Are you starting or organizing your nonprofit?  Any business needs a setup to operate effectively, and nonprofits are no different. A basic organization may be a no-brainer for some people, but may not be that obvious many as well. 

As in any business sector, there is a need for an effective infrastructure working behind the scenes to keep things running smoothly. This is especially true in the nonprofit sector where operations support the organization in a number of functional areas, including: 

·   office management,

·   accounting and finance,

·   administration,

·    human resources,

·   information technology,

·   marketing and development.

Across all of these functional areas there is one objective: to make sure the organization is operating efficiently and to its full potential in providing goods and services to a community.

One of the challenges of nonprofits is to create and manage a structure that works well. Many founders of nonprofits are not managers and do not have a background in management. They are “program” people. They created the nonprofit to fulfill a goal, a dream that they are familiar with, but management is not their expertise.  Knowing the basic structure of a nonprofit can only help in setting up an organization that is functional.

It is important for founders and boards of directors to realize this issue and to find proper personnel or volunteers to fill out the needed spots. I have seen new, small organizations fail to follow their mission statements because they didn’t have a basic infrastructure, management, personnel to deal with proper insurance, and other risk factors.

A common structure is for nonprofit operations to be divided into  three  areas,  all  supervised  by  the  board  of directors that could have an executive director to manage the daily operations.

  • Programs/ Services -- MOST IMPORTANT       
  • Management and General -- usually overhead
  • Fundraising

Identification of the three main areas of nonprofit operations is crucial to set up proper accounting systems, internal controls, reporting, and management.  If you have an area of operations, it must follow this organization. Sometimes it’s not that obvious.  For example, someone working in contract compliance is most likely part of management, even though the work relates to programs as well.

BEWARE>>> Note that tax returns and most financial reports are classified by these three areas.

Read about donations details that matter
Read about volunteer retention ideas
Check out 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award


Internal controls does not mean a convoluted way of doing daily transactions. You do not need to spend a fortune to have good controls at a small environment, including small businesses and nonprofit organizations.  

Below are some more ideas that can be implemented easily:

1- Have bank statements sent to the home of the executive director or a board member who is not involved in accounting. This person can take a quick look at the statement and at copies of checks for any unusual activity. Then he can give the statements to accounting personnel.  Since many use online banking, someone apart from accounting can take a look online at bank transactions, even before statements are mailed out.  

2- Always have two people counting cash. One person can count first while another witness and then the other person counts it, writing down the total and then securing cash with a rubber band and/or an envelope. Keep it in a safe before depositing it in the bank, not in a drawer or in an obvious place. If needed, get a safe and have it bolted to the floor or wall.

3- Wire transfers must be done by two people- one to initiate the transfer and another one to approve it. Both could have passwords or PIN numbers for extra security.  In the case on online payments where the bank pays someone directly, at least one person outside the process should approve this before it is done.  You can set this up with your bank.

4- Petty cash is kept in a safe- again, not in a desk drawer. Thieves know that drawers may contain petty cash and they go there first.  Keep petty cash small and replenish often, checking on receipts.

5- Review bank reconciliations monthly with no delays and look at odd deposits that have not cleared the bank and old checks that are still outstanding.  Check on deposit amounts on the books and on the bank to make sure they are the same. Also, look at checks being cashed to see if the amount and payee make sense. Many online banks allow you to actually see a copy of the check online, which can be very helpful.

6- Give receipts to everyone giving your organization money, specially cash. The receipt book should have duplicates so that the top receipt goes to donor and the copy stays in the book. Depending on the amount, the person receiving the money could sign a receipt to make sure the organization have proper records.

7- If using faxed forms for donations or payments, mark the original faxed page as "Original" in red. This is especially important in credit card donations. Otherwise it is too easy to charge a card multiple times for one donation. Make sure that donors know that faxed forms are NOT to be mailed. A good option here is to handle most cash inflows through a website.

8-People working with cash and accounting should take vacations. Many fraud cases are discovered when the perpetrator is home sick or away and someone else takes over for a few days. It's good to have more than one person trained in certain accounting tasks, so that if something does happen, someone can fit in with minimum training.

