Top 3 Accounting Mistakes Nonprofits Make

Rose Report: Issue 51

By Ted Rose, CEO, Rose Financial Solutions

Keeping costs down is key for non-profit organizations, which often leads to fewer accounting and administrative personnel than for-profit companies. However, compared to other organizations, nonprofits face unique finance and accounting challenges. Here are the top three accounting mistakes associations make along with tips on how to avoid them.

Utilizing outdated software that isn’t cloud-based

Not-for-profits organizations may not manage for profit, but they must manage for sustainability. To make informed decisions for your nonprofit, you’ll need accurate and timely financial data, just like any other business.

Disparate systems are error-prone and time-consuming. If your organization is relying on manual or outdated accounting software, moving to cloud accounting with automated processes is a smart option. Electronic records can save time and money since they are easier to organize, access, and search. Furthermore, well-functioning finance and accounting software assists organizations in becoming better financial stewards by offering the financial clarity needed to determine how to enhance and sustain operations in the future.

Accurate grant reporting is essential as grant-makers rely on these reports to see how their money is being used and if they made the right choice in awarding funds to a specific organization. A well-functioning finance and accounting system allows nonprofits to provide complete and accurate reports which could mean the difference between a funder continuing to support the organization or moving their funding elsewhere.

With advanced finance and accounting system you will also be better equipped to avoid making errors on your forms 990, which are public documents often scrutinized by donors, grantors, and members as they make resource allocation decisions. Think of it this way—if an organization’s form 990 reflects that it can’t properly manage its own finances, why would anyone want to support it?

Lack of internal controls

Internal controls are the financial policies and procedure put in place to protect an organization’s assets, ensure compliance, and deliver accurate reporting. Organizations that do not have a proper control structure in place put themselves at risk. With this in mind, nonprofits should implement finance and accounting systems that automate tasks and enforce procedures that limit access to review and approve payments to individuals with authorization.

It is important to implement adequate control structures so you can verify your employees’ actions. In order to reduce fraud and errors, create a segregation of duties by dispersing business functions to more than one person or department. For example, have different people set up and approve new vendors, approve bills to be paid, write checks/initiate electronic payments, approve new hires, approve and change pay rates, process payroll, and reconcile the bank and credit card accounts.

Unprepared for Year-end Audits

The word “audit” has a negative connotation for many organizations. It might even cause anxiety and fear. However, audits are very beneficial as they serve as confirmation of an organization’s legitimacy and provide a snapshot of its financial health. A clean audit can also demonstrate to your donors and members that their money is being put to good use.

When undergoing an audit, one of the most common issues that many associations face is responding to an auditor’s request for information in a timely manner while still getting their day-to-day business done. As such, you should keep track of all of your financial records throughout the year in cloud based organized systems, including accounts payable, billing, cash receipts, journal entries, and balance sheet reconciliations. All of your financial paperwork should be accessible and easy to find when year-end arrives.

You should make sure your books are closed within 30 days of the fiscal year’s conclusion. If you’ve never had an audit before, get a sample PBC list from your accounting firm. Additionally, if you have government grants, gather all award documents, supporting reports, and documentation as auditors are likely to want to see these documents, too. It’s also crucial to have long-term plans and consider audit preparation as a year-long project, not something you perform at the last minute.

Rose Financial Solutions (RFS) has been providing financial clarity and non-profit compliance to organizations for more than 25 years. Our Finance as a Service (FaaS) solution easily integrates with most accounting software, simplifies your accounting processes, and provides you with a single place to view all of your finance, tax, and accounting information. We specialize in providing support to non-profit organizations and ensure that the companies we work with meet their compliance requirements and will be audit ready all year. Learn more about our solution by scheduling an introductory call today.

This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business.