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.

The IRS, Notice 1382 and Your Organization

Effective January 3, 2012, the IRS eliminated the Advance Ruling process. Now, the instructions for Form 1023 (the application form) are prefaced with this notice when you download the form from the website. However, the application instruction package still includes the entire section related to the advance ruling process. This seems to be creating confusion on the part of new organizations applying for nonprofit approval. 

Prior to Notice 1382, your organization could apply for approval, and receive an “advance ruling” that conferred conditional or preliminary approval, allowing donations to be considered tax-deductible. That is gone. Now, you must receive a formal Letter of Determination to use the statement that “donations are tax-deductible”, or whatever generic statement you are using. The upside of this is that you don’t have to contend with the five-year review.

Section IX (Financial Data) is affected by the ruling as well. Notice 1382 contains specific information on what lines of the application to ignore, and what areas not to sign.

Section IX seems to be the one that is creating the most trouble for my clients. The IRS specifically says in Notice 1382, that new organizations are required to make a “good-faith estimate” of receipts and expenses in lieu of providing specific information, going forward three years. For some reason, people contacting me seem to think that they can’t apply unless they have been in business at least one year. That is not the case. You simply have to be able to provide three years of projected financial data.

This does require some planning and forethought. Essentially, it is no different from the cash-flow projections in a standard business plan. It does require some semblance of a relationship between your mission objectives and the numbers. If you are planning to start a 25,000 sq. ft. museum and open it in three years, it probably isn’t realistic to state that your total income over three years is going to be $5,000.

Over or under-stating your income and expenses will result in a red flag that may delay your approval at best or result in an outright denial. The IRS is not requesting anything here that a lender would not require in the for-profit world. It is simply asking you to have a strategic plan that includes some reasonable goals and estimates. Because a nonprofit must be a viable business first, allowing it to achieve its charitable goals, this is planning you should be doing at the onset. 

How Do You Pay for Nonprofit Start-up Costs?

You have a mission. You’ve identified a need, and you want to help. You know that receiving grant funds or offering tax-deductible status for donations requires you to be a 501(c)(3) nonprofit. You’ve done some preliminary cost investigation and discovered that like most things in life, it costs money to begin. Now what?

Depending on your state of residence, just filing with your state as a corporation and paying the fee to the Federal government can cost well in excess of $1,000. Adding attorney or consulting fees to set up your bylaws and educate you on the legal requirements for nonprofits, can cost from several hundred to several thousand dollars.

What many people do is contact someone such as CloudLancer Writing Services, and want to apply for grant funding. Unfortunately, there is little to no “grant” (that is, “free”) money available to start any business and that includes nonprofits. Fortunately, fundraising is about a lot more than grants. Here are some strategies that have helped our clients get started.

1.  Start at home. No, I mean really, start at home. Canvass your relatives and friends for small donations. You probably have candidates in mind for your board of directors, and they should be willing to help. The support might be in cash, or in the form of some donated item or items that you can sell.

2.  Stage fundraising events such as yard sales, or ask local businesses to sponsor fundraising events. These could range from car washes or  BBQ’s, to selling craft items.  Approach your local craft clubs, and offer to give them a showcase for their member’s products for a cut of the sales. Perhaps local businesses will have excess stock that they would be willing to donate to a silent auction.  In addition to raising funds, you will get the benefit of exposure to other prospective donors and you can let people know that you will be offering a solution to a problem. You may attract help you didn’t even think to include in your fundraising strategy.

3.  Build a following on one of the social media sites, like Facebook. (Be sure you let all your “friends” know about your page). Let people know through the page that you are raising funds. Even if they can’t help, they may tell someone who can. Set a specific goal of X dollars, and post a progress report to let folks know that you are achieving your goal. 

4.  Network with other nonprofits in your area. There’s nothing like benefiting from someone else’s experience.

By the way - keep good records on who gives what. First, you’ll need the records to track uses for the money you raise, and some of the people who help now, may be willing to continue their support later.

Also, be aware that until you receive your nonprofit status, donors may not be able to deduct contributions on their tax returns. Normally, the amounts you will receive will be small enough that this won’t be a big drawback at first.

The other benefit to this fundraising approach is that you will become much more comfortable with asking for money. Believe it or not, many nonprofit managers/founders/board members don’t like this facet of being a nonprofit, but learning to do an effective “ask” is part of the nonprofit world.  You will learn to refine your message and present it to different funders with diverse motives for helping you, and that is experience you can’t get from a book or the internet. If you would like further information on fundraising strategies, you can contact us through our Facebook page or the website at www.cloudlancerwriting.com.