Working With a Nonprofit Accountant: What to Expect
Monday, January 27, 2020
Nonprofit founders didn’t start their organizations to crunch numbers and file paperwork. They started it in order to achieve a mission: to contribute to society. However, financial number crunching is necessary for effective funding of this mission and to facilitate nonprofit growth. This means nonprofits must ensure effective accounting principles and strategies to function.
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Nonprofit accounting is a unique beast to tackle. This is especially true because of the accounting staff differential between nonprofits and for-profits.
Because for-profits are primarily focused on making money, they’re much more likely to hire an expert individual for a full-time financial position right off the bat. Meanwhile, because nonprofits are mission-focused, they’re more likely to hire highly motivated and passion-driven staff members who are willing to give financial management a try.
When it comes to accounting, it’s especially important for nonprofits to have access to an expert who can help interpret financial information and provide next-steps and recommendations. But what does this look like for nonprofits?
Throughout this article, we’ll work to answer this question by breaking it down into the other common questions nonprofit professionals tend to have about working with a nonprofit accountant. Start from the beginning and read with us, or use the following navigation to find the answers to your more specific questions:
- What does a nonprofit accountant do?
- How is nonprofit accounting different from bookkeeping?
- When and why should I hire a nonprofit accountant?
- What are the types of nonprofit accounting services?
- How do I get started with a nonprofit accountant?
Ready to get started answering some questions? Let’s jump in.
1. What does a nonprofit accountant do?
Nonprofit accountants help organizations ensure financial health and stability, maintain standards for financial data, and make decisions based on the fiscal capabilities of the nonprofit.
Some of the responsibilities that fall onto a nonprofit accountant include:
- Reviewing accounts. Nonprofit accountants have the expertise to review all accounts for any incorrect information. They’ll make sure all of the information in your nonprofit’s accounts looks correct and is on track to help you reach your goals.
- Balancing both sides of a transaction. For double-entry accounting systems, nonprofit accountants will record both the debit and credit records of liabilities and assets and make sure both sides of the transaction match.
- Reconciling bank accounts. Bank reconciliation is an important part of internal controls for your nonprofit. Your accountant will make sure that all of your nonprofit’s records (like those on the general ledger) are correct and shown on the bank statement.
- Preparing for audits. A nonprofit accountant will help your organization ensure everything in your transaction history is correct and ready to be audited. They’ll also help make certain your nonprofit has all the proper documentation and forms prepared.
- Preparing your annual Form 990. Your nonprofit’s annual Form 990 is what the IRS requires to remain a tax-exempt organization. Nonprofit accountants help to collect the necessary information and file these forms for you.
- Reviewing accounts for GAAP standards. GAAP, generally accepted accounting principles, standards help organizations maintain transparency and consistency in their financial records. Nonprofit accountants will ensure your records adhere to these standards.
- Comparing expenses and income to your budget. Nonprofit accountants help organizations understand where there are differences between budgeted and actual income and expenses over periods of time.
As you can see, all of these tasks require an expert’s opinion in order to make sure they’re completed at the highest quality and lead your nonprofit in the right direction.
You may think about your nonprofit accountant as your financial detective. They conduct the analysis of financial data that’s necessary for nonprofit decision-making. This is the driving factor that also makes them different from a nonprofit bookkeeper.
2. How is nonprofit accounting different from bookkeeping?
While often lumped into the same category, nonprofit accounting and bookkeeping are very different concepts, requiring different levels of expertise. However, both are essential for your nonprofit’s strategic growth. Knowing the differences can help you better understand what you’re hiring someone to do.
Nonprofit bookkeepers don’t require specialized education or a CPA, although it helps. They’re responsible for the daily activities at your nonprofit.
A nonprofit bookkeepers’ duties tend to include tasks like:
- Basic data entry
- Recording one side of each transaction
- Writing checks and making deposits
- Processing payroll
- Allocating costs
Essentially, bookkeepers help nonprofits track and manage the daily transactions and financial information of the organization. Meanwhile, accountants take it a step further to help nonprofits with the big-picture financial information.
Accountants generally have at least a four-year education in the field of accounting. When your nonprofit hires an accountant, you should also make sure the individual has their CPA (certified public accountant) status. This is given to accountants who take a specialized test that proves their knowledge in the field.
This specialized knowledge helps accountants fulfill 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.
Nonprofit accountants interpret, classify, and summarize financial data. This helps them ensure everything is correct, presented effectively, allocated efficiently, categorized well, and accurately portrays financial expectations.
3. When do I hire a nonprofit accountant?
Many nonprofits may ask the question: How big does my nonprofit need to get to warrant the expense of an accountant? The answer: every nonprofit needs access to an accountant to grow.
Nonprofits who don’t have an accountant on their team are more likely to make detrimental financial mistakes that could lead to the demise of the organization itself.
If your nonprofit is on the fence about hiring a CPA, our advice is to go ahead and do so. However, there are some specific indicators that illustrate a nonprofit’s need for an accountant. You might need a nonprofit accountant if…
- Your nonprofit wants to ensure financial transparency. Financial transparency is what helps your organization gain a positive reputation in the community. Donors expect (and laws regulate) a certain amount of financial transparency for nonprofits in order to make sure the organization responsibly uses the money provided by generous people.
