Not-for-profit organizations play a crucial role in addressing various social and community needs. To effectively fulfill their missions, not-for-profits must maintain accurate financial records and practice sound accounting and bookkeeping. Proper financial management is not only essential for transparency and accountability but also for sustaining the organization’s operations and attracting donors. In this article, we will explore ten best practices for not-for-profit accounting and bookkeeping.
1. Separate Accounts
One of the fundamental principles of not-for-profit accounting is to maintain separate financial accounts for the organization and its programs. This separation allows not-for-profits to track the financial performance of individual projects or programs and ensures that restricted funds are used for their intended purposes. Common accounts to maintain include the general fund, program-specific funds, and restricted funds.
2. Accurate and Timely Record Keeping
Accurate and timely record-keeping is the cornerstone of not-for-profit financial management. Regularly update your financial records, including income, expenses, donations, and grants. Use accounting software or tools specifically designed for not-for-profits to streamline the process and reduce errors. Reconcile your accounts on a monthly basis to catch discrepancies early and maintain a clear financial picture.
3. Implement Fund Accounting
Not-for-profits often receive donations and grants earmarked for specific purposes. To manage these restricted funds effectively, implement fund accounting. Each restricted fund should be tracked separately, with expenditures aligned with the donor’s intent. This practice enhances transparency and ensures compliance with grant agreements.
4. Budgeting and Planning
Developing an annual budget is crucial for not-for-profit financial stability. Create a detailed budget that aligns with your organization’s strategic plan and mission. Regularly review and compare actual financial performance against the budget to identify variances and make necessary adjustments. Budgeting also helps not-for-profits prioritize spending and allocate resources efficiently.
5. Segregation of Duties
To prevent fraud and errors, it’s essential to segregate financial duties among staff members or volunteers. Implement a system of checks and balances where different individuals are responsible for authorizing, recording, and reconciling financial transactions. This separation of duties helps prevent any single person from having too much control over financial processes.
6. Internal Controls
Establish strong internal controls to safeguard your not-for-profit’s assets. This includes setting policies and procedures for financial transactions, approving expenses, and managing access to financial records. Regularly review and update internal control policies to adapt to changing circumstances and to enhance accountability.
7. Compliance and Reporting
Not-for-profits must comply with various regulations and reporting requirements. Stay informed about tax laws, not-for-profit regulations, and reporting deadlines applicable to your organization. Prepare accurate financial statements and reports, such as the Statement of Activities and the Statement of Financial Position and make them available to stakeholders and donors.
8. Donor Stewardship
Maintain strong relationships with your donors by practicing good donor stewardship. Acknowledge donations promptly with thank-you letters and receipts. Clearly communicate how donations are used to fulfill your mission. Transparency in financial matters builds trust with your supporters and encourages ongoing donations.
9. Regular Financial Reviews
Consider having YHB conduct regular financial reviews or audits, depending on your organization’s size and complexity. An independent review or audit can provide an objective assessment of your financial practices, helping to identify areas for improvement and ensuring compliance with financial regulations.
10. Continuous Training and Education
Invest in the financial literacy of your staff and board members. Provide training and resources to ensure everyone involved in financial management understands not-for-profit accounting principles, regulations, and best practices. Informed and knowledgeable individuals can contribute to better financial decision-making.
Not-for-profit accounting and bookkeeping are essential for the success and sustainability of organizations dedicated to making a positive impact on their communities. If you are a not-for-profit organization in need of expert accounting and advisory services tailored to your unique mission, we invite you to reach out to our dedicated team of professionals. Our Not-for-Profit and Client Accounting and Advisory Services Teams are here to support you in achieving your goals, ensuring financial transparency, and navigating any challenges that may arise. Contact us today to learn how we can collaborate to make a lasting impact in your community.