Nonprofits handle finances very differently than for-profit organizations.
For instance, there tends to be less flexibility in the budget for nonprofits to work with. And every penny makes a difference because nonprofits are financially focused on achieving their mission rather than turning a profit.
Due to tight budgeting and limited resources, it’s easy for nonprofits to make mistakes when it comes to their finances. This is especially true for brand new nonprofits because they are still building out their networks and internal operations.
Below is a list of common mistakes made by nonprofits so that you can avoid them. As you continue to grow and expand your organization, the last thing you want to do is set a precedent of ineffective financial operations.
Learning more about the mistakes that others make can help you avoid making them yourself. Ready to dive a little deeper? Let’s get started.
This is one of the first mistakes nonprofits tend to make. Organizations have the bad habit of thinking, “Handling the finances can’t be that hard; why should I invest in an accountant?” The answer is yes – they can be that hard, and yes, you should invest in one immediately.
Drawing conclusions from the financials, filing reports and required forms, and strategizing for years to come all require the attention of an expert to be done correctly.
Access to an experienced CPA will help when it comes to nonprofit auditing, financial consulting, and planning for the future of your organization. Generally, the options for gaining this access include hiring a full-time staff member, asking for in-kind donations from an accounting business, and outsourcing your accounting needs.
We recommend outsourcing. Hiring a full-time staff member requires a lot of resources; it may be necessary for a larger organization, but not a smaller one. In-kind donations are also incredibly generous and sometimes nonprofits get lucky, but there’s a lack of motivation to do a good job in the long-term if an accountant is working for free.
Meanwhile, there are several major benefits to outsourcing your nonprofit’s accounting needs:
If your nonprofit doesn’t have access to an experienced accountant, you could be missing out on a lot. Not only are you missing the expertise necessary for auditing and drawing effective conclusions, but you may also be missing growth and fundraising opportunities.
When it comes to recording financial data, it’s important that everything is correct and matches up between your different information sources. Human error is inevitable from time to time, but the important thing is that those errors are caught quickly and that they don’t stem from a lack of understanding.
In other words, when it comes to recording financial data, you need an experienced and effective bookkeeper to minimize mistakes and catch any errors that may occur.
Consider when errors are most likely to occur in keeping the financial books for your nonprofit. Generally, it’s either during:
When it comes to the incorrect recording of data in your nonprofit’s books, there are a couple of steps you can take to minimize the risk. First, integrate your software. Then, make sure you have someone specifically dedicated to keeping your nonprofit’s books tidy.
TIP: Not sure where to start with nonprofit software? Check out the top-rated solutions and find the best one for your needs – only on G2. |
In addition to recording information incorrectly, many nonprofits fall into the trap of simply not recording some of the vital financial information at all. This doesn’t happen too frequently, but it can cause a big mess of things if it does occur.
For instance, consider the following situations:
These are two of the most common situations, but it can happen with anything. This is why it’s so important for your organization to have experienced financial team members working with you. Decide if you need access to a nonprofit bookkeeper or accountant. Then, make a plan that works for your organization’s needs.
When your nonprofit was accepted as an official 501(c)(3) organization, you became tax-exempt. However, nonprofits still need to file tax forms. Form 990 is the annual tax form nonprofits must file each year in order to keep this exempt status.
According to the Journal of Accountancy, some of the common reporting errors made by nonprofits as they file their Form 990 include:
Naming the president as the officer and key employee. |
Entering the only compensation expense as employee salaries. |
Reporting only the unrestricted income of the nonprofit. |
Naming the incorrect people as interested persons. |
Reporting incorrect information from previous Form 990s. |
No one likes tax season. It’s tough to keep all of the different numbers and information straight. Plus, those forms are long and complicated.
To avoid making mistakes on your organization’s Form 990, make sure a trained accountant reviews the information before you send it in. This will help limit the amount of incorrect data. Then, save copies from each year so that you always have a record of the information you submitted in the past.
Security should be taken seriously by nonprofit organizations. However, many smaller organizations get into a bad habit of not implementing the necessary internal controls that can keep the nonprofit safe.
Your nonprofit should be focused on keeping your data, your office, and your financials all safe using a written internal controls program.
The average cost of a data breach in the United States is around $7.91 million. The last thing you want is to lose the trust of donors and a bunch of money all at once. That’s enough to shut a nonprofit down for good!
As you create your internal controls document, make sure you do the following:
Some examples of internal controls you should set include simply asking the last person leaving at night to lock the office door, keeping all cash in a locked drawer, and asking for two signatures on checks.
Too many nonprofits have the impression that overhead expenses are inherently a bad thing. However, this has become quite controversial lately as nonprofit professionals see overhead as a long-term investment rather than a short-term unnecessary expense.
These long-term investments can actually help the organization save money over time. Consider employee compensation. Lowering your compensation rates is a good way to raise your employee turnover rate. Then, you’re stuck paying higher prices to hire someone new.
Good accountants will tell you that even nonprofits should invest in themselves in order to see growth at the organization.
If your nonprofit is worried about its overhead expenses, take the following precautions as outlined by NonProfit PRO:
Overhead expenses are not inherently bad. Unnecessary overhead is what your nonprofit should try to cut, but be careful how you define the word unnecessary.
Nonprofits, especially new nonprofits, tend to make some financial mistakes. If you make one or two small mishaps, it’s not the end of the world. Generally, mistakes lead to a better understanding of how nonprofit financials work.
However, a lot of mistakes are completely avoidable if you have access to the right resources. Before the year is done, maximize your impact by learning five year-end fundraising strategies to close the calendar year out.
Having access to trained financial team members is the first step to avoiding the above mistakes. Then, your nonprofit can move forward and grow without a hitch!
Find an accounting firm for your company's needs to get started on the right foot in 2020.
Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa.
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