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Nonprofits can do tremendously good things in support of worthy causes and provide fortifications to communities around the world. However, without the right nonprofit accounting systems in place, an organization’s dreams of granting charitable and humanitarian opportunities might be hindered. While passion is a necessary ingredient, running a nonprofit also requires clear systems for managing finances, ensuring compliance, and maintaining the trust of donors, grantmakers, and the broader community. Setting up an accounting department correctly from the start is essential to the health and longevity of your organization.
Understanding the Unique Needs of Nonprofit Accounting
Unlike for-profit businesses, nonprofits do not focus on generating profits for owners or shareholders. Their primary mission is to serve the community and reinvest resources into programs. As a result, the accounting requirements for nonprofits vary in key ways. For example, instead of tracking profits and losses, nonprofits track changes in net assets. They also need to separate restricted funds from unrestricted funds to comply with donor requirements.
Accounting for nonprofits is also closely tied to public accountability. Financial statements are not just for internal use; they are often shared with donors, grant agencies, and regulatory bodies. This makes accuracy, transparency, and compliance even more important.
Determining the Structure of Your Nonprofit Accounting Department
The size and structure of your nonprofit accounting team largely depend on your organization’s budget and funding sources. For instance, small entities might rely on part-time bookkeepers for nonprofits, supplemented by nonprofit accounting services, to perform quarterly audits or handle complex financial tasks. Alternatively, a larger organization may benefit more from having a dedicated internal department with multiple roles or leaning on nonprofit accounting firms for additional support.
Key functions to consider include:
- Bookkeeping: Recording daily transactions, managing invoices, and maintaining the general ledger.
- Accounts Payable and Receivable: Handling bills, reimbursements, and incoming donations or grant payments.
- Payroll: Managing salaries, benefits, and payroll taxes for staff.
- Grant and Fund Accounting: Tracking restricted and unrestricted funds in compliance with donor agreements.
- Financial Reporting: Preparing monthly, quarterly, and annual reports for stakeholders.
- Compliance and Audit Preparation: Ensuring records meet IRS, state, and funding agency requirements.
In smaller organizations, some of these roles may be combined; however, it’s essential to maintain a clear separation of duties to minimize the risk of errors or fraud.
Choosing the Right Accounting Software for Nonprofits
The right accounting software will streamline operations and reduce errors. Many nonprofit organizations benefit from using software designed specifically for their needs, which includes features like fund accounting, grant tracking, and nonprofit-specific reporting.
When choosing software, consider:
- Integration with donation platforms and CRM systems.
- Capability to manage restricted and unrestricted funds.
- Easy generation of IRS Form 990 reports.
- Multi-user access with secure permissions.
- Cloud-based access for remote collaboration.
Popular nonprofit organization accounting software options include QuickBooks Online for Nonprofits, Sage Intacct, and Blackbaud Financial Edge. However, the best choice will depend on your organization’s size, complexity, and budget.
Establishing Policies and Procedures
Strong policies and procedures create consistency and accountability. These guidelines should outline the procedures for recording, approving, and reporting financial transactions. They should also outline who is authorized to make purchases, approve expenses, and access sensitive financial data.
Common policies include:
- Expense Reimbursement Policy: Defines the eligible expenses and the required documentation for reimbursement.
- Donation Acceptance Policy: Outlines the process for receiving, recording, and acknowledging donations.
- Internal Controls Policy: Describes how duties are separated, who approves transactions, and how audits are conducted.
Well-documented procedures help new staff learn quickly, ensure compliance, and protect your nonprofit from financial mismanagement.
Meeting Compliance and Reporting Requirements
Nonprofits must follow specific IRS and state regulations. In the United States, most nonprofits are required to file an annual Form 990, which discloses financial information, governance practices, and the organization’s mission. Many grantmakers also require detailed financial reporting to show that funds are used as intended.
To stay compliant:
- Maintain accurate and organized financial records throughout the year.
- Track restricted funds separately from general operating funds.
- Schedule periodic reviews or audits by a CPA with expertise in nonprofit organizations.
- Stay informed about changes in federal and state nonprofit regulations.
Meeting these requirements not only keeps you compliant but also strengthens credibility with donors and the public.
Building a Nonprofit Accounting Department Team That Supports Your Mission
Your accounting department is a critical partner in fulfilling your nonprofit’s mission. Hiring staff or engaging outside professionals with nonprofit expertise ensures your organization’s finances are handled accurately and strategically.
In many instances, accounting services (such as outsourced accounting for nonprofits) can be utilized for some or all accounting functions as a cost-effective solution for building a team that supports an organization’s mission. Nonprofit accounting services allow you to access specialized knowledge without the expense of a whole in-house team.
FAQs About Nonprofit Accounting Department Setup
How soon should a new nonprofit set up an accounting department?
Ideally, a nonprofit accounting system should be in place before your nonprofit begins accepting donations or grants. Early setup ensures that all funds are tracked correctly from the start and helps avoid compliance issues later.
Do all nonprofits need a full-time accountant?
Not necessarily. Smaller nonprofits can often operate with part-time staff or outsourced accounting services, while larger organizations may require a whole in-house team. The key is having consistent oversight and proper internal controls.
What is fund accounting, and why is it important?
Fund accounting is a method used by nonprofits to separate and track resources according to donor restrictions or grant requirements. It ensures that funds are used as intended and provides transparency to donors and regulators.
Can volunteers handle nonprofit accounting tasks?
While volunteers can assist with some administrative tasks, core accounting functions should be handled by trained professionals to ensure accuracy, compliance, and confidentiality.
How often should a nonprofit’s finances be reviewed?
It’s best practice to review financial reports monthly and conduct a more in-depth review or audit annually. Regular oversight helps identify potential issues early and maintains your organization’s financial health.
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Matt Garrett is the Founder and Chief Executive Officer of TGG. He is a regular speaker across the country on behalf of Vistage educating business owners on the need for sound financial practices, and is Vice President of the Board of Directors of FINACA. Under Matt’s leadership, TGG has received the following recognition: INC. 5000 top companies in the U.S. five years in a row; one of “San Diego’s Fastest Growing Companies” the past four years; and is among San Diego’s “Best Places to Work.”