9- Make sure your insurance policy covers losses, such as fraud, just in case. This policy should also cover volunteers and part-timers. Be sure to double check with your insurance company regarding any special events or programs that may require a special rider. 

10- Consider getting background checks on everybody handling financial tasks. It's not that expensive and you can decide about hiring the person upon reviewing the background check. These checks are often required by insurance companies, so it's usually not a big deal.

Read about donations details that matter
Read about volunteer retention ideas
Check out 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award

Organizations do not get cash donations only. Many times they get furniture, equipment and other items that are valuable, but are not in form of cash, check or credit cards funds. These types of donations are considered to be in-kind contributions. If an item is expensive, for example $5,000 and over, a formal appraisal may be needed, not just for accounting purposes, but for taxes as well. Often enough donors help to pay for the appraisals because they want the deduction in their income tax returns.

Donated in-kind contributions are booked as both expenses and revenues. The journal entry is:

Debit Equipment expense-In-kind 3,000

Credit Donations- In-kind 3,000

Donated in-kind contributions can also be booked as a debit to assets, in the case of items that can be capitalized, usually expensive, such as donation of costly computer servers.. The journal entry then would be:

Debit Asset- In-kind 10,000

Credit Donations- In-kind 10,000

Capitalized assets are often depreciated over the useful life of such asset.

The other type of in-kind contribution is related to donated services. Per accounting rules, only professional services can be recognized. For example, if volunteers work at special events as ushers and receptionists, their time is not recognized by accounting. However, if a doctor provides services or a lawyer volunteer his time with professional services, then the time is accounted for using a reasonable hourly rate. For example, a CPA may provide high level accounting services for free and an hourly rate of $150 would be reasonable. If an lawyer provides legal services usually billed at $200/hour, but charging the organization only $30/ hour, the difference- $170- is considered in-kind donation. The journal entry to book this contribution for 10 hours will be:

Debit Legal expenses - In-kind 1,700

Credit Donations- In-kind 1,700

In order to substantiate in-kind services, the professional could send the non-profit a note with his time spent. The organizations could send the professional a thank you note acknowledging his donated time. Note that services donated are not deductible in income tax returns.

Overall, nonprofits should have policies and procedures to define in-kind contributions, what should be expensed instead of capitalized and other detail. It's important to keep the accounting of in-kind contributions consistent.

Read about donations details that matter
Read about volunteer retention ideas
Check out 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award

Many people, businesses, including nonprofits, have stopped paying their bills using checks, envelopes and postage; instead, they prefer to use the Internet to make payments. It can be very convenient. When paying bills online, you have a few options, such as bank-generated payments and vendor-generated payments.

Bank Generated Payments

Many banks offer bill paying services for free. You enter the vendor's name, address and an amount at the bank's website and a check is issued on a specified date. Every month you must log in the bank site and change the amount to be paid. It's simple and straightforward. 

This system is great for people who travel a lot, and want to have control over bill payments. this also works well for small or one-person accounting departments. Depending on your bank, you can sign up for checks to be issued for certain amounts every month, such as for mortgage or rent expenses. When you use this method, payments go out without you having to log in and authorize them individually. Be sure to schedule payments in advance of due dates, and beware that sometimes payments are not received by vendors and are returned to the bank. Test the system by sending payments many days before they are due, so that if they don't go through, you don' t use the bank service. Usually, if the first bank payment goes through, chances for problems down the road are slim.  

Vendor Generated Payments

This type of online payment has been around before the Internet became so popular. The idea is to let the vendor to debit the payment from your checking account at a certain date every month. Instead of the bank making payments, the vendor pays itself by using your account. You can allow individual payments to be taken from your bank, or you could go to "auto-pay," when payments are debited from your account every month. You don't need to worry about payments -- if you have a balance in your account, payments are done behind the scenes for you. Many people use this option with credit card companies to get the minimum amount paid every month. 

