Setting up an Accounting Dept– Some Pointers

 

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? Below are some ideas to get you going.

Identify accounting tasks

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 the staff is supervised by a manager or a controller, who often is responsible for financial policies and procedures for the organization.

Analyze functions

Many businesses, including nonprofits, organize their accounting department using flowcharts and job descriptions. You don’t want to have the same task be performed twice or three times, but also,  you don’t want to miss an important process. Some nonprofits 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.

Hire people with proper accounting skills

A common mistake 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 organization. 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.

Segregation of duties

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 check-and-balances, internal controls, to prevent and correct mistakes or misappropriations.

Background checks 

Don’t forget to run background checks on all employees and volunteers dealing with accounting and cash functions. Make this a policy within your organization, so that people understand the situation as one of internal controls, not just paranoia.  Actually, many insurance companies require this step before issuing policies against theft and fraud.

Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide – Second Edition— First edition Nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

Special Events– Pick up All Costs

 

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 template budget form that contains common line items. Not every event is the same, but they usually have many expenses in common.

2- Consider Insurance Issues

Oftentimes events involve certain activities, such as a petting zoo that 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. Be sure to have this cost as part of the template budget form.

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 waivers, 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 fee as rent 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.

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the McAdam Book Award

Prevent Volunteer Liability

If you’re around nonprofits, you know that many rely on volunteers for operations, special events, and programs.  According to the U.S. Bureau of Statistics, “about 62.6 million people volunteered through or for an organization at least once between September 2014 and September 2015.”

Usually, these people are good-hearted and do very good jobs.  However, we also have bad apples and those who misbehave or have incidents in the name of the organization. This creates a huge liability for the nonprofit that is counting all pennies to provide goods and services to the community.  It doesn’t matter that volunteers are not paid, they can still do damage that the nonprofit may be held liable for.

Actually,  “Good Samaritan” laws exist for volunteers in the case of personal liability, such as the Volunteer Protection Act of 1997. However, that doesn’t mean that the nonprofit is also covered under this act automatically. Better be safe than sorry.

Training

Usually, when things go wrong, the issue of proper training and oversight of volunteers is often questioned.  So, proper training and supervision is a must in any volunteer situation, including making sure they get an appropriate education and are placed in situations where they are qualified to be.  For example, if you run a swimming class, make sure the lifeguards are properly certified and trained to identify problems and take care of them. Swimming instructors should also have minimum qualifications for the job.  Just because it’s a volunteer situation doesn’t mean that standards can to be lowered.

Policies and procedures manual

Helping to maintain standards, many nonprofits use manuals to clarify policies and procedures, very similar to those created for employees.  Be sure that such manuals include sections about prevention of sexual harassment, safety and proper behavior in the workplace.  Also, consider policies and procedures about volunteer disciplinary actions when warranted.

Background check

One way to avoid unpleasant surprises is to do a background check on all volunteers, even if they cost a bit. It doesn’t mean that everybody should be perfect, but if someone has a riskier background with problems with the law, they may need to be more closely supervised and placed in jobs that don’t compromise the organization.  Also, many insurance companies require such background checks when they cover volunteer activities.

Insurance

Nonprofits must consider getting volunteer insurance policies to protect the organization from volunteers behaving badly or accidents.  Beware that because volunteers are unpaid, they are NOT usually covered by worker’s compensation insurance, and if something happens to them, the nonprofit may be on the hook for it. So, consider adding a rider or a separate policy to include volunteer while they work for the organization.

Volunteers are often wonderful and many organizations wouldn’t be able to offer their programs if it was not for them. However, they also present a liability to nonprofits that must be addressed. Since protecting nonprofits against these risks can be expensive, be sure to include these costs when preparing budgets, grant proposals or gift requests so that you have the required funds to protect the organization against any losses.

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

Checks & Balances Ideas for Nonprofits

Checks and balances are activities that protect organizations against errors and fraud. Also known as internal controls, these checks and balances provide an extra level of protection to the organization so that errors or losses are issues are caught and can be fixed or managed. Internal controls may also protect against fraud, including money theft. The good news is that you don’t  need to spend a fortune to have good controls at a small environment, nonprofit organizations.

Below are some ideas that can be implemented easily to protect your organization:

1- Have bank statements sent to the home of the executive director or a board member 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 one witnesses it, 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 of online payments where the bank pays someone directly, at least one person outside accounting should approve this before it is done. You can set this up with your bank.

4- Petty cash is kept in a safe, 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, especially cash. The receipt book should have duplicates so that the top receipt goes to the 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 has 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 happens, he or she 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.

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the McAdam Book Award