Few people start a career in the nonprofit sector because they love finance. However, the higher you rise in your organization, the more you need to know about accounting and budgeting. The first thing you need to understand is the yearly accounting cycle, which includes bookkeeping, generating financial statements, and analyzing information from those statements.
Bookkeeping is basically recording various financial transactions. A new organization will base its bookkeeping on the cash-basis accounting system, using either a checkbook to track transactions or a cash receipts journal and a cash disbursements journal to post your receipts, the simplest method of tracking transactions. As the organization grows, you move to an accrual-based system, which you will need a payroll journal, an accounts receivable ledger, an accounts payable ledger, and a general ledger. This system lets you post entries when you earn money and when you owe it to track enough information to generate a financial statement. There are many programs that can help you keep your records.
Once converted to the accrual system, you need to monitor assets, liabilities, net assets or fund balances, revenues, and expenses. Nonprofits have to report both activities directly related to providing services to clients, such as function or program transactions, and supporting transactions, which include those common to all programs, such as general management costs.
Eye on the Big Picture
Companies have an operating or annual budget that shows planned revenue and expenses for the coming year. These budgets have categories such as salaries, benefits, computer equipment, and office supplies. Nonprofits should strive to minimize overhead and administrative costs such as rent, labor costs, and insurance. Each month, update your budget report to include actual revenue and expenses. This will give you a good idea of whether you are operating according to plan and where you might need to reduce expenses and build revenue.
For small, recurring expenses paid right away, you will use a petty cash fund. You might establish this fund by writing a check to your organization and noting that it goes to petty cash. The company will withdraw from the fund by filling out a voucher that describes who took the money, amount taken, purpose, and date withdrawn.
Use your bookkeeping information to produce a cash flow statement, a statement of activities, and a statement of financial position. Funders often want to see the statement of financial position, which depicts the overall value of your organization at a given time, usually at the end of the year. This is where you will report total assets, subtract your total liabilities, and report the resulting net assets.
Numbers in isolation are helpful, but it is by comparing figures from different areas that you learn a lot about how your nonprofit organization is doing. Compare planned expenses to actual expenses to see whether your spending is on track.
One way to compare numbers is to use ratios, comparisons made by dividing one number by another. For example, consider the program efficiency ratio: your program expenses divided by total expenses. This measures how much you are spending on your primary mission rather than just administration. The closer the ratio is to 1, the more efficient your organization is.
This is just a broad overview. The size and other specifics of your organization will dictate your particular needs. It is important you work closely with an accountant to make sure your financial systems are efficient.
Contact Nikki M. Kuretich, CPA for guidance on bookkeeping and accounting services to fit your situation.