The origin stories of most nonprofit organizations are remarkably similar: an individual or group of individuals identifies a need in society and wants to do something about it. In the beginning, organizations operate by their bootstraps, raising whatever money they can to get by and carrying out as much programming as possible. Nonprofit leaders that bring their organizations past the startup phase quickly realize that they need to professionalize their operations. At Nonprofit Data Solutions we focus on the data management needs of organizations. But the area that often presents the biggest challenge to growing nonprofit organizations is accounting. Nonprofit board members have a fiduciary responsibility to the organization, so getting accounting right is of the utmost importance.
We spoke with Chris Bavolack, the Director of Finance and Operations for Chazin & Company, an accounting firm that specializes in nonprofit accounting to ask for his advice on how nonprofit organizations can develop proper accounting systems and avoid potential pitfalls.
Nonprofit Data Solutions: When should nonprofit leaders begin to think about setting up an accounting system?
Chris Bavolack: When a nonprofit organization is starting up and does not have a lot of funds or transactions, it is ok to use Excel or some other spreadsheet system. They should reconcile their bank statements each month and have a workbook that tracks where all of the money coming in comes from and where all of the money going out goes to. Even at the spreadsheet stage it is helpful to categorize expenses because at some point, a nonprofit will need to convert to an accounting system and develop a chart of accounts. For most small organizations, a system like Quickbooks Online is adequate. A 501(c)(3) may purchase Quickbooks Online at a discount through TechSoup.
NDS: So when is that point when spreadsheets are not enough?
CB: Once you start having regular and/or multiple sources of revenue, and more than a handful of expenses each month, you should consider setting up an accounting system. The amount and types of revenue are the real drivers because of the associated reporting requirements for nonprofits.
NDS: What kind of things should set off a red flag that an organization needs an accounting system?
CB: For example, if an organization is receiving funding from grants – either private or government – each individual grant should be tracked and expenses including but not limited to salaries will need to be allocated to each grant as well. This becomes increasingly difficult to track with spreadsheets. Also, once an organization exceeds $50,000 in annual gross receipts they must file a form 990 EZ for form 990. This may also be a sign that it is time to graduate to an accounting system.
NDS: Nonprofit organizations typically reach the point where they need accounting systems before they believe that they have enough disposable cash to engage an accounting firm. What is your advice to them?
CB: Right. The first thing that needs to happen is that organizations get their chart of accounts set up correctly. They should engage an accountant who specializes in nonprofits. Accounting for nonprofits is very different than for-profit accounting. Additionally, the chart of accounts should not be developed based solely on the organization’s existing needs – it should be designed to incorporate future growth. If you keep your books yourself, have an accountant review them regularly – monthly or at least quarterly. That accountant can also provide ongoing training for internal staff so that your books stay in good shape. A quarterly review for a small organization does not have to be very expensive – maybe $200 – $400 per quarter.
NDS: When organizations get a little bigger, how should they next invest in accounting?
CB: Once an organization has consistent revenue and a larger number of transactions, it may be time to bring in accounting assistance. Instead of having the accountant simply review the books quarterly, they may want their accountant to also close the books monthly and prepare financial reports.
NDS: This seems like sensible advice. What are the risks that organizations face by not putting proper systems into place right away?
CB: Building good accounting habits early on is an important step toward having accurate financials that management and potential funders can rely upon. It is much more expensive to correct accounting issues down the road than it is to implement best practices from the beginning. Nonprofit leaders should also keep in mind the first time an independent audit will be required when considering when they should invest in a solid accounting function.
About Chazin & Company
With over 15 years working exclusively with nonprofits, Chazin & Company takes pride in having a unique understanding of nonprofit accounting needs. We believe that nonprofits deserve personalized, quality service and should not settle for a one-size-fits-all approach. We collaborate with you to provide a fully virtual, customized, solution that is not only cost-effective but also strengthens your accounting function. We offer a team of industry experts at your disposal to provide advice, leading technology, and to supplement existing staff to improve efficiency and compliance. Chazin & Company can be found online at: https://www.chazinandcompany.com