Setting Up the Accounting for a New Nonprofit

Setting up a new nonprofit involves big joys and big challenges.

Over my career I’ve seen too many organizations with great missions stumble because of mistakes they made setting up their back office. 

Behind every successful nonprofit, you’ll find a strong back office. What you do in the early stages will absolutely influence whether your 501c3 soars or struggles in the years that follow.

Here are a few lessons that might help you.

For profit vs nonprofit accounting

Accounting practices for nonprofits differ from those of standard corporations. While some differences may seem superficial, such as the terminology shift from "profit" to "surplus" or “net assets,” most accounting principles remain the same.

However, one key area that sets nonprofits apart is the Chart of Accounts (CoA), which can significantly impact your organization's financial management and reporting capabilities. 

A well-designed CoA makes possible meaningful financial reports for your management team and provides clear and accurate information for grantors, enhancing your organization's