Many growing for profit and nonprofit organizations find themselves with financial reports that make no sense, "forgotten" revenues and slow bill paying processes. They may be at a point where the part-time bookkeeper is over his or her head and flooded in work. So, what can you do? You can look at accounting tasks and divide the work within these tasks. For example, a typical accounting department performs the following work:

  • Pay bills - Accounts Payable
  • Recognize revenues - Accounts Receivable
  • Process payroll - Payroll Administrator


Other tasks associated with an accounting department are: Cash management, bank reconciliations, budgets, financial reporting and taxes. In large businesses each of these functions is performed by one individual or more. In smaller firms, tasks are shared and staff is supervised by a manager or a controller, who often is responsible for financial policies and procedures for the organization.

A mistake common in growing small businesses is to assume that accounting is easy and can be done by the person who is a receptionist or works in another part of the business. Without training or education, this person should be able to perform accounting functions of a full-charge bookkeeper. That's a mistake and is not fair. Hire accounting people who have the proper education and experience. Accounting managers or controllers should have at least a bachelors' degree in accounting. Someone with a four-year degree in business, and a few years of accounting experience may also qualify.

As you organize the department, consider segregation of duties. For example, the person who opens the mail or receives money should NOT be the person who books revenues in the accounting system. If the person running accounts payable is also doing bank reconciliations, then a manager or controller should review the reconciliation and look at cashed checks. Why?  To have a form of check-and-balances, internal controls, to prevent and correct mistakes or misappropriations.  

Before hiring anybody for accounting positions, run a background check on all individuals, who should be trustworthy with a clean credit history. Of course, exceptions can be made, but they are usually rare occasions.  This also applies to volunteers as well.

Many businesses organize their accounting department using flowcharts and job descriptions. You don't want to have the same task be performed twice or three times and at the same time, you don't want to miss an important process. Some firms hire outside consultants to help them in organizing their department for maximum efficiency, while considering risks and controls. Unfortunately, this last option is usually used after a fraud or loss situation, when people are traumatized and willing to pay for professional advice.  

When considering a new accounting department, you have a few options and what works for one business may not work for another. You could organize the department yourself and then ask for an outside CPA or management firm to review your set up for internal control and efficiencies.

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Nonprofit Financial Statements blog
Budgeting for Nonprofits blog
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  1. Setup a summary sheet for each grant with reporting dates and other crucial date information. This summary is updated for each new grant and is reviewed every week to make sure nothing falls through the cracks.
  2. Develop your own standard template for each grant. Every write-up should look the same with a couple of sentences about the purpose of the grant and then fields for dates, specific requirements and other compliance issues in detail, such as staff education level requirements. The template could be setup in a spreadsheet or in a database to facilitate access and reporting.
  3. Make sure the accounting system captures revenues and expenses on each grant. You could identify grants through the chart of accounts by reserving a couple of digits towards specific grants or through "classes" or other method specific to your software. You may also need to train your accounts receivable and payable staff to recognize grant funds coming in and out so they can code them properly. If items are not coded properly, you will have a nightmarish time providing reports to grantors and other interested parties.
  4. Develop a good filing system. Be sure to download and print all OMB Circulars and other documentation relevant to grant control, including notes on meetings and phone conversations. Keep them filed and accessible at all times. You can make a summary listing of all non-allowable costs that you are likely to have and keep it handy.
  5. Establish a budget for the organization based on grant budgets. Every grant funded project should have its own budget, which is entered in your accounting system. Review reports on each project monthly to be identify errors and monitor financial compliance.
  6. Review documentation on journal entries associated with grants. It is easy to make mistakes in journal entries and a regular review can identify and correct the mistakes. All journal entries should have proper documentation attached to them explaining clearly the purpose of the entry and how numbers were derived.

