The Cost of Cutting Costs
As a nonprofit, we know you are looking for ways to cut the administrative costs of business and put more money toward your program expenses. Although this is noble, and ultimately the mission of every non-profit, it is also very important that these cuts to administrative expenses do not come at the expense of quality.
Professional accounting help can be expensive, and outsourcing isn’t always an option. For these reasons, it is often one of the areas where nonprofits will attempt to cut costs by recruiting volunteers or entry level help. This is a very big mistake, one that can cost your organization time and money. While volunteers have the best of intentions, they often lack the accounting knowledge needed for your organization.
Aspects of accounting that may seem like simple data entry, such as entering or coding donations, revenue, and expenses can have vast repercussions to your books. A volunteer (usually) won’t possess the education and training to correctly input these values, or grasp the ramifications they could have down the road.
A donation coded to the wrong account can affect budgeting, reporting, tax filing and may even put your organization at risk of losing their 501c3 non-profit status. Often, it takes years to catch and correct these errors. This is due in part to the fact that smaller organizations are exempt from audits unless they have a grant reporting requirement, because of this, it can be several years before you obtain any verification that your data is being recorded accurately.
At Jitasa, one of the biggest mistakes we see is the failure to correctly allocate expenses across programs and administration. More often than not, a client will come to us asking for help because these errors have been made for years and have finally caught up to them. When these mistakes are not corrected, it can result in an inaccurate reflection of high administrative expenses. If an organization reports high administrative expenses, they can be at risk for losing their nonprofit status. This is something that a volunteer or entry level bookkeeper may not know or understand, making them unable to grasp the long term implications of coding an entry incorrectly.
Another problem many nonprofits experience concerns a high level of employee turnover. Because of this, there are times when bookkeeping will stop altogether until a replacement can be found, leaving gap periods in your bookkeeping and accounting functions. This delay can result in missed deadlines for grant reporting, tax filing, and payroll. In addition, with constant turnover, the margin of error is significantly higher as each new employee has to become trained and familiar with your programing, accounts, and bookkeeping needs. This learning curve is required to fully understand your organization, and further compromises the integrity of your accounts.
Employee or volunteer turnover also leads to a lack of consistency in your bookkeeping practices. Every time you change the person doing your entries, the method used will also change. This variable accounting makes it nearly impossible for your organization to keep an audit trail, which then increases fraud opportunities within your organization. One of the largest preventers of fraud within any organization is the use of best practices. In our article aptly titled, “preventing fraud through best practices” we discussed how and why risk management prevents fraud within an organization or business. These are practices that things like turnover and inexperience harm. A temporary volunteer will not feel accountable and won’t be responsible for ensuring checks and balances are in place.
There are countless examples that detail how a situation such as this can lead to fraud. One that comes to mind immediately is an organization which had volunteers entering expense reimbursements into the accounting system for payment. The reimbursements were being paid without any review or approval process. This allowed an employee at the nonprofit organization to grossly abuse the reimbursement policy for their own monetary benefit, over an extended period of time. This fraud was only discovered because the reimbursement policy or lack thereof was noted as a material weakness during an audit review, which then prompted the organization to do a more detailed review.
Reports of fraud or misuse of funds can be devastating to your nonprofit, and losing your 501c3 status is overwhelming and difficult to reverse. Both ultimately result in turmoil, and the loss of donor confidence. Gambling on the future of your nonprofit and sacrificing your mission to save on administration costs doesn’t make sense….making your reputation a priority does. Any steps that can be taken to protect the reputation and financial risk of your organization should be considered a priority in your budget and organization. Hiring an accounting professional will cost money, but the long term benefits will save you time, money, and will be the difference between success and failure.
Melissa Winder, Nonprofit Accountant for Jitasa
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