Overcoming Common Challenges in Nonprofit Accounting

Published by LTBD, P.C. | February 26, 2018

Nonprofit organizations have the great benefit of providing their employees, donors and partners with a clearly defined mission and, in most cases, the basis for a healthy culture built around that mission. People who choose to build a career in the not-for-profit world do so because they care about the vision or focus of the sector and are willing to sacrifice greater opportunities for personal gain, in order to contribute to the greater good.

At the same time, nonprofit organizations are complex entities. They require many of the same skills and abilities that one typically associates with the private sector. From lending, capital, and contract management to complex cash flow forecasting, nonprofits often find themselves overseeing a complicated and wide-ranging set of operating responsibilities and domains.

One of the core areas in which nonprofits need to excel is accounting and finance. Not only essential to the not-for-profit sector in an operations capacity, accounting is the process by which transparency for donors and funders is achieved. It serves as the basis upon which accountability and mission effectiveness will be measured.

In this sense, a small or even mid-sized nonprofit may actually face greater accounting responsibilities than a similarly-sized private business. In the private sector, a small business is only responsible to taxing authorities and its owner(s). Quite the opposite, a nonprofit is accountable to a myriad of parties including board members, donors, foundations, auditors, banks, and the programmatic communities they serve.

Within this complex environment of accountability as well as financial and operational transparency, nonprofits often find themselves grappling with similar accounting challenges. Here are three of those challenges and some key tips for addressing them effectively in your nonprofit organization:

Challenge #1: Managing Cash Flow in the Nonprofit Environment

In any organization (whether for-profit or nonprofit), the number one priority of the accounting and finance department is to protect and enhance cash flow. “Cash is king” as they say, and all other functions need to support strong cash flow. This begins with a clear understanding of the organization’s run rate, which describes and defines its cash needs and consumption of funds to maintain operations on an ongoing basis over time.

That being said, many nonprofits fail to consider the cash flow impacts of seasonal activities or varying grant and donation scenarios. A nonprofit that is highly dependent upon individual donors may receive most of those funds only at certain times of year. Typically, those two times are during an annual fundraising drive, and during the holidays. In other cases, a nonprofit that is dependent upon a handful of foundation grants may have contracts that only issue part or all of a given grant’s funds on a reimbursement basis. This both delays receipt of funds and requires ‘bridge’ funding to cover execution costs while awaiting grant funds earmarked for those activities.

Another common challenge is the high percentage of restricted funds that a nonprofit may have to rely on, while other funds necessary for day-to-day operations and capacity building are often smaller and harder to come by. The management team should not just be worried about positive cash balances at any given point during the year, but also maintaining positive, unrestricted cash balances. By properly planning cash flow and closing the books monthly, you can monitor this challenge via the Unrestricted Net Assets balance on the Statement of Financial Position (Balance Sheet).

These scenarios require both a clear understanding of the organization’s cash needs and a willingness to turn down funding sources or agreements that would place the organization’s cash flow requirements in jeopardy.

It would be incredibly beneficial to prepare a monthly cash flow budget and/or projection that treats each month as its own activity period. Look at each month as a separate activity period with consideration towards seasonality and activity within the organization.

Additionally, you can prepare a cash flow report for each program that has restricted funding and consider unrestricted funding to these programs on a monthly basis. Have each of the programmatic budgets roll up into the overall budget to ensure you are maintaining both the programs and the overall organization as a whole.

Challenge #2: Revenue Tracking

Tracking revenues throughout the nonprofit organization is a process that involves multiple essential touch points. One key priority is effective tracking of restricted funds, which requires careful coordination as well as precise configuration of the chart of accounts to ensure that funds are appropriately designated and disbursed.

Also important is close coordination with development staff to ensure that all funds received from donors and funders come with clearly understood parameters and designations. Finally, both the accounting and development departments need to add and maintain accurate and current contact records.

At the same time, grant tracking creates other challenges. While the grant-maker may provide infrastructure and some support for grant execution (for example, scheduling progress payments on the grant so that the nonprofit can plan when to expect what funds), the challenge with many grants is accurate tracking of how funds are received, disbursed and applied to the activity categories and objectives defined in the grant.

This is essential not only to ensure that future grant fund disbursements are executed on time, but also to protect the nonprofit’s ability to apply for and secure future grants from the same grant maker.

Challenge #3: Staffing Strategy & Payroll Management

Recognizing that the culture of nonprofits is often built around a shared passion and purpose focused on the mission, we can also surmise that staffing issues can become very complex in such an environment. Whereas the private sector culture is focused on the bottom line and is perhaps more flexible in acknowledging that certain positions or longtime roles are no longer necessary, nonprofit leaders often struggle to make personnel changes in part because they recognize enthusiasm for, and support of, the mission as a prioritized value.

Nonetheless, many nonprofits either outgrow the skills of longtime team members (and need to replace them with differently-skilled personnel) or find themselves over-staffed in times of financial challenge, since they are unable to accept the reality that key players may need to be sacrificed in order to protect the organization as a whole. This is especially trying in nonprofits that focus on the alleviation of social problems and service to the less fortunate.

In addition, the tendency to make mission enthusiasm a priority can also skew hiring decisions toward less-skilled or under-experienced individuals who are nonetheless highly enthusiastic about the mission. If these individuals are willing to accept guidance, skill training and close supervision (and if the nonprofit is in a position to provide it), then this enthusiasm can be harnessed effectively. If not, the organization may find itself weighed down by a complement of highly engaged but fundamentally under-skilled personnel who, collectively, can put the organization’s health and long-term viability at risk.

In addition to focusing on putting the right people in the right positions and ensuring that the organization’s staffing itself is ‘right-sized’ and effective, we also must make sure that payroll support and planning for employee benefits are protected as a core priority.

Those who work in the not-for-profit sector choose to make a difference and they already sacrifice other opportunities to pursue a career in this field. That should never be translated as an appropriate basis for under-paying personnel or providing measly or inadequate benefits to your team. Smart nonprofit leaders recognize and commit to the management maxim that when managing cash flow and core financial operations, one of their very first responsibilities is to ensure that payroll is executed accurately, fully, and on time – every time.

Proper staffing, training, and compensation cannot be emphasized enough as financial priorities for not-for-profits. When the need for personnel is definite, speaking with an accountant to see where the organization stands and how financials would be affected by new hires is incredibly important.

Keys to Success in Nonprofit Accounting

It is clear that nonprofit accounting presents a myriad of requirements, responsibilities and considerations that can pull even an experienced nonprofit executive in many directions. The key to nonprofit accounting success begins with an understanding of the various components of an effective nonprofit accounting operation and continues with a strategic commitment to focus on activities, opportunities and decisions that protect and support the organization’s core mission, and its core needs (such as cash flow requirements and operating realities).

By committing to a well-defined and fully formed accounting strategy at the outset, a professional nonprofit executive can set his or her organization on a long-term path to sustainability and success.

Image Credit: ministeriebz (Flickr @ Creative Commons)
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