accountant: What to Expect
Tuesday, June 27, 2023
Your nonprofit was founded to make a positive, lasting impact on your community—not to crunch numbers and file paperwork!
However, financial number crunching and paperwork filing is vital for your nonprofit to fund its mission and grow its impact. Because nonprofit organizations’ finances differ greatly from those of for-profit companies, it’s important to have access to a professional who can help interpret data, provide recommendations, and create a strategy that aligns with your organization’s unique financial position—a nonprofit accountant.
In this guide, we’ll cover the basics of what a nonprofit accountant does and what to expect if your organization works with one. We’ll answer the following common questions:
- What does an accountant do for a nonprofit?
- How is nonprofit accounting different from bookkeeping?
- When should I hire a nonprofit accountant?
- What are the types of nonprofit accounting services?
- How do I get started with a nonprofit accountant?
Nonprofit accounting is a unique beast to tackle, so it’s most beneficial to hire an accountant that not only has experience with organizations like yours but specializes in working with them. Let’s get started with an overview of what nonprofit accountants do.
1. What does an accountant do for a nonprofit?
Nonprofit accountants help organizations ensure financial health and stability, analyze financial data, and make decisions based on the nonprofit’s unique financial position.
Some of a nonprofit accountant’s key responsibilities include:
- Reviewing all of your organization’s accounts. One of a nonprofit accountant’s most essential resources is the chart of accounts, which serves as a guide to your organization’s financial data. They’ll make sure all of the information in your nonprofit’s various accounts is correct and on track to help you reach your goals.
- Balancing transactions. For double-entry accounting systems, nonprofit accountants will record both debit and credit records and make sure both sides of the transaction match. Your accountant will also compare your organization’s ledgers to your bank statements to ensure your records are correct.
- Compiling financial statements. Nonprofits have a standard set of reports they compile each year to analyze their finances. A nonprofit accountant will not only pull all of the data needed to create your income statement, balance sheet, and cash flow statement, but also review those reports to draw conclusions about your organization’s financial health.
- Preparing for audits. If your nonprofit conducts independent financial audits, an accountant will help you compile all of the necessary documentation and ensure everything in your transaction history is correct and ready to be audited.
- Filing tax forms. A nonprofit accountant will collect the necessary information for your annual tax return and file it for you, as well as completing the various tax forms you’re required to issue to your organization’s employees.
- Analyzing operating budgets. Your accountant can help you understand where there are differences between your organization’s budgeted and actual income and expenses each year, and they’ll work with you to create new budgets for each fiscal year.
- Maintaining compliance with GAAP standards. In order to maintain transparency and accountability in financial reporting, your accountant will review your reports and accounting practices to ensure they adhere to the Generally Accepted Accounting Principles (GAAP).
All of these tasks benefit from an expert’s opinion to make sure they’re completed at the highest quality and lead your nonprofit in the right direction. You might think of your nonprofit accountant like a financial detective, since they conduct the financial data analysis that’s necessary for effective nonprofit decision-making.
2. How is nonprofit accounting different from bookkeeping?
Both accounting and bookkeeping are essential for your nonprofit’s financial health and ability to grow. The two are separate but related concepts that require different levels of expertise to do well.
To help you understand the roles you’re filling when you bring on a bookkeeper or an accountant, let’s walk through the differences between the two.
Nonprofit bookkeepers help your organization track and manage its day-to-day financial activities. Their duties often include tasks such as:
- Entering basic financial data into spreadsheets or bookkeeping software.
- Writing checks and depositing funds.
- Recording single-entry transactions like bills paid.
- Allocating expenses for different programs, fundraisers, and administrative needs.
- Processing payroll (if this function doesn’t live with a separate HR department.)
Although specialized education and certifications can help bookkeepers do their jobs more effectively, these aren’t required. Basically, bookkeeping lays the foundation for the accounting processes that follow.
