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Accounting Helping You?

“Business is great” is not as effective as “Business has had sales of $10,000 per month,” and you presenting a financial report with the numbers on it. The more precise you are, the more credibility you have. And to be precise, you need a way to compile, classify data — that’s the role of accounting in businesses, including nonprofits.

Without accounting, you really don’t know if your business is doing well, and you cannot answer simple questions, such as how much you paid for office supplies this year. If you’re small, you may get away by using your checkbook as an accounting system, but as you grow, you will see how hard it can be to control expenses and analyze transactions without a more formalized system.  Accounting software is so affordable and easy to use now that it makes little sense to be operating in the dark — without proper financial information.

Below are some compelling reasons to employ some form of accounting:

Objectivity:

Accounting is objective, rational, unbiased with no feelings attached to it. That’s why it’s so valued by managers who want data that is real and not based on gossips or recollections. Since these numbers are backed up by documentation, oftentimes the accounting department becomes the go-to place for many areas within a business. Of course, we have accounting fraud and bad accountants that make up numbers, but overall, if you have a well-run accounting department with proper controls, the information is good and reliable.

Accuracy:

The more accurate the information, the better off you are. It may not be 100%, but often financial reports can be relied upon for management to make decisions and plan for the future. You may have good intuition and make decisions based on that, but having something to validate someone’s intuition doesn’t hurt. For example, if you thought you had a great month and received about $100,000 in revenues, but the accounting system tells you that you made only $30,000, then you may need to re-think your estimation or look for reasons why the accounting system shows such a low number — it could be something you didn’t consider.

Organization:

Managers often use accounting to find specific information. Accounting organizes data so that it can be found easily. For example, if you want to find how much you spent on food for a program, you can go to a food account and see all food expenses there, organized. Because of accounting, all relevant data is in one place, in a certain order. Without an accounting system, you will need to look for paper docs, add them up and maybe miss a couple of those, making this task clumsy and ineffective.

Many people are scared of accounting, assuming it’s difficult and cumbersome.  But in reality, it‘s not.  Many popular programs, such as QuickBooks and PeachTree, have free online tutorials and help groups, making accounting accessible to many people with no accounting background. From experience, often the accounting system becomes the main information system of an organization with people relying on it for other functions, such as a customer service or membership information. Because of this need, many accounting systems offer other modules or add-ons to gather information besides financial data.

Check out the book “Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.

Nonprofits – Mind Your Programs

The program area is the most important facet of a nonprofit organization. It defines the organization and it justifies its existence.  Without programs, the nonprofit has no reason to exist.  It doesn’t mean that all programs should be the same since nonprofits have different goals. For instance, if the purpose of an organization is to help the homeless, the nonprofit will offer programs in accordance with this goal. Most likely programs would involve temporary housing, food distribution, and job training.

Identification

This seems to be a no-brainer, but sometimes it can be a challenge. A program in one place may be fundraising in another organization. For instance, a nonprofit could sell used clothes in a thrift shop. The thrift shop is most likely part of the fundraising area and not the program. However, if the organization provides job training for teens, the thrift shop may be part of a program, especially if it has teens working there, being trained in the shop’s operations and selling techniques.

The first step in identifying programs is to look at the organization’s mission statement. A good, clear mission statement is critical. The clearer and simpler the mission statement, the easier it is to identify major programs–the reasons for the organization to exist. Suppose a nonprofit’s mission statement is to “provide temporary shelter to the homeless.” It is simple and focused. If the organization hosts a car race, then it is not part of a program–most likely it’s fundraising.

On the other hand, an organization with the mission statement “helping people to become self-sufficient” is too general, increasing the chances of confusion about what is a program and what is not. The more focused the mission statement, the easier it is to identify programs versus other operational areas. It makes it easier for the organization to stay on track, as well.

It’s worth noting that the IRS is also interested in this area, as both program information and mission statement are required on the tax form 990. If programs don’t connect well to the mission statement, the organization tax-exempt status may be at risk.

>>> Beware

“Mission creep” is an important item that should be reviewed often.  This creep usually happens when certain stakeholders want to take the nonprofit in directions not really related to its mission statement.  Donors and grantors may also contribute to this creep by offering funds for programs outside the scope of the organization’s mission. It’s management responsibility to identify and avoid mission creep. Or the nonprofit will be all over the place without a real path or strategy. Depending on the case, it may jeopardize its tax exemption as well.

Check out the book d“Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.