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Read also No more Audit Freak out
Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
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Each organization is different, but every nonprofit faces challenges when planning for the future. Cash flow is crucial --no business, including a nonprofit, survives without proper funding. However, oftentimes, people are concerned about the day to day activities of an organization and don't pay attention to planning for the future. This issue has become even more important now that FASB released a new guideline requiring nonprofits to basically show how they can pay their bills in the next 12 months. This guideline is effective for organizations with fiscal year beginning after December 15, 2017.

Check out 5 ideas that nonprofit managers may consider when conducting financial planning for an organization:

1- Use a budget

Budgets should be prepared before the year starts. Small organizations could use the prior year's income and expense numbers as a budget number for the following year. Running a nonprofit without a budget is like shooting in the dark. It's too easy to forget details and to end up with no money at the end of the year.  Once a budget is setup, then income and expenses should be compared to the numbers to be sure the organization is on target financially.

2- Pay attention to the timing of your cash flow

Cash is king in the nonprofit world. Without cash, an organization cannot pay its bills and must close. Timing is crucial, not just the amount of funding.  For example, if an organization has a big bill to pay in August, but the money to cover this expense will be received in November, the nonprofit must deal with this shortage and start planning for it months in advance.

3- Consider getting a line of credit BEFORE you need it

Since funding can be cut or reduced, nonprofits should get a line of credit from its bank. the best time to apply and get a line of credit is before the nonprofit needs it. This money could be used if funding is delayed or to cover a planned short-term cash shortage. Inquire about lines of credit for nonprofits, which may have a lower interest rate and more favorable terms.

4- Educate your board of directors on financial literacy

Many organizations have very involved directors and officers, but they don't really have the knowledge required to run a nonprofit. Such leaders should get a basic understanding of finance to evaluate reports and to hire and staff the accounting department properly. Some boards hire an outside consultant to come in a few hours a month or a week to supervise staff and resolve any problems before they become major. It's an option, but the board must understand what is going on.
5- Allow for surplus

When planning ahead, be sure to consider getting a cushion for the unexpected. This could be 2-10% of the total budget for a year, or an amount or percentage agreed by the board. This surplus, also known as "reserve," is to be used for emergencies or unexpected costs, and is usually replenished once used up. The plan should be NOT to use these funds, but to have them, "just in case."

Financial planning for a nonprofit can be a bit of a challenge, but it should be done to maximize the chances for survival and growth of a nonprofit. Without planning, small organizations may get by, but may not be ready for unexpected funding cuts or events. Making financial planning a priority can help your nonprofit to go in the right direction and make a difference in the community.

See more:
Nonprofit Financial Statements blog
Budgeting for Nonprofits blog
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Many managers get aggravated with demands from the accounting department.  However, nonprofits have a lot to gain by following proper accounting requirements, such as requesting proper receipts or approvals. The requirements may seem a bit burdensome, but they serve important purposes within a nonprofit organization's operations. 

Below are a few important reasons for nonprofits to follow accounting requirements:

1- Accounting/financial requirements may be mandatory for recipients of federal and other government funding. In order to avoid errors and misappropriations, grant providers often use certain requirements and procedures, including reports. There is really no choice-either the nonprofit follows the proscribed requirements, or funding stops.

2- The IRS inquires about financial tasks on the tax form 990, the information return filed by nonprofits. For instance, the return explicitly inquires about the number of items reported on the 1096, the Annual Summary and Transmittal of U.S. Information Returns. This is usually related to reporting payments to contractors over a certain amount. To comply with this inquiry properly, the nonprofit should have financial rules to capture this information.

3- The nonprofit must also follow all local, State and federal laws. For example, employees may need to file time sheets to be paid correctly. If they don't follow this accounting rule, paychecks may be printed incorrectly, putting the nonprofit at risk for fines and penalties. So, accounting folks must require proper documentation and approvals so that this process run smoothly. 

4- Following accounting guidelines protect the nonprofits from errors and fraud. An example would be the popular procedure of requiring approvals on all invoices to be paid. Usually, a supervisor approves such invoices to avoid payments for fake or wrong items or services. Compliance with accounting requirements can save the nonprofit lots of money.