Nonprofit accountants interpret, classify, and summarize financial data. Through this process, they ensure all information is correct, presented effectively, allocated efficiently, categorized logically, and accurately portrays financial expectations.
Accountants generally have at least a bachelor’s degree in accounting or a related field, and many also obtain master’s degrees. When your nonprofit hires an accountant, make sure the individual has their CPA (certified public accountant) certification, which is given to accountants who take a specialized test that proves their knowledge in the field.
This specialized knowledge helps accountants fulfill all of the duties listed in the previous section. They can help your nonprofit create strategies to boost your financial standing and complete projects in a fiscally responsible way.
3. When should I hire a nonprofit accountant?
Nonprofits often ask the question, “How big does my organization have to get to warrant the expense of an accountant?” The answer is that nonprofits of all sizes need and can benefit from working with an accountant, especially when planning for future growth!
If your nonprofit is on the fence, our advice is to go ahead and seek out an accountant. However, there are some specific indicators that illustrate a nonprofit’s need for one, including:
- Wanting to ensure financial transparency. Because nonprofits by definition don’t work to earn a profit, the main purpose of nonprofit accounting is accountability. Being transparent with donors and stakeholders about how your organization is handling the funds they’ve generously provided helps retain their support long-term. Plus, a certain level of accountability is required for your nonprofit to comply with legal requirements.
- Filing annual tax returns. Completing the IRS Form 990 each year is critical to your organization’s ability to maintain its tax-exempt status and avoid fines. An accountant will advise you on which type of the Form 990 to file and help you complete it by the deadline. More than that, they’ll ensure your nonprofit fills out the form correctly to prevent sensitive data like social security numbers from becoming publicly available.
- Making decisions about major projects and campaigns. Large projects and the fundraising campaigns to support those projects require financial data analysis to make sure your goals and timeline are feasible. Between advice from an accountant and a fundraising consultant, your nonprofit will know if you have the fundraising and financial capabilities for a major project before putting effort and resources into the campaign.
While accountants allow for organizational growth, your collaboration with your accountant will likely look different as your nonprofit expands. For example, an organization that’s just starting out may need extra help filing their first tax return, while an established nonprofit might benefit from more advice on maintaining transparency as their financial situation becomes more complex.
4. What are the types of nonprofit accounting services?
Another way your organization’s relationship with your accountant might change over time is through the type of accounting services you access. Each type has its pros and cons, so weigh your options and choose the solution that will best fulfill your specific needs. Let’s examine each of the three types in more detail.
Hiring an Accountant In-House
Hiring in-house tends to be a good option for enterprise-level, multi-chapter organizations. Your accountant’s dedication and focus allows them to easily manage multiple fundraising campaigns, solve banking or staffing dilemmas, and deal with the additional complexities of large nonprofits’ financial situations.
If your nonprofit decides to hire an accountant in-house, make sure to:
- Ask about the accountant’s background. Ensure they have experience working with nonprofits of your size and scale, as well as expertise in fund accounting.
- Hire someone reliable. One of the biggest advantages of an in-house accountant is that they are immediately accessible as problems come up, so the person you hire should be able to provide this benefit.
- Align passions for your mission. Like any other nonprofit staff member, your accountant will be more motivated to work hard for your organization if they care about the specific impact you’re making in the community.
Despite the benefits of hiring an in-house accountant, it’s a major investment for your nonprofit to take on. Recruiting and training a new staff member is expensive, and your organization would be liable for any mistakes that may occur because this person is on your payroll.
In-Kind Donations of Accounting Services
Nonprofits that are just starting out, especially those in their first year of operations, may not yet be able to invest in a full-scale nonprofit accounting solution. Additionally, small nonprofits often don’t have the manpower required to do effective research about accounting providers and personnel who would fit in well with the organization.
Instead, brand-new nonprofits might seek out relationships with accountants in their area so they can ask for the in-kind donation of nonprofit accounting services. Accepting in-kind donations means you don’t need to pay for the services, which can be a big help as nonprofits start figuring out their accounting systems.
