Hiring professionally-trained accountants and bookkeepers can prevent costly nonprofit accounting errors down the road.
Best Advice for Proper Nonprofit Financial Management
Proper financial management is critical for nonprofit sustainability. Regardless of type, size or administrative budget, timely and accurate financial reporting plays a vital role in determining whether a nonprofit can fulfill its mission. Financial statements that contain accounting errors can undermine both the long-term and short-term viability of an organization.
Because financial reports are necessary when completing grant applications and proper stewardship of donor funds, errors that lead to poor reports can pose a significant threat to the fiscal solvency of an organization.
How Hiring Qualified Accountants Prevent Nonprofit Accounting Errors
When your nonprofit organization hires unqualified people to handle accounting functions, nonprofit accounting errors can cause serious problems with fiscal management and funding. These problems manifest themselves in financial reporting that is often inaccurate and doesn’t properly reflect the financial health of the organization.
Why Do Nonprofits Minimize the Importance of Accounting?
So, why do a majority of small to medium size nonprofit organizations employ non-accountants to do their accounting? Would they hire unqualified counselors for their counseling center? Would they let someone with no social work experience work with their clients?
All nonprofit organizations have a board of directors. Most also have some combination of finance committees, executive committees, program directors, development directors, and audit committees. When these committees and directors meet they need financial reports to measure the effectiveness of their programs.
Most of the time the financial data must be presented differently to address specific needs of the targeted audience. In addition, financial reporting needs to be provided to funding sources, donors, and government agencies.
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Unique Requirements for Nonprofit Accounting
Nonprofit accounting rules regarding the recording of restricted funds and handling multi-year grants are unique requirements of nonprofit accounting. Expecting someone who doesn’t understand the difference between a debit and a credit, and assets and liabilities to handle your critical accounting functions is asking for trouble. How can you expect to receive accurate financial reports?
The fault is not in the personnel charged with managing the accounting. The buck stops at the executive level. Nonprofit boards and executive directors place unrealistic expectations upon inexperienced and under educated bookkeepers.
Misconceptions When It Comes to Hiring Nonprofit Accountants
There is also a misconception that all you have to do is give the person in charge of accounting easy-to-use accounting software, and they will magically be able to generate accurate and relevant financial reports. The reality is that no matter what accounting software is used, if the user does not know how to read a balance sheet or income statement, he or she will not be able to properly support your organization as you try to fulfill your mission. Your accounting software, no matter how good, will not correct for bad data input.
Another fault of nonprofit boards is their unwillingness to invest in the right software tools that will make their accountants’ job easier. There is a mistaken belief that nonprofits can use off-the-shelf accounting software for their accounting. A Board Member will say, if it works for my business, then it can work for the nonprofit. But, nonprofit accounting is much different from for profit accounting.
Wake-Up Call for Nonprofit Organizations
It’s time for nonprofit management to wake up and realize if you want your organization to be successful in fulfilling its mission, then the accounting and financial reporting have to be entrusted to experienced professionals who will generate timely and accurate financial data. Having an experienced accountant on staff, or an accountant who can oversee your financial responsibilities on a regular basis will increase the reliability of your financial reporting.
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Bottom Line
A competent finance department will make the organization run smoother and provide more time for capacity building, fund-raising, securing donors, and developing your programs. Having someone who understands nonprofit accounting can also help in developing a plan for your future financial needs that ensures your organization can fulfill its mission and remain sustainable.
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