5- Compliance with accounting requirements, including financial processes, are often evaluated by auditors to assess the risks of nonprofits. If an accounting requirement is for monthly cash reconciliations, for instance, but the auditors note that they are actually done once every four months, most likely the audit risk will increase along with the costs of such audit. So, accounting requirements are to be followed ALL THE TIME to avoid problems.

6- Accounting rules can help in building a nonprofit's competence, while minimizing confusion. For example, a rule to pay bills on only certain days every week may give employees the sense that there is  set order and process to do certain tasks. One cannot walk in there and expect that a check be ready within minutes. Financial rules can instill confidence and controls within a nonprofit.

Accounting, taxes change throughout the years, so don't be surprised if the requirements change. 
For example, starting effectively in 2018, nonprofits must prove that they can pay their bills short term. This is a new  requirement of FASB, the organization that dictates accounting rules for nonprofits. So, expect some new requirements from accounting regarding this new guideline and others coming down the pipe.

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Read also No more Audit Freak out
Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
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You’re an executive director or a manager, and you receive a request for payment on a bill or a stack of bills. You look up the backup documentation, see authorizations and all the proper paperwork and you're done. Simple enough, right? Hold on a minute. Many managers really don’t question anything, but look at a bill and go on auto-mode on approving bills. This can be quite risky, and if something goes wrong, blaming someone for your wrong approval or payment will not go well. Below are some ideas about what to do to avoid issues paying bills.

 1- Ask for a vendor change/new vendor report from your computerized system. Most software can give you this information. The idea here is to make sure the vendor exists. I (and probably you) have heard about employees making up vendors and depositing checks in their own accounts. It could be an odd name that could be someone’s grandma or a name similar to other vendors. The step of reviewing new or changed vendor information regularly may prevent this issue.

 2- Have a policy of requiring two signatures on payments of over a certain amount, say $5,000. It’s always good to have two pairs of eyes looking at the documentation. One or both people could be members of the board of directors or managers in different departments. Many nonprofits have more than two people allowed to sign on payments to vendors, so that if one person is not available, another one may be. Additionally, make sure that whoever signs checks or make online payments is not connected with the accounting area to assure proper segregation of duties. 

 3- Review your bank account online once a week, looking at a sample checks to make sure they look familiar. Unfortunately, it’s possible for checks and other payments to be modified after they are signed off. Zeroes can be added afterward or payee can be changed a bit. So, having someone not involved with accounting take a look online at the checking account can prevent problems down the road. Also consider using “positive pay,” a bank system that only pays checks on a list. Review this list regularly, if your nonprofit uses this system.  
 
 
Are you confused about what to look for when reviewing financial statements? Maybe a bit intimidated by all the numbers? Well, you are not alone. Many board members don't really have a framework to evaluate financial reports and may miss important details. You don't need to have an accounting background or to understand debits and credits to be able to focus on relevant areas. Below are four important areas to look for:

1 - Be sure to approve budgets that spend most of the funds in programs.

Programs are the most important part of a nonprofit and should be the main focus on any budget. If most of the expenses are allocated to administration or fundraising, it may mean that the organization will be launching a new program, or it could mean that the nonprofit lost its focus and needs to re-think its budgets as it relates to programs. If the focus in not on programs, there is something wrong.

2 - Always look at the cash on the Balance Sheet/ Statement of Financial Position.

Many boards only look at revenues and expenses, but not at the cash account balances. Cash is indeed king and should be evaluated carefully as revenues and expenses may or may not show cash transactions, depending on the accounting basis used. If you see $10,000 in income and $1,000 in expenses, but only $100 in the cash balance, you should start questioning how the nonprofit is paying its bills.  

3 - Pay attention at variances between actual and budget numbers cumulatively.