However, donated accounting services usually aren’t sustainable. Because the accountant isn’t getting paid for their work, other responsibilities and paid projects can easily take precedence and eventually end their relationship with your organization. As your nonprofit grows, you’ll need to look into other options to meet your accounting needs.
Outsourced Nonprofit Accountants
For organizations that aren’t among the very largest or very smallest nonprofits, the best option is often to outsource accounting services to a team of experienced professionals. There are a wide variety of benefits to outsourcing, including:
- Assured expertise and motivation. Because they have experience working with a range of nonprofits, outsourced accountants are experts in their fields. If your organization finds itself in a particular financial situation, chances are your accountant has seen something similar before and can draw on that knowledge. They’re also the ones liable for any mistakes they make, which motivates them to do high-quality work.
- Improved internal controls. Outsourced accountants will work with your nonprofit to establish or update your system of security standards. Their third-party, objective perspective can help your organization see through blindspots and develop internal controls that allow you to better prevent and manage risks.
- Cost effectiveness. As stated previously, hiring is expensive, not to mention the complete compensation plan you’d need to offer an in-house accountant. Outsourcing provides access to experts without incurring the additional costs of recruitment, training, and providing benefits. However, because outsourced accountants are paid for their work, they have more long-term motivation than someone donating their time would.
- Consistency in relationships. Both in-house and in-kind accounting services have higher potential for turnover than outsourcing does. Instead, you can build a long-term relationship with the accounting firm you outsource services to and maintain consistency.
If you choose to outsource your nonprofit’s accounting services, keep in mind that turnaround times may be slightly longer than if you hired in-house. However, by consistently communicating with your accountant and planning ahead, you can easily make outsourcing work for your organization.
5. How do I get started with a nonprofit accountant?
No matter which of the types of nonprofit accounting services you choose, you need to make sure you’re investing in the right people. Here are four steps you can take to get started:
- Consider your organization’s needs. Your nonprofit accountant needs to be able to fulfill those particular needs, so make a list of the tasks you need a financial professional to accomplish. Double-check your list so you know which of those needs require a nonprofit accountant and which are better suited to a bookkeeper.
- Begin your research online. Googling your accounting needs or searching for an accountant online can help you learn more about the available options and start making a list of potential accountants. Make a note of each individual’s and firm’s background, services, and pricing.
- Ask for referrals. Contact other nonprofits of a similar size and in a similar vertical to yours about their experience working with an accountant. If you’ve worked with an independent auditor in the past, they may also be able to refer you to a nonprofit accounting firm. Although it’s tempting to go with the first “good” accountant you hear about, do some additional research to ensure each reference can meet your needs.
- Reach out to your top choices. Narrow down your list, then contact each of your favorite choices individually to discuss your goals and determine whether they would be a good fit for your organization.
After selecting your nonprofit accountant, you’ll be able to work with them to develop the internal controls and financial data analysis you need for your organization to succeed. Then, you and your other staff members can get back to what matters most: furthering your mission!
Working with a nonprofit accountant is a key contributor to your organization’s overall health and ability to grow. They’ll help you do the detective work you need to analyze your financial position, manage your funding effectively, and remain accountable to donors and stakeholders. Keep in mind that every nonprofit is different, and your choice of an accountant needs to align with your organization’s situation and goals for the collaboration to succeed.
For more information on working with a nonprofit accountant, explore these resources:
- Nonprofit Bookkeeper vs. Accountant: Who Should You Hire? Dive deeper into the differences between bookkeeping and accounting, and discover why both are essential for your nonprofit.
- Restricted Funds: What Are They? And Why Do They Matter? Learn more about an element of your accountant’s work that is highly specific to nonprofits: restricted funds.
- Outsourced Accounting for Nonprofits: Top 10+ Firms. Start your research into outsourced nonprofit accounting services with this comprehensive guide.