When should nonprofits upgrade accounting systems?
It’s easy to imagine the beginning stages of a new nonprofit entity. A founder has a passion to serve the community, whether it be the less fortunate, the undereducated, or perhaps even stray animal friends. They found their organization, and it has early success through their sheer determination and long hours of work. Accounting for these organizations is often simple: cash in the door becomes supplies to run the business. The ebb and flow of cash is all the organization is conscious of and making sure the lights stay on is the sole concern.
However, what happens to the organization when it starts becoming a little too successful?
It seems like a silly idea: a nonprofit organization becoming too successful? Not only can it happen, but success can lead to an organization’s downfall. Not making the right choices when it comes to an organization’s accounting will lead to your nonprofit’s downfall. A nonprofit can reach some of these tipping points overnight, and it’s imperative to not fall off the cliffs on the other side.
Let's look at the warning signs.
Restricted Funding
Once a nonprofit is up and running, it will often have a variety of programs or services on offer to the communities it serves. These can be as simple as your house of worship’s flower fund, to as large and complex Harvard University’s $50 billion endowment. While orders of magnitude different in size, both have a commonality: restrictions. In the nonprofit world, donors may add time and purpose restrictions to their gifts to nonprofits, meaning the organization must only use the funding according to the funder’s wishes. This is to say, when you make a donation to the flower fund, you want it to be used to purchase flowers, not to buy a new G-Wagon for the worship leader!
“Restricted funding can be one of the first hurdles for an up-and-coming nonprofit.”
Restricted funding can be one of the first hurdles for an up-and-coming nonprofit. A donor has legal recourse to demand their contributions refunded if not tracked and used correctly. Knowing the remaining balances of these restricted funds and the ins-and-outs of the usage of the funds in organizational activities is a step up in complexity that an inexperienced bookkeeper may not have.
Grant Management
Much like restricted funding, grants are another level of accounting complexity that can flummox basic bookkeepers. In addition to having time- and purpose- restrictions like donor-restricted funding, grants (which are generally applied for instead from other entities and not given by individuals) will often have reporting requirements, both narrative and numerical in nature. Your organizational leadership may be able to paint a word picture saying what a difference the money is making in the community, but can they say what the funding actually purchased?
Again, grants will have right-of-return clauses that dictate a refund to the grantor if you didn’t spend the money the right way. This can cripple an organization if it is their main source of revenue and there aren’t any savings from other company activities to pay the grantor back.
Audit Requirements
It’s the dreaded “A” word: audit. While the word audit may conjure up visions of IRS boogeymen coming to garnish wages and seize property, financial audits aren’t scary if you are prepared.
“While the word audit may conjure up visions of IRS boogeymen coming to garnish wages and seize property, financial audits aren’t scary if you are prepared.”
A financial audit is simply a neutral third party, generally a licensed CPA, going over your financials and giving them a grade on accuracy and following the rules. Audits in Wisconsin are state mandated when an organization has $1 million of contributions in a year, as outlined in the state statutes. A basic bookkeeper may be able to say you made a certain amount of money in a year, but did they account for pledges made by donors to be paid in the future? Did they split out cash received for services rendered versus true contributions? These differences, especially when nearing the threshold, can mean the difference between needing and not needing a five-figure costs factored into your organizational budget.
Federal Funding
While it’s easy to grumble so soon after Tax Day about not getting a refund or having to pay Uncle Sam, our tax dollars fund wonderful nonprofit programming in America. From land conservation to feeding the hungry, portions of our taxes go to nonprofit organizations making a difference for everyday folks.
That said, the federal government has strict rules in place to make sure those funds are used correctly, and the rulebook is a complex web of guidelines that even seasoned accountants brush up on frequently. Spending $1 million of federally-sourced funding results in needing a Single Audit, a government-mandated financial audit that goes beyond what is part of a traditional financial audit. Failing a Single Audit can easily result in loss of all federal funding.
Stay proactive.
See how easy it is for basic bookkeeping can quickly let you down with success? Once a nonprofit starts getting big enough for restricted contributions, grants, audits, and federal funding, you need expertise to navigate these rules and regulations. Wegner CPAs has staff with decades of experience to help your nonprofit scale up operations. Get in touch to learn how our team can help you move forward with confidence.
