6 Financial Mistakes Nonprofits Make (+How to Avoid Them)

Nonprofits handle finances very differently than for-profit organizations.

For instance, nonprofits tend to have less budget flexibility. 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, nonprofits often make financial mistakes. This is especially true for brand-new nonprofits, which 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.

1. Failing to work with a certified accountant

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: 

• You don’t have to limit yourself. Your organization can grow astronomically before the need arises to hire additional staff members.
• You form good habits. The accounting firm will offer advice to guide you in the right direction as you get everything up and running at the organization.
• You have access to help. You can get help with advice for maintaining the organization in the future. Plus, you can get help with fundraising. Pulling the right data from your books creates a compelling cause to convince donors to contribute to your nonprofit.

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.

2. Recording financial data incorrectly

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:

• Data transfer from one solution to another. Your organization stores information in many different places. Integrate software solutions as much as possible to limit the amount of human transfer.
• When work isn’t double or triple-checked. Even with all of your software integrated, you still need an effective bookkeeper on your side. It makes a real mess of things when someone enters $60 instead of $600 in your books. With such a busy staff, you’ll need to make sure you have a bookkeeper with the time to double- and triple-check all of your numbers. 

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. 

3. Forgetting to record financial data at all

In addition to recording information incorrectly, many nonprofits fall into the trap of simply not recording some vital financial information at all. This doesn’t happen frequently, but it can cause a big mess if it does.

For instance, consider the following situations:

• Your nonprofit is hosting a fundraising pledge drive. Pledges are promises to give to an organization rather than actual gifts at the moment. Your financial department should record these pledges as assets, but they are frequently missed when entering data into the accounting system.
• Your nonprofit receives a large number of in-kind donations. In-kind donations take away the step of asking for donations from supporters to buy goods or services for your nonprofit. Instead, you just ask the donor directly for those goods/services. Just like any other gift, this should be recorded in your nonprofit’s books.

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.

4. Making mistakes on annual forms 

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.

5. Not implementing internal controls

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 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: 

• Write everything down. Don’t just assume that people will follow the rules after a single memo or speech. Writing down the processes and ensuring everyone at the nonprofit has access to the document makes it official.
• Name responsible parties. For each procedure and policy, make sure you know who is responsible for making it happen. This names clear responsibilities throughout the organization.

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.

6. Cutting too many overhead expenses 

Too many nonprofits have the impression that overhead expenses are inherently bad. 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 in the organization.

If your nonprofit is worried about its overhead expenses, take the following precautions as outlined by NonProfit PRO: 

• Encourage predictable revenue. From improved retention rates to more recurring gifts, predictable revenue makes it easier for nonprofits to stay within their budgets for operational expenses.
• Increase financial transparency. Improving transparency helps nonprofit supporters better understand why it’s important to make overhead investments. They’ll be more likely to continue giving, knowing that their investments will only help the nonprofit grow.

Overhead expenses are not inherently bad. Your nonprofit should try to cut unnecessary overhead, but be careful how you define the word.

Takeaways

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 can be avoided 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!

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