Auto-pay can be a good option if you travel a lot, or you want avoid late charges.Same comment for one-person or small accounting offices. However, once you're on auto-pay and you find an error in the bill, the payment may come out of your account, and it may take time to get the issue resolved. Because of this issue, usually auto-pay using a credit card may be better since it may be easier to get money back.

Another problem with auto-pay is that you cannot stop your bank from accepting the charges. For example, if you signed up for loan payments using auto-pay, these businesses can debit your account even after you pay your loan in full. Your bank may give you credit, but the process can be a hassle to resolve. Often banks advise customers to close accounts to avoid auto-debits, which can be problematic for nonprofits and small businesses.

Special Considerations

Setup a procedure to use online payments and keep up a written list of such payments to document ALL online payments to avoid confusion. For instance, a bookkeeper may pay a bill with a check, while the same bill is paid automatically by a vendor. Accounting staff needs to be aware of all Internet payment types to avoid double paying or paying late. 

Another concern is to make sure that internal controls exist to prevent misuse and errors in online payment processing. For example, an accountant may set up auto-pay in a bank to pay a fictitious firm and nobody would know about it. To avoid this problem, make sure that someone outside accounting, such as a manager or board member logs in the bank website and review auto-payments and debits to the account at least once a month. Some banks offer the option of emails be sent to business owners or someone outside accounting to provide a form of internal control to this process.

Read about donations details that matter
Read about volunteer retention ideas
Check out 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award

It may come as a shock to you to learn that nonprofit organizations file tax returns and may even pay taxes on certain income. But it's the truth -- nonprofits must be aware of many tax forms at local, state and federal levels. If nonprofits fail to file the forms, they may be liable for penalties and interest, making tax compliance a priority to many organizations. This article focuses on federal and California tax forms and requirements.

Below are some tax issues and forms nonprofits should pay attention to.

Sales tax

States and local authorities may collect sales tax on fundraising efforts, including proceeds from auctioned items. Some states allow for exemption if the nonprofit files for an exemption form before the event.

In California, sales taxes are applied to certain auction items, and the nonprofit must remit the tax using the form BOE401a2. Depending on the case, you may need to file the taxes online and pay using a regular check, e-check or other method.

Payroll taxes

Nonprofit organizations must follow the law when it comes to payroll taxes, including withholdings and paying their share of Social Security tax, unless the nonprofit has its own approved retirement plan.

Nonprofits file the same payroll forms, as for-profit business do, such as the form941, Employer's Quarterly Federal Tax Return, and form 940- Employer's Annual Federal Unemployment Tax Return. A nonprofit distributes tax forms W-2 to employees in the beginning of the following year with summaries of salaries and withholding.

States also have their own payroll taxes. California has the formDE 1NP Registration Form for Nonprofit Employers and DE-9 Quarterly Contribution Return and Report of Wages.

Annual Information tax returns

Except for religious organizations and a few others, nonprofits are required to file a form within the 990 tax series a few months after year-end. Small organizations may file online the e-card 990-N, giving the IRS basic information, such as name and address of the nonprofit. Larger organizations file the forms 990 Return of Organization Exempt from Income Tax, or the 990-EZ, which are more detailed, requiring specific numbers for revenues and expenses along with information on programs and board of directors.

California has annual reporting requirements with smaller organizations filling out form FTB 199N online, and larger ones filing longer, more detailed form 199.

Unrelated Business Income tax

There are instances where nonprofit may compete unfairly with for-profit businesses, such as a nonprofit opening a restaurant with no connection to its mission. Many exceptions apply, but if the organization is deemed to have unrelated business income, it must file form 990-T with the IRS and pay the proper tax.

California requires that nonprofits with taxable income to fill out the form 109 Exempt Organizations Business Income Tax Return.

>>>>Be sure to double check the requirements for these forms at least once a year, since things change often and you don't want to be out of compliance. For instance, Obamacare has requirements for businesses, including nonprofits, to provide health insurance for employees if the organizations have certain number of employees.  It also may be possible for smaller nonprofits to get the Small Employer Tax Credit.  Since Obamacare may change in the future, keep an eye of it.

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Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
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