Top 7 Accounting Best Practices for Nonprofits

Jan 30, 2023

By Alina Mouscher, CPA – Supervisor, Accounting and Assurance

Nonprofits face a lot of demands. They often have limited resources when it comes to both financial and human resources. The accounting team usually not only supports general operations, but it also has to fulfill the demands associated with regular reporting and periodic audits. A nonprofit reports to a variety of stakeholders, including donors, the public, and grant agencies. It must also answer to its Board of Directors.

The finance team faces a lot of demands, but if things get behind or disorganized, it can mean disaster for the entire organization. Not only is a Board unable to make informed decisions based on accurate or timely information, but donors and lenders may also lose faith in the nonprofit’s ability to be a good steward of funds.

Nonprofits seem to face the same concerns time and time again. Having accurate training and good habits can make a world of difference for nonprofit finance teams and the organization as a whole.

This quick guide provides a few “hot-button” issues for nonprofits, including suggestions on how nonprofits can implement these best practices.

1. Keep up with timely reviews and reconciliations.

It is easy to get behind, especially in the context of operating a busy nonprofit. However, having a control structure that requires monthly reconciliation and analysis of the books can be very useful. It allows for better, more accurate tracking of the organization’s results and financial condition and it also helps the organization be prepared for independent or agency audits or reviews.

A good rule of thumb is that bank accounts should be reconciled monthly The person who reviews the bank statements should not be the same as entering cash receipts and disbursement. This separation of duties and extra level of oversight increases accountability and decreases the potential for fraud and errors.

Receivables (accounts receivable, pledges receivable, grants receivable, etc.) and accounts payable should be reconciled from the general ledger to subsidiary ledgers monthly.

2. Create a written policy for expense reimbursements.

Having a clear written policy for employee expense reimbursements helps align spending with the organization’s goals and prevents abuse.

The written policy should clearly state the types of expenses that can be reimbursed and the documentation required. The policy should also clearly state the types of transactions that will not be reimbursed, for example personal use items, meals above a certain amount, or receipts more than 60 days old.

3. Create a separate tracking method for grant activity.

Tracking grant dollars received and used is critical. Having a separate cost center in the accounting system will make this cost tracking easier and less prone to errors. Reporting to grantors should match the information in your internal accounting system.

Keeping track of grant terms and reporting requirements is critical as well. Ensure you have some kind of calendaring or reminder system to help keep track of these important deadlines.

4. Create a system for year-end adjustments.

Nonprofits should ensure that period-end adjusting journal entries are made promptly. You should also create a system to review these entries. All entries over a certain dollar amount should be reviewed by someone who is not involved in the activities that triggered the journal entry.

Be sure that all departments are aware of accounts payable reporting period cut-offs. Getting these deadlines right is especially important at the end of the year.

5. Do a periodic review to ensure the nonprofit is still in line with its mission.

Every nonprofit should periodically check to ensure that the direction in which it is heading is still in line with its mission and values. While this may not be an accounting function per se, it can have accounting implications.

For example, if an agency determines that the nonprofit has veered too far from its stated goals, it could decline to provide further funding. Your tax status might be affected as well.

Do an annual review of all of the nonprofit’s print and online materials to ensure they are consistent with the nonprofit’s mission and goals. If necessary, make changes or updates to adjust.

6. Annually review for unrelated activities or business revenues.

Any activity that is not related to the nonprofit’s goals may need to be separated and segregated for proper reporting. Do an annual check for unrelated and business revenues. These are reported on IRS Form 990-T, Exempt Organization Business Income Tax Return.

7. Do at least annual audits and follow up on any concern areas.

If you use internal audit personnel, be sure that the audit team provides suggestions to management for areas of improvement. Even small areas that might be lacking can be a great way to make improvements. Continuous internal accounting improvements show a great deal of integrity to nonprofit stakeholders.

If you do not have an internal audit team, you may want to consider engaging an independent audit firm. You can also engage an independent accounting firm as part of or in conjunction with any external audits you may have. Having an internal audit performed by a third party will help you prepare for your annual audit and address any problem areas before they are reported beyond your walls.
Regardless of how you perform an internal audit, be sure that a summary of the findings is included in a report to the Board of Directors.

With a bit of planning and a few good policies, a nonprofit’s finance team can function much better. These best practices will put you well on your way to better financial reporting and control within your organization.

Do you have questions on any of these best practices? Please contact us at 847.982.0333.

Alina Mouscher, CPA – Supervisor, Accounting and Assurance, provides assurance, review, and compilation services for corporations, not-for-profit organizations, and employee benefit plans. She holds a Master of Science in Accounting and a Bachelor of Science in Accounting degree from the University of Illinois at Chicago. She is a member of the American Institute of Certified Public Accountants and the Illinois CPA Society.

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