Does your nonprofit make these common accounting mistakes?
Running a successful nonprofit takes more than just passion and a big heart. It also takes several life-times worth of skills and experience. That means that nonprofits often end up making some serious accounting mistakes.
Mistake #1: The bookkeeper wears too many hats
Good bookkeeping doesn’t always get the respect and appreciation it deserves. That leads too many organizations to assume that a nonprofit employee can add it to their responsibilities as if it were just “other duties as assigned.” When someone has bookkeeping as one of five, ten, or more regular responsibilities, they can only ever achieve a DIY level of expertise. That can lead to costly errors and omissions.
When that person is also the executive director or other top leader, then you should also consider carefully what else that person could do with their time. Even if they happen to have bookkeeping experience from a previous job, doing the bookkeeping ends up being a poor use of their time. It’s far better for the ED to have coffee cultivating a donor, for example, especially when a single check can pay for months of bookkeeping by a highly qualified bookkeeper.
Instead, think of bookkeeping as a stand-alone responsibility. If your nonprofit doesn’t have enough work for a full-time bookkeeper, outsource instead.
Additional reading:
Mistake #2: Paying full price for QuickBooks
Many nonprofit leaders still pay full price for all sorts of software, including the leading bookkeeping software, when most nonprofits can get significant discounts through TechSoup. At $75 per year for QuickBooks online, it’s practically free!
Pro-Tip 1: Although QuickBooks has its shortcomings, that’s also true of any accounting software. Its relatively inexpensive price, its market dominance, and that its fairly user friendly, it is the right choice for 95% of nonprofits with budgets under $3 million.
Pro-Tip 2: Intuit, the maker of QuickBooks, adds nails to the coffin of QuickBooks Desktop every year. Although QuickBooks Online had its shortcomings ten to fifteen years ago, it now has many advantages over the legacy desktop version. Nonprofits that wait to convert to QBO until the final nail goes into the coffin may find their transition to be excessively long and difficult as they wait in line for experts to help them make the switch.
Mistake #3: The wrong chart of accounts
A chart of accounts is the way that the bookkeeping for your nonprofit is organized. When it’s done well, you’ll be able to get quick answers to basic questions.
All too often, though, I run into nonprofit charts of accounts put together by people who might have been smart CPAs but who knew very little about nonprofit accounting. Nonprofits tend to have more complexity than similarly-sized businesses and need to answer different financial questions.
How do you know if your chart of accounts needs a clean up? If you can’t get your basic financial questions answered, that’s a strong hint. Another is if your financial reports are more than a couple of pages long.
Mistake #4: Just standard financial reports
Very few nonprofits conduct their meetings in languages like Klingon or Esperanto, yet far too many expect their leaders to make strategic financial decisions using financial reports in what is essentially a foreign language to them.
13 out of 14 American adults have math anxiety. Once we understand that, it should come as no surprise that most board members and staff leaders get quiet if the only financial data they receive is the basic financial reports that their accounting software generates.
Instead, nonprofits that prioritize inclusion and the full participation of their leadership in financial decisions provide financial dashboards. These typically consist of a couple of pages of easy-to-read graphics displaying the key measures of the organization’s financial health. These don’t replace the standard financial reports, they just present that data in a way that makes it much more likely that people will actually participate in the conversation.
Additional reading:
Mistake #5: Thinking an external audit will detect or prevent fraud
Your standard, external audit is not designed to detect or prevent fraud.
A review or compilation, sort of “light” versions of an audit, will do even less.
In fact, of all the fraud cases that come to light, fewer than 4% are thanks to an external audit.
Nonetheless, many nonprofit board members mistakenly believe that they must get an external audit as part of their due diligence and fiduciary responsibility. In many states, there is no legal requirement for a nonprofit to get an audit.
I also suspect they’ve confused the external audit with a forensic audit, in which a CPA reviews the accounting specifically looking for fraud and the like.
An external audit is simply designed to present financial reports in a highly standardized manner. Originally designed with publicly-traded businesses in mind, funders use external audit reports to compare grant applicants.
So, what are the most effective ways a small nonprofit can detect and prevent fraud?
Strong internal controls
A strong whistle-blower policy
An internal audit committee
Getting an independent nonprofit accounting specialist to carefully examine their accounting
Additional reading:
Mistake #6: Subsidizing a Government Grant
The federal government is willing to pay 100% of the true cost of the projects it engages nonprofits to perform, yet too many nonprofits actually subsidize those projects out of their own pocket instead of charging the full cost to the government. This happens especially in the form of indirect costs like rent, administrative support staff, and the like.
The government will allow a nonprofit to spend up to fifteen percent of the grant money on indirect costs with minimal questions and paperwork.
Organizations whose indirect costs exceed fifteen percent can apply for a Negotiated Indirect Cost Rate Agreement (NICRA). Once approved, the organization can get the government to pay the full cost of the project, including indirect costs.
Additional Reading:
Mistake #7: Overworking Accounting Staff
America has had an accountant shortage for years and the pandemic made it much harder for all employers to attract and retain good talent.
Accountants, bookkeepers, and other financial professionals frequently start work early and leave the office late. That combined with our typically quiet personality types means that organizational leadership can easily overlook when we’re in imminent danger of burnout.
To avoid this situation, plus the large expense of turnover, successful nonprofits work hard to attract and retain accounting staff by:
Providing competitive pay and benefits
Cultivating a healthy work culture
Prioritizing work-life balance
Right-sizing responsibilities
Investing in good tools
Outsourcing part-time functions
Additional reading