The key to any business’s success sits in their financial statements. In an ever-evolving world of business, successful leaders know that the right foundation starts with strong financial management.
In the scope of Nonprofits, this couldn’t be more true as Nonprofits are met with a unique set of financial challenges that need to be managed with constant oversight to ensure the viability of their mission.
First, let us distinguish the difference between a profit and a Nonprofit business
What Is A For-Profit Business?
A for-profit business is either a private or public company that has its primary business goal set to make a profit. The business operates with the goal of generating revenue that is higher than its operating expenses. They sell services or products to earn income for the owners, shareholders or they have investors.
What is a Nonprofit Business?
A Nonprofit is different in that it is purpose is not to make money for profit but rather to serve the public or a social cause. Nonprofits receive donations and grants and are exempt from paying taxes. Due to them receiving this tax exemption and using public funds for business purposes, they are governed by strict rules and regulations making managing a Nonprofit a far more complex process.
What Is The Hardest Complexity Nonprofits Must Manage?
All Nonprofits will agree that Financial management is the hardest part of managing a Nonprofit. Without strong financial management, a Nonprofit organization can meet a quick and swift end as it provides the board and managers with all the necessary information to make the right business decisions and meet the strict laws and regulations around running a Nonprofit.
Why Is Nonprofit Financial Management So Difficult?
The main difficulty comes from the complex reporting that is required by different stakeholders. You have a multitude of interested parties all wanting to know different information these stakeholders are donors, grantors, board of directors and regulatory bodies. Each of these stakeholders might require a different set of financial reports which adds complexity to the process.
Nonprofits have to be extra careful in the modern age as technology advancements and people being more in the know play a factor in how they do business and run the financials. Using manual processes is common practice for struggling Nonprofits as they are error-prone. Errors lead to inaccurate financial reporting which leads to a loss in donor trust and grants.
Add a multitude of programs, grants and fundraising campaigns and the accounting work quickly stacks up and without the right processes and staff skillset the financials can very easily become an accounting mess as the transactions pile up and the manual data entry gets delayed which leads to errors being made.
The next question you could be asking yourself is, why aren’t the board at the forefront of this issue?
The Nonprofit Board Of Directors
A Nonprofit’s board of directors is the key personnel responsible for driving the operations to meet the mission statement of the organization.
Members of a Nonprofits board will be seasoned and accomplished professionals within given fields as they will bring a plethora of skills that will drive the Nonprofit’s vision. One skill that is known to be lacking at this executive level is a strong financial officer who can explain and show the Nonprofit’s financials
In a way that is easy to understand at all levels.
The importance of the board having a strong grasp on the financial aspects of the Nonprofit cannot be stressed enough as the Nonprofit must have a high level of financial transparency to meet the requirements of audits and major donors.
They are tasked with creating the budget, monitoring and addressing any issues between the actual vs. budgeted figures and holding the relevant directors accountable for any variances.
With this high level of oversight of the Nonprofit’s financials, the board must design and implement financial policies and procedures to protect the Nonprofit against mismanagement and fraud. These internal controls need to be managed and constantly checked with an auditing trail to show due diligence was followed when it comes time for compulsory audits.
To bridge the gap of the needed financial skills many Nonprofits turn to outsourcing this important function to a reputable supplier that has the right expertise and communication skills needed to get the job done effectively and accurately. This removes the pressure from the board members so they can maintain a high-level overview of the financials without having to drill down into every transaction.
To learn more about the impact of CFO services on nonprofit’s click here.
What Happens When A Nonprofit Fails at Financial Management?
The disclosure of accurate financials is the cornerstone of gaining donors’ trust. It shows corporations and people who want to donate to your cause that you are trustworthy and driven to meet the goals of the organization.
Failure to disclose financials is the quickest way to lose public trust and gain the attention of watchdog groups. These groups serve a purpose as they dig into the details of Nonprofits, compile and share reports on their findings and rate Nonprofit’s compliance.
Nonprofit Watchdog Groups
Watchdog groups like Better Business Bureau, Charity Navigator, Charity Watch and Guidestar are there to evaluate and report on Nonprofit organization’s financial health.
The biggest reg flag they look for when deciding where to spend their resources on who to audit is checking which Nonprofit hasn’t submitted their audits and IRS form 990. Nonprofits are subject to submit audits and when they don’t Watchdogs take this as a sign that they have something to hide.
The Watchdogs will take the time to assess and dig into the operational and financial details of Nonprofits in order to compile reports on the Nonprofit’s transparency and accountability.
To learn more about Nonprofit Watchdog Groups click here.
Auditing Requirements
In today’s modern world of business mismanagement of a company’s financials has become a practice seen in the news far too often. When it comes to Nonprofits a light is constantly shone on how they are operating and spending the funds as they are using public money to achieve a predefined goal.
Due to this, they have rigorous auditing requirements that require a high level of reporting and internal controls compared to other types of businesses of the same size.
To maintain the required level of reporting Nonprofits need to reconcile their accounts and update the necessary audit papers every month.
To learn more about a Nonprofits auditing requirements click here.
Tax Requirements And Reporting
The complexity of tax reporting comes to the fore as Nonprofits have one of the most difficult tax codes. These codes are designed to reduce fraud and ensure that Nonprofits remain fully transparent about their funding.
As Nonprofits are tax exempt the IRS has to take extra steps with added reporting structures to govern Nonprofits so that they do not abuse the tax exemption.
A Nonprofits tax return is a public record that anyone can access as the public has a right to see how their donations were spent.
To effectively manage this constant need for disclosure around financials it is recommended that Nonprofits set up a chart of accounts with the different classes and sub-classes to create the reports needed for a tax return. If you keep your financials audit ready, your Nonprofit will be tax-ready.
Conclusion
With all the demands placed on Nonprofits to meet their mission and manage all the financial reports, it is no wonder that they seek the help of professional outsourcing companies that have the knowledge and expertise needed to make the Nonprofit work effectively within the financial restraints that come from running an organization that is not focused on profit but on making the world a better place.
At Lescault and Walderman we have a team of over 30 accountants across 18 states to help your Nonprofit organization become financially agile with a potential saving of 30–40%.
As a recognized Sage Business partner we have trained and dedicated software specialists that can offer a Sage software and integration solution that can be customized to meet the specific needs of your Nonprofit. To learn more about Sage Software for Nonprofits and charities click here.
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