We provide accounting services to nonprofit organizations in the Sacramento Area, The Bay Area, Fairfield, and beyond.
When nonprofits come to us, they often are dealing with a common set of challenges and concerns. Some common concerns are securing the long-term sustainability of their organizations, helping board members focus on appropriate items and not get bogged down in the details, predicting cash flow, attracting more donors, etc.
Any sizable nonprofit needs a good nonprofit accountant. Nonprofit accounting is similar in many ways to for-profit accounting, but it has its special features. It is important that the nonprofit accountant you choose be aware of them.
The most obvious difference is that nonprofits don’t share profits with their owners or principals as for-profit businesses do. But it’s a misconception that nonprofits don’t make a profit, or shouldn’t make a profit. Any profit left over after paying all expenses should be allocated to an operating reserve fund. As a matter of fact, it’s good nonprofit policy to budget for profit every year. We assist our clients in this budgeting process.
“Turning a profit” is important for the long-term sustainability of any business. It’s especially important to maintain this focus in nonprofit organizations because they are mission driven, and their mission isn’t to make a profit for shareholders. Their mission is generally to achieve some social good. Many nonprofits get lost in their passion around achieving the mission and let their attention shift away from the numbers side of the business. We help you stay focused on the numbers, and use your numbers to effectively run and grow your nonprofit business and achieve long-term sustainability, while still accomplishing your nonprofit mission.
Many nonprofit leaders must focus on fundraising, whether it comes from government grants, private individuals, foundations, etc. The financial health of the nonprofit makes a huge difference when soliciting donations. Put yourself in the shoes of the donor for a minute. Assume you are passionate about the nonprofit mission. Would you rather donate to an organization that is sustainable over the long term, or one that might be gone in a few years?
And don’t let your own passion for the mission blind you. Make no mistake, major donors are educated and savvy and they look at the financial health of an organization before donating. You want quality strategic nonprofit accounting services to put your organization at the head of the pack in donors’ eyes.
Nonprofit Tax Return Preparation
Another thing that makes a huge difference in soliciting donations is the preparation of the IRS form 990 tax return. Donors look at the 990 when deciding which organization to donate to. The 990 is full of information, both financial and nonfinancial, that donors use to make donation decisions.
If you hire a transactional nonprofit accountant to complete your 990, it’s likely it will comply with IRS guidelines, but it’s unlikely it will help you improve your fundraising ability. A strategic nonprofit accountant can help you plan in advance to use your 990 to increase fundraising. A strategic nonprofit accountant works with you year-round, knows your business well, and can guide you to put the right information in the right places on your 990.
Nonprofit Cash Flow Budgeting
While it isn’t unique to nonprofits, cash flow accounting and budgeting is another important factor in the financial health of any organization. A nonprofit’s revenue usually comes from one or more sources including donations, government grants, and fees for services provided. Often there is one season in which more donations come in. There may also be certain months when government grants arrive, or there may be a delay in receiving funds after grants are written, or services are provided. All these factors affect the timing of receipt of revenue. There can be slow seasons, or months when revenue is scant. Nonprofits must plan expenditures around these fluctuations in revenue. Do you put out extra money to trim the trees or install a new roof during the months when cash flow is tight? Probably not. You need to make payroll. Instead, use a cash flow budget tool to plan those expenditures for times when cash is plentiful.
Another helpful tool to get through the slow months can be a bank line of credit. Many banks won’t lend to nonprofits because there is no one to provide a personal loan guarantee as there would be in an owner-operated for-profit business. There are a few banks, however, that value the work nonprofits do and have special lending programs for nonprofits that don’t require a signature guarantee.
Restricted vs. Unrestricted Funds
Another nonprofit-specific factor affecting cash flow is the concept of “restricted funds.” The revenue nonprofits receive can be restricted by the funding source. There can be restrictions as to how it can be spent and there can be restrictions on when it can be spent. For example, a donor might insist that her donation be spent 100% on programmatic activities. Having too many funds restricted in this way can limit a nonprofit’s ability to cover its day-to-day administrative costs. As discussed earlier, a nonprofit is a business and a business that can’t pay for day to day operations is unsustainable. In the nonprofit world, the term “core mission support” is used to refer to the administrative and fundraising activities that support the organization’s programmatic or mission-driven activities. A strategic nonprofit accounting firm understands these concepts and helps you plan to support your core mission in a long-term sustainable way.
At our firm, we can also help you build a dashboard of key metrics you can use to run your nonprofit. The board can also use this tool in board meetings. Boards often get bogged down in information overload looking at numbers-rich financial statements during board meetings. The end result of this can be paralysis by analysis. It can lead to an excessive focus on small details when the function of the board should be strategic. Leave the day-to-day details to the executive director and the admin staff. A simplified dashboard provides the board with just the strategically-focused key metrics they need to guide the nonprofit and make high level decisions.
Here’s a link to download a free dashboard template. The metrics on it will be helpful to any nonprofit, but they are generic. Working with a strategic nonprofit accountant, you can develop financial and nonfinancial metrics that are relevant to the success of your organization. Click here to read our blog post on Five Key Nonprofit Metrics for Improved Financial Health.
Unrelated Business Income Tax (UBIT)
One other difference for nonprofits is that while income directly related to their exempt purpose isn’t taxable, some income they generate may be subject to tax. Strategic financial planning can help determine whether investment in the activity that produces the “unrelated business income tax”, also known as UBIT, is offset by the revenue generated after factoring in the cost of the related taxes. Allocating expenses to these UBIT generating activities is also important in the minimization of these taxes. Limiting the unrelated business income is important as well. Too much unrelated business income, or too much staff time committed to producing it, and your nonprofit may no longer be considered a nonprofit by the IRS.
With so many features unique to nonprofits, we highly recommend working with a strategically-focused nonprofit accounting firm to help your organization survive and thrive. Innovative Solutions CPAs & Advisors is just that type of firm. We specialize in providing strategic accounting services to nonprofit organizations in Sacramento, Fairfield, Napa, the Bay Area, and beyond. Thanks to modern technology, we can have a close strategic advisor relationship with you and your nonprofit no matter where you are located.
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