- You file annual tax forms. Nonprofits are required to file annual 990 forms. If you don’t file for 3 consecutive years, your nonprofit will lose tax-exempt status, not to mention the late fees each year. Therefore, it’s incredibly important to file each and every year. Make sure all of the information on your form is correct and only includes the required data. Over 630,000 social security numbers have become publicly accessible since 2001 due to nonprofits accidentally including it on their 990 forms. With the help of an accountant to file these forms, your nonprofit can avoid mistakes such as this.
- You’re making decisions about major projects and campaigns. Large projects and campaigns to support such projects require analysis of your financial data to make sure they’re possible. A failed major campaign has the potential to be the downfall of a nonprofit. But between advice from an accountant and a fundraising consultant, your nonprofit will know before launching a campaign if you have the fundraising capabilities and financial backing to attempt a major project.
While nonprofit accountants are necessary for organizational growth, your organization’s relationship with your accountant might look slightly different as you grow over time. This is because there are different types of nonprofit accounting services you may choose to invest in.
4. What are the types of nonprofit accounting services?
There are a few main ways that your nonprofit can access accounting services. Each has its pros and cons. Your nonprofit needs to choose the solution that will best fulfill your specific needs.
Using the wrong type of accounting services may lead to your nonprofit spending far too much money or not getting the care you need. Consider the following types of nonprofit accounting services with stars indicating positive qualities and minuses indicated negatives:
Outsourced Nonprofit Accountants
Basically, any nonprofit who isn’t one of the largest or the smallest organizations should seriously consider investing in an outsourced nonprofit accounting team.
Outsourcing to a nonprofit accountant helps your team save time to focus more on your mission while creating great long-term relationships. Plus, you can be sure you’ve invested in someone who is truly an expert in the field. They’ll be liable for any mistakes they make too, further motivating the accountant to do their very best for your organization.
There are a lot of other benefits of outsourcing your accounting needs, including:
- Cost savings. In-house staff members are expensive! Between direct compensation, benefits, and the cost of actually hiring someone, it can get pretty pricey to add a new accountant to your team. Instead, outsourcing provides access to experts without incurring all of those additional costs.
- Better internal controls. Outsourced accountants will work with your nonprofit to establish internal controls. This saves your nonprofit from having to establish this system on its own and provides a third-party, objective perspective for security standards. An outsourced nonprofit accountant will help you see through security blind-spots.
- Outsourcing a nonprofit accountant prevents turnover. It’s incredibly frustrating to hire just the right person to do a complicated job such as accounting, then to have them turn around and leave in a short period of time. Outsourcing your nonprofit accounting needs prevents this option and ensures a consistent relationship.
Outsourcing is an option that would best serve the greatest number of nonprofits. It’s cost-efficient and allows your organization to develop a relationship with the accountant. Plus, you can rest assured you’ll have the care you need because these firms have seen it all before.
In-Kind Donation of Accounting Services
Nonprofits who are just getting started (such as those launched less than one year ago) may not have the budget or the necessity to invest in a robust nonprofit accounting solution right off the bat. On top of that, nonprofits of this size may not 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 look for relationships with a good accounting firm in order to 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 first get started. However, this is rarely a sustainable option because the accountant has little motivation to continue the relationship and do effective work over long periods of time.
It can be hard for nonprofits to move on from the in-kind donation option, but as time goes on, and you continue to expand, you’ll likely want to start looking into other options.
Hiring a Nonprofit Accountant In-House
The largest nonprofits may choose to hire an accountant in-house. In-house accountants are a huge investment for your nonprofit to take on. They’re expensive and your organization has to have a lot of faith in their expertise.
If your nonprofit decides to hire in-house, you’ll want to make sure to:
- Ask about the accountant’s background. You’ll want to make sure they have experience with other nonprofits and are an expert in fund accounting.
- Hire someone reliable. One of the biggest advantages of an in-house consultant is that they are immediately accessible for any ad hoc accounting need or problem.
- Align passions for the mission. Don’t hire someone who doesn’t care about your mission. The last thing you want is for them to leave and you need to go through the hiring process all over again.
Hiring in-house tends to be a good option for the most massive nonprofit organizations. This allows your accountant to get into the nitty-gritty of chapters’ fundraising, banking or staffing dilemmas, or any other financial issue your nonprofit runs into along the way.
5. How do I get started with a nonprofit accountant?
So you’ve decided to get started with a nonprofit accountant? There are several steps you should take to make sure you’re investing in the right people:
- First, consider your needs. You want to make sure that whoever is the nonprofit accountant for your organization will fulfill those needs. Make a list of the tasks you need to be accomplished. Make sure you know which of those needs require a nonprofit accountant and which require a bookkeeper (you may find both during this process!).
- Second, conduct research. Googling your accounting needs or searching online can help you learn more about the nonprofit accountant options that are out there. Start making a list of names of the places and people who will help you fulfill your needs.
- Next, ask for referrals. Ask other organizations, your auditor, and other trusted resources about the best nonprofit accountants. Then, conduct further research about these references. Don’t simply go with the first accountant you hear about! Every nonprofit has different needs. You should still conduct research, even if the referral comes from a source you trust highly.
- Finally, reach out to your top picks. After analyzing the prices, services, and background of nonprofit consultants and firms, go ahead and reach out to your top picks. This is the last step in the research process before you make your final decision!
Once you’ve selected 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 your mission!
Working with nonprofit accountants is necessary for your nonprofit to grow. They’ll help you do the financial detective work you need in order to analyze, summarize, and otherwise improve your financial standing.