fbpx

Congratulations on embarking on the journey of creating a nonprofit organization! As you begin your mission to make a positive impact on the world, one critical aspect that demands your immediate attention is accounting and financial management. Kicking off our five-part series, titled “Stepping Stones: Paving the Path to Long-Term Financial Success,” we will explore why investing in accounting from the start is essential for your nonprofit’s success and how it fosters transparency, financial prudence, and growth. 

The Significance of Accounting and Finance

Accounting and finance make up the backbone of any successful organization, be it for-profit or nonprofit. Even though you are driven by a noble cause, it is crucial to remember that running a nonprofit still involves handling money and resources responsibly. Here are some key reasons why accounting and finance should be a priority from the inception of your nonprofit: 

  1. Wise resource utilization: As a start-up nonprofit, you may have limited resources at your disposal. Effective accounting allows you to track every dollar spent, ensuring that funds are allocated wisely to achieve your mission’s objectives.
  2. Informed decision-making: Financial data provides valuable insights into your nonprofit’s performance and helps you make informed, data-driven decisions. Tracking income, expenses, and program costs can guide you in setting realistic goals and making strategic choices to grow your organization.
  3. Compliance: Nonprofits must fulfill compliance requirements at the federal, state, and sometimes even at the municipal level. Funders often have their own set of compliance requirements. A nonprofit must have an effective accounting and finance function to efficiently provide accurate financial data to meet these requirements.
  4. Transparency to stakeholders: Stakeholders and supporters of nonprofit organizations deserve to know how their resources are used. Proper accounting practices enable you to maintain clear and accurate financial records, instilling confidence in your stakeholders and ensuring that your organization remains accountable.

Getting Started: Policies, Internal Controls, and Best Practices

Now that we understand the importance of accounting and finance for your nonprofit, let’s delve into the essential steps you need to take to set up a strong financial foundation. 

  1. Establish policies: Begin by defining financial policies and guidelines that govern how money should be managed within your organization. These policies should cover areas such as budgeting, spending limits, expense reimbursement, and financial reporting.
    • Terminology tip: For nonprofits, the Income Statement is called the “Statement of Financial Activities,” and the Balance Sheet is called the “Statement of Financial Position.” 
  1. Implement internal controls: Internal controls are procedures designed to prevent errors and detect and address irregularities. These controls could involve segregating financial duties, conducting regular managerial reviews, securing cash and checks, and ensuring proper documentation of financial transactions.
  1. Create a chart of accounts (COA): A chart of accounts is a categorized list of accounts for tracking financial transactions. It provides a clear framework for organizing revenue, expenses, assets, and liabilities, making it easier to generate informative financial reports.
    • Technology tip: Choose an Accounting System Strategically.

While not an immediate necessity for all nonprofits, selecting the right accounting system can significantly streamline your financial management. If your transaction volume is low, you can manage with a spreadsheet organized much like a chart of accounts. However, as your transactions increase or if you receive external support like donations, grants, or program revenue, transitioning to an accounting system becomes essential.   

Timing is key! Don’t wait until your transaction volume or reporting requirements have become unmanageable to consider an accounting system.   

When selecting an accounting system, opt for a highly rated, cloud-based accounting system tailored for nonprofits that aligns with the size and complexity of your organization. With numerous options available, thorough research and consulting with accounting professionals can help you make the right choice. 

Charitable Solicitation License and Audit Requirements

It’s important to remember that as a nonprofit, you may need to register for a charitable solicitation license(s) at the state level, especially if you plan to raise funds from the public. Some states require nonprofits to undergo financial audits or reviews as part of this registration process. These measures are put in place to protect stakeholders and ensure transparency and accountability in the nonprofit sector. 

Wrap-Up

Investing in accounting and finance from the start is a crucial step for the long-term success of your nonprofit organization. By implementing sound financial policies, internal controls, and best practices, you lay the groundwork for transparency, efficiency, and prudent financial management. Embrace the responsibility of handling your nonprofit’s finances with diligence, and you will pave the path to achieving your mission and making a meaningful difference in the world. 

Remember, building a successful nonprofit is like constructing a sturdy bridge—one step at a time. In the next blog, we will explore the concept of internal controls and understand why they are vital for your nonprofit’s financial health. 

How Can We Help?
Picture of NFP SmartStart
NFP SmartStart

Built specifically for small and/or start-up nonprofits. NFP SmartStart provides accounting best practices, compliant processes, accurate financial data, and meaningful reporting, to help you lead your organization to the next level.

Learn More

Read the Full Series

Stepping Stones: Paving the Path to Long-Term Financial Success
Share This Post:
Picture of Chazin

Chazin

With over 20 years working exclusively with nonprofits, we pride ourselves in having a unique understanding of nonprofit accounting needs. We believe that nonprofits deserve personalized, quality service and should not settle for a one-size-fits-all approach. We collaborate with you to provide a fully virtual and customized solution that is not only cost-effective but also strengthens your accounting function. We offer a team of industry experts at your disposal to provide advice, leading technology, and to supplement existing staff to improve efficiency and compliance.

Facebook
Twitter
LinkedIn