Updated : Feb 09, 2018 in Finance Accounting

Non-Profit Financial Systems – Lessons Learned and Best Practices

Non-Profit finance and accounting in many ways, is much more difficult than for-profit accounting. Accounting for items such as grants, restricted funds, and in-kind donations all add complexity. There are unique GAAP rules for non-profits that vary if you are a government not for profit, or a private nonprofit. The IRS then has its own set of rules. And foundations and major donors such as the United Way typically have their own set of rules. Keeping track of all of this is a daunting task!

To add to the issue, over 90% of the 1.1 million non-profits in America, have less than 10 staff. As a result, most non-profits do not have the scale to have an accounting department. Frequently they attempt to hire a more senior accountant, but out of necessity ask this person to also do bookkeeping. The high powered accountant gets frustrated booking receipts all day, but the non-profit simply doesn't have the scale to also hire a bookkeeper. Or a non-profit hires a bookkeeper who is great at banging in donations all day, but is not qualified to know the details and intricacies of non-profit accounting.

All this has resulted in the following: A recent study by the National Center for Charitable Statistics reports that over 50% of non-profits do not properly follow GAAP. Only 16% properly follow IRS guidelines. What can a small to mid-sized non-profit do to improve? There are several options.

1) There are many training firms that provide capacity building for non-profits. They attempt to teach all of these special rules to the non profits. These are great, however most people who join non-profits join for the mission, not to do administrative work. Plus, most people in non-profits are overworked and simply have too many to-dos to stop and learn a whole new skill set.

2) Hire a freelance bookkeeper. Freelance bookkeepers are cheap. But their turnover is high. Finding a reliable freelance bookkeeper, skilled in non-profit accounting, can be incredibly difficult. Also, many bookkeepers wear multiple hats – such as secretary, office administrator, and / or assistant to the development director. All of these tasks can distract from their accounting 'chores.'

3) Volunteers. Volunteers are great for project work, but tend to be unreliable for repetitive and routine tasks such as accounting and bookkeeping.

4) Local accounting firms. Local accounting firms tend to be expensive, but qualified. However, often they place their most junior people on the non-profit accounts and tend to squeeze in the non-profits when they have time.

5) Shared Services. Some firms focus specifically on non-profits and their unique issues. These firms offer ala carte services that can be tailored to each specific small or mid-sized non-profit. They can work with start-ups, alongside in-house staff, or provide full accounting department services. By sharing scale and size with other non-profit clients, each client is able to get the expertise and experience they need at an affordable price. Some rural hospitals employ this model by sharing accounting departments or key employees.

Accounting is not a necessary evil. Financial systems that function well provide reliable, timely, and useful management information. This information can help make key decisions that determine the direction of a non-profit. Poor accounting can thwart fundraising attempts, lead to poor decisions, and generally choke the mission of a non-profit. As a sector, non-profits have a long way to go to improve the accuracy and reliability of our financial data. Solutions exist, but it will take proactive boards and strong leadership from Executive Directors to make a difference.