Accounting forms the bedrock for any organization’s financial health. For non-profits, this aspect is even more critical. While dedicated to noble causes, they often grapple with the complexities of financial management alongside their altruistic pursuits. Since most of them have no idea about the best practices to face unique NGO accounting challenges, we have decided to lend a helping hand!
In this blog, Finsmart – trusted for accounts outsourcing services – will share 8 best accounting practices tailored for nonprofits. We are certain that by the end, you’ll be able to figure out how to navigate your financial complexities with confidence.
What are the Best Accounting Practices for Nonprofits?
The following are some of the best accounting practices tailored for non-profits:
Segregate Funds
While running a household, we don’t throw all our income into a single pot and hope for the best. But instead, we allocate funds to specific purposes (groceries, rent or mortgage, utilities, entertainment, and savings), right? This helps us ensure that we can track where our money is going and make informed decisions about spending.
Similarly, non-profit organizations can benefit greatly from segregation funds. Just like one manages household finances by categorizing expenses, non-profits can create separate accounts for different funding and programs. For instance, donations meant for a specific project or initiative should be distinct from general operating funds.
This approach will help NGOs maintain transparency, enabling you to accurately monitor how funds are allocated and utilized within your non-profit.
Switch to Accrual Accounting
For those who don’t know, accrual accounting is a financial practice that serves non-profits as a cornerstone for effective financial management. Unlike cash accounting where you have to record transactions only when money changes hands, this accounting approach captures transactions right away, regardless of the cash flow.
By switching to accrual accounting, non-profit organizations will be able to see a more comprehensive picture of their financial position. Put simply, it will provide them insights into commitments and resources that may not be immediately reflected in their bank balances, facilitating strategic decision-making.
Keep Reporting Transparent
Janet Yellen once said, “Transparency is the foundation of accountability.” We 100% agree with it. In the realm of non-profits, transparency isn’t merely a choice but a moral imperative. With their unwavering commitment to social good, they have to hold a profound responsibility to be open about their financial practices.
Transparent reporting goes beyond numbers. It’s a promise fulfilled to stakeholders, donors, and the wider community. By openly sharing financial reports and information, NGOs can build trust and reinforce their dedication to their mission. Donors will be able to witness the direct impact of their contributions.
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Budgeting Precision
This is one of the most important accounting practices for non-profit organizations. In the intricate dance of non-profit management, precision in budgeting is a choreography that can’t be underestimated. Much like a skilled choreographer plans each move to attain a flawless performance, non-profit organizations can craft detailed annual budgets to harmonize their financial resources with their impact aspirations.
A meticulously structured budget serves as a roadmap, guiding expenditures and assuring alignment with the organization’s mission. Regularly revisiting and adjusting it will allow for dynamic adaptations to funding, expenses, and priorities changes.
Overall, budgeting precision will help NGOs navigate the financial challenges that could arise, ensuring that resources are optimally distributed accordingly to amplify their reach and effectiveness.
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Establish a Donor Management System
For a non-profit, every donation carries the potential to drive a positive change. In this scenario, a robust donor management system is a compass guiding it toward lasting impact. Can’t make a picture in your head? Think of it as a conductor orchestrating a harmonious relationship between your NGO and supporters.
From maintaining donor profiles and preferences to tracking contribution history, a well-implemented donor management system will help you improve engagement, streamline communication, and ultimately improve fundraising efforts. Start by selecting a suitable accounting and donor management software that aligns with your organization’s requirements. Also, integrate it with your existing databases to assure seamless data flow.
Adhere to Grant Compliance
Another important accounting practice for charities to keep in mind. Navigating the intricate landscape of non-profit financial operations often involves securing grants to fuel important initiatives. However, receiving these grants comes with a responsibility – grant compliance.
Non-profits should adhere to grant guidelines established by the government of their respective country. This includes accurate and timely financial reporting, meeting project milestones, and allocating funds precisely as stipulated. By adhering to grant compliance, you can live up to the grantor’s expectations, nurturing a relationship built on trust and reliability.
Establish Robust Internal Controls
Forming robust internal controls is akin to building a solid foundation for your charity’s financial structure. Think of it as constructing a safeguard fortress that will protect non-profit resources from potential threats. These controls encompass practices such as segregating duties, regular reconciliations, and systematic reviews.
Robust internal controls ensure that financial transactions get executed accurately while mitigating the risk of fraud and maintaining the integrity of the NGO accounting operations. It will build a shield against your organization’s financial vulnerabilities, allowing you to focus on achieving your noble mission.
Outsource Accounting Operations
Most non-profits juggle a myriad of responsibilities, making it a monumental challenge to keep meticulous accounting operations. Although hiring full-time accountants might seem like a solution, the cost associated with salaries, benefits, and overhead can strain limited resources.
This is where the idea of outsourcing comes in!
Outsourcing the accounting function to a team like Finsmart will ease all the pains associated with bookkeeping, taxation, reporting and financial management.
Partnering with us for non-profit accounting will redirect your internal talents and energy toward the core mission
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Best Accounting Practices for Nonprofits: Final Words
There you go!
We’ve delved into some of the best accounting practices tailored specifically for non-profits. By considering these, you can empower your charity and ensure financial clarity, transparency, and efficiency.
At Finsmart, we’re committed to supporting non-profits in their mission to make a positive social impact. If you’re ready to embark on a journey toward stronger financial management, consider sending us an email at sales@finsmartaccounting.com.
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Shalaka Joshi is the founder of Finsmart Accounting and operates in the capacity of Director. A Chartered Accountant passionate about outsourcing and problem-solving, Shalaka has more than 20 years of experience in the field of accounting, payroll and MIS reports.
