8 Reasons Why Financials for Nonprofits Are More Difficult than For-Profits
Financials for nonprofits require an in-depth understanding of the sector as well as exposure to some of the challenges that make it so unique.
As an accounting professional, you may have exposure to financials of a wide range of sectors, which helps fine tune your skills and expand your knowledge. However, one sector that tends to be unique and in a league of its own is the developmental or social sector.
Financials for Nonprofits Pose Unique Challenges
Compared to other organizations, nonprofit financials need to be transparent and up-to-date as it is a highly scrutinized sector compared to the corporate space.
Here is a quick rundown of 8 factors that make it unique, along with the challenges that may arise for accounting professionals who serve the sector.
1. Watchdogs Are Proactive
By virtue of its very nature, nonprofits are supposed to leverage every penny to serve their main stakeholder — the marginalized group or social cause it is associated with.
From the point of view of taxation, nonprofits must submit Internal Revenue Service (IRS) Form 990, which presents all their financial information. Nonprofits are also subjected to regular audits.
Moreover, several watchdog groups keep tabs on the financials of nonprofits. Failure to be transparent in financials can escalate into inquiries by watchdogs. Typically, bad press also follows, and there is a chance for the organization to be shut down.
The key purpose of the watchdog groups is to share reports on their findings, especially if there are any irregularities.
2. Donors Have Expectations
In the case of non-profits, the organization is accountable to the donors who fund their activities. The corporations or individuals donating funds expect a report on how the funds are spent. They also expect them to be allocated to activities that are pre-decided.
As such, it’s a good idea for accounting professionals to develop a report for the donor that indicates exactly how their funds are being spent.
3. Manage Cash Flows
One of the common issues with non-profits is cash flows. This is because they depend on funding and donations, unlike a for-profit, which is self-sustaining.
This is where budgeting and planning play a very important role in making cash flows sustainable. Predicting expenses and always having reserve funds is extremely important. You can leverage tech-enabled platforms these days to manage cash flow processes efficiently.
4. Tax Reporting Is Different
The tax reporting for non-profits is a more complex one, designed to reduce the scope for fraud and build transparency. The IRS put additional reporting requirements to limit abuse of the “tax-exempt” status. Secondly, the tax returns of a non-profit are on public record. Hence, multiple stakeholders can view them anytime. Keeping books audit-ready helps.
5. Multiple Audits
Unlike a corporation, nonprofits are subjected to regular audits. They are expected to maintain higher standards of transparency and reporting. Since most of its funding is donated, the money must be traceable; otherwise, an irregularity may be detected. Its financials must be up-to-date, and all the balance sheets must tally up.
6. Compensate for Board Oversight
It’s definitely a good idea to be proactive and make important financial documents accessible to help board members get up to speed. These can include budget reviews, projected cash positions, and compliance reviews. This will help the board of directors perform their duties more efficiently.
7. Lack of Financial Knowledge
Social sector professionals may not have the necessary financial and tax-savviness to manage all aspects of the financial cycle. As an accounting professional in this sector, you can curate the tools needed to support teams in becoming proficient.
For example, you can provide them with the information they need to make key decisions such as investing in new infrastructure or taking on a new project. Aspects like bookkeeping can be outsourced while you support the organization with strategic planning and suggestions that offer deeper value.
8. Limited Funding for Operations
It is expected that most funding for any non-profit goes into the projects it serves. Hence, the funding available for operations is always limited. Secondly, since funding comes from philanthropists, government, and corporations, it is earmarked for specific projects, and not a lot is reserved for operations and related expenses.
There is extensive reliance on volunteers, and hence, accounting professionals play a key role in supporting the non-profit in meeting its goals with limited access to funding.
Takeaways
As an accounting professional, you must also stay abreast of the latest trends and upgrade your skills to keep pace with your industry. Be alert to any changes to the taxation and audit frameworks of nonprofits.
It’s also important to ensure that funds are spent based on pre-decided allocation and not based on the whims of one or two individuals. Accountability and transparency must be prioritized. A good mix of technology, thorough knowledge, and discipline can ensure that this is achievable. This paves the way for the sustainability of the organization.
About the Author
Bryan Kesler is a renowned CPA exam mentor and founder of CPA Exam Guide. He aims to provide affordable mentoring and tutoring solutions to smart accountants to pass the CPA exam. You can connect with Bryan on Linkedin and follow him on Twitter.
Is your nonprofit organization generating compliant financial reports? We welcome your thoughts and comments.
Originally published at https://www.araize.com/financials-for-nonprofits-8-ways-to-overcome-unique-challenges/