As budget vs. actual reports are presented, you should look for small variances in revenues and expenses that may end up being a large difference after a few months. If revenues, for instance, are below budget by 5% every month, at the end of three months, the cumulative difference could be 15%, and the nonprofit may not have the resources to pay for its expenses as time passes. So, be sure to review cumulative variances as well as monthly ones.

4 - Review tax returns before they are filed.

The IRS promotes the idea of boards of directors to review the tax returns before they are filed. The 990, nonprofit tax form, specifically asks if the board reviewed the returns. The point here is to make the board accountable and not just a detached government body. As board members review the tax returns, they may get ideas about internal controls and verify the information presented --whether they like it or not, they are responsible for the 990 information filed.

Read article  Nonprofits: Tips on Managing Consultants
Read also Nonprofit fraud issues
Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
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Nonprofits, like any other business, need to deal with taxes. Even though a nonprofit may be tax-exempt, it still has to file and sometimes, even pay taxes. Let's not forget that tax compliance can be required at local, country, state and federal levels, so nonprofits cannot just ignore this issue. Below are some important tax considerations:

1- File the 990-N online

The 990-N is an Internet-based filing available to small organizations, requesting basic information, such as name and address. Nonprofits may lose their tax-exempt status after the organization fails to file the 990-N for three years. Note that the Internet system can be used only for the current year, therefore if you're late, you cannot file the 990-N, and must file the 990 or the 990-EZ in paper-form. The eligibility for the online form varies each year, so check with the IRS website often to see if your organization can use the 990-N online.

2- Sales/Use taxes

Many vendors don't charge nonprofits sales taxes because they are under the wrong assumption that these organizations don't pay sales/use taxes on purchases. This may seem like a good deal at first, but can create problems later if the vendor is audited and found that it should have charged taxes. The audit may spread to the nonprofit, and overall, it's not a pretty picture. This situation happens often because some states indeed don't charge sales taxes on nonprofit purchases, but this is not the case with every state. California, for example, requires most nonprofits to pay sales/use taxes on many types of purchases.

3- Payroll taxes

Nonprofits must follow the laws like any other business. Failure to pay proper taxes can create a huge burden on the nonprofit, which may be hit with large penalties and interest. The Treasury Inspector General for Tax Administration issued a report in 2014 regarding nonprofit delinquency and noncompliance with payroll taxes, so this seems to be a common issue within this sector. Be sure that your payroll department and/or processing service is aware of all payroll obligations, including proper payments for state and federal taxes.

4- Unrelated Business Income Tax

The idea here is to prevent nonprofits to compete unfairly with other firms, providing similar goods and services. Proceeds classified as unrelated are carried on regularly and are substantially independent to the exempt goal of the organization. Nonprofits file and pay this tax using form 990-T. However, note that the IRS provides many exceptions to this rule, giving nonprofits breaks on what is taxable. Income from volunteer work is one such exception.

Read article  Nonprofits: Tips on Managing Consultants
Read also Nonprofit fraud issues
Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
Also check out the book "15 Quick Tips on Becoming a Great Consultant" -- free on Kindle Unlimited
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Planning your next fundraising event? Now it's the time to consider pesky financial issues that can derail your best efforts. Many fundraisers, focused on the tasks to make the event a success, end up forgetting some crucial activities and costs, such as the items discussed next.

1- Create a Budget for the Event

Be sure to create a budget with all costs way before the event takes place. I have seen an event budget for a gala where the cost of drinks was forgotten. So, it's easy to miss important items and underestimate the event expenses. A way to avoid this problem is to have someone from accounting or finance department look at the budget numbers. Another way to prevent this issue is for development people to use a pre-set budget form that contain common line items. Not every event is the same, but they usually have many expenses in common.

2- Consider Insurance Issues

Oftentimes events happen that involve certain activities, such as a petting zoo may require an insurance rider to be sure the event is covered. These riders are usually not expensive, but they are part of the overall costs of an event. Nonprofits can also ask insurance documents from the third-party to be sure all is covered and a rider is not necessary.

