Nonprofit Financial Recordkeeping - Watch It!

Okay, bookkeeping is a dull topic. However, before you nod off, consider the following.

80% of my clients are very small, often newer nonprofits. Many of them have never done any bookkeeping beyond balancing a checkbook. For many of them, their personal checkbook IS their accounting system.

At some point, these folks have crossed the bridge between just personally supporting their mission with the help of a few friends and minimal online donations, to beginning to attract funding from foundations and larger donors. 

When you are dealing with Other People’s Money, and that money is defined as belonging to the public by your non-profit status, it’s time to go beyond your checkbook.

I advise every nonprofit to spend a few dollars and hours with a good accountant,  invest in the software of your choice, and above all, maintain a separate bank account for all nonprofit funds.

Do this as soon as you decide to become a 501(c)(3)nonprofit.  You and your board can be held personally liable for mishandling of funds. Mixing personal and business expenses in the same account is an invitation for someone to question whether you are properly using the funds entrusted to the nonprofit. When you received your determination letter, it was not just a “license” to raise money. It carried with it a legal obligation to manage the financial affairs of the nonprofit in an ethical and legal manner. 

Whether by good luck or good instincts, I have never been associated with a nonprofit that deliberately misspent donor money. Unfortunately, I have encountered naïve or just stubborn nonprofit leadership that actively resists the formalities of complying with GAAP (Generally Accepted Accounting Principles) or the newer FASB guidelines.

I cannot stress too strongly that the Internal Revenue Service has zero tolerance for nonprofit boards that feel this way.  For those NPO’s that have been filing a simple postcard return, the point at which they confront the full 990 form can be an expensive shock. Expensive not only because they will find that they probably will need an accountant to sort out their sloppy recordkeeping, but because failure to file it in properly completed form could cost them their nonprofit status.

Nonprofits are still businesses. Good financial records not only protect you from accusations of mishandling funds, but provide you with a snapshot of the organization’s financial health every month.  Good bookkeeping allows you to see if you are meeting the goals in your strategic plan, and identify trends in donor support. If a particular project or program is not attracting the level of funding you projected, you will know it before it becomes a crisis. Applying proper accounting theory can even find you savings in your operation and allow you to provide help in your chosen field of interest more effectively.

Good recordkeeping. The topic is dull, but the benefits are golden. Do it right in the beginning, and you won’t waste your time and money doing it over.