Proper financial management is crucial to ensuring the sustainability and success of your organization. Tracking and analyzing your financial performance allows you to make informed decisions and provide accurate reports to stakeholders. In this blog post, we'll cover the basics of nonprofit accounting so you can make informed financial decisions, effectively manage your organization’s resources, and maintain transparency with stakeholders.
While business accounting is based on income sources being allocated to expenses, fund accounting allocates income received to funds which are designated for specific events, programs, or purposes.
Nonprofits generate revenue through a variety of sources to support their missions and operations. Some common ways that nonprofits make money include donations, grants, fundraising, membership fees, program service fees, investment income, corporate sponsorships, government contracts, in-kind contributions, and social enterprises.
Fund accounting, informally called nonprofit accounting, is about demonstrating transparency and financial stewardship relating to the income, expenses, assets, and liabilities for all of a nonprofit’s programs. Nonprofits that properly implement fund accounting can demonstrate to grantors and stakeholders that grant funds are being used exclusively for the intended purposes, as well as ensure compliance with grant requirements and exhibit financial accountability.
Nonprofits use different funds to effectively manage and allocate their resources across various programs, projects, and initiatives. This enables transparency by segregating financial resources into distinct categories based on the nonprofit’s needs, legal requirements, or donor stipulations associated with each fund.
As mentioned just now, nonprofit funds are classified as either restricted or unrestricted funds and more detail about the funds is conveyed by various subcategories within each of these two categories.
Restricted funds for nonprofits refer to financial resources that are designated for specific purposes, projects, or timeframes, as outlined by the donor or grantor. These funds are intended to support particular activities or initiatives, ensuring that the donor's intentions are respected and that resources are allocated efficiently.
Restricted funds can be temporary, such as those tied to a specific project, or permanent, such as endowments where only the generated income can be spent while the principal remains intact. The use of restricted funds allows donors to contribute to causes or programs that align with their interests and values, while enabling nonprofits to establish dedicated revenue streams for critical initiatives.
Some common subcategories of restricted funds include:
Unrestricted funds for nonprofits refer to financial resources that are not subject to any specific donor-imposed conditions or restrictions. These funds provide nonprofits with the flexibility to allocate resources as needed, supporting general operations, administration, new programs, or unexpected expenses. Unrestricted funds are essential for the financial stability and sustainability of nonprofits, as they allow organizations to adapt to changing circumstances and seize opportunities that align with their mission.
Some common subcategories of unrestricted funds include:
In FASB 117, the IRS establishes the standards for external financial documents that will be produced by a nonprofit. These guidelines specify which information must be disclosed within your organization’s financial documents so they accurately and clearly describe your organization’s finances to external stakeholders. The three primary financial statements include the statement of activities, the statement of financial position, and the statement of cash flows.
A statement of activities (also known as an income statement or statement of operations) is a financial statement that shows a summary of the revenues, expenses, and net changes in net assets of a nonprofit organization over a specific period, typically a fiscal year. Revenues are the inflows of economic resources, such as donations, grants, and program fees, while expenses include costs incurred in the process of generating revenues or furthering your organization's mission, such as salaries, rent, and supplies. The difference between revenues and expenses is your organization's net change in net assets, which can be either a surplus (when revenues exceed expenses) or a deficit (when expenses exceed revenues).
The statement of activities helps stakeholders understand how your organization is using its resources to further its mission. It is typically prepared at the end of your organization's fiscal year, but can also be prepared at other times as needed.
This financial statement is equivalent to the balance sheet for businesses and shows the financial position of a nonprofit organization at a specific point in time. A statement of financial position provides stakeholders with a snapshot of your organization's assets, liabilities, and net assets (also known as fund balances).
The statement of financial position helps stakeholders understand your organization's financial position and its ability to meet its financial obligations. It is typically prepared at the end of your organization's fiscal year, but can also be prepared at other times as needed.
A statement of cash flows shows the sources and uses of cash for a nonprofit organization over a specific period of time, typically a fiscal year. The statement of cash flows is divided into three main sections: operating activities, investing activities, and financing activities.
Nonprofit cash flow statements will typically refer to donations, membership fees, program fees, and fundraising proceeds, unlike business cash flow statements that refer to sales, service fees, and investment income.
A nonprofit accountant is responsible for a range of tasks related to financial management and reporting. These tasks may include:
Overall, a nonprofit accountant plays a crucial role in the financial management and reporting of a nonprofit organization. By accurately tracking and analyzing financial data and following proper accounting practices, you can help ensure the sustainability and success of your organization.
At MBS Accountancy, we specialize in providing accounting, bookkeeping, and tax reporting services to help nonprofits effectively and efficiently manage their financial operations. We tailor our nonprofit accounting services to meet the unique needs of nonprofit organizations, ensuring that our clients receive top-notch service to support their mission-driven activities.