3- Look out for Sales Taxes

Many states, such as California, tax specific items within a fundraising event, such as certain auction items. Check your state and other government agencies to verify what is taxed in your jurisdiction. Tax rates may vary by state, county and city, so double-check this issue and consider it in your budget because it can take an unexpected bite of your proceedings. In California, the sales tax rate can be as high as 9.00% of gross sales.  This tax may change, so double check with your state to make sure you're OK.  Ask about sales tax wavers, if available.

4- Don't Forget Overhead

Overhead costs are those that are not directly associated with the event. For example, an event carried on at the premises may involve rent or mortgage, fire insurance, maintenance,utilities and other administrative costs. These expenses are easily ignored because the event organizers don't have to pay for those; they are often considered to be costs of the organization in general. To account for this "hidden: cost, some nonprofits charge a rent fee to the event, while others charge a percentage of direct costs. The point is to note all costs associated with the fund-raising event.

5- Don't Leave Wages out

Wages paid, including any overtime, to employees involved with the event should be part of the event budget, especially when dealing with large events where a lot of time is spent on planning and organizing. For instance, if someone is paid $30K in wages and works three months on an event, about $7,500 ($30,000 x 3/12) should be considered an event cost. Usually, a percentage, such as 20% is added to the gross wages to account for payroll taxes and benefits.

Read also Overhead Basics
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If program is the heart of a nonprofit, overhead is its backbone. Overhead is known as general and administration costs and, in some circles, it includes fundraising as well. Since the definition of overhead may vary, you should be clear on what it means. For example, in government agencies, fundraising is usually not part of overhead, while Charity Watch considers anything besides program costs, overhead.

Significance of overhead

Overhead rate on grants --Many grantors use “overhead rates” to reimburse nonprofits for administrative costs. This rate, a percentage, is usually calculated based on prior financial numbers and negotiated with grantors. The calculations can be complicated and detailed.

To decrease this complexity, the Federal government pays nonprofits a standard 10% overhead rate on their grants. This means that after reimbursing direct costs, it adds a 10% for overhead. If direct costs are $100, the reimbursement will be $110. This setup   may be fine for smaller organizations, but not for larger ones that may negotiate a higher rate. The idea is for the overhead rate to cover costs that cannot be allocated easily to a program, like an electric bill for a building that houses many programs.

This rate should be reviewed every year to make sure that indeed the overhead rate is at least equal to actual overhead costs. If the rate of 10% reflects $100,000, but the actual overhead costs are $120,000, then the organization may need to negotiate a higher rate with the grantor for the next fiscal year.

Overhead requirement on grants and gifts--Another reason overhead is important is that it must be part of every grant proposal or gift. Some nonprofits have funds restricted for certain programs only with nothing much left over for overhead, forcing many to fundraise for overhead mostly. It’s a strange situation where an organization may have money to fund research programs, but cannot pay its phone bill and other basic needs. Quite real and disconcerting situation.

To avoid this issue, nonprofits have started to require a percentage for overhead to be included in the gift or grant or they cannot accept it. I have seen a large nonprofit say no to a large gift because of this issue.

Overhead should NOT be zero –Overhead exists for a reason and if it shows as zero on financial statements or tax forms, you have a problem.  It could be an accounting error in classification or not understanding what overhead is. Whether fundraising is included or not, there should be something allocated to overhead in items like insurance policies, salaries or supplies. Even if all employees are unpaid, there are expenses that cannot be specifically assigned to a certain program and are part of overhead. While it’s understandable the wish to keep overhead costs low, it’s not realistic to keep it at zero.

The first thing to think about when someone mentions overhead is to understand what it means. That is very important to make sure everyone is talking about the same thing. The overhead definition and calculation may vary among grantors and even government agencies. So, ask questions about it, don’t assume anything and don’t forget about it in proposals.

 

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Read also No more Audit Freak out
Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
Also check out the book "15 Quick Tips on Becoming a Great Consultant" -- free on Kindle Unlimited
Website: www.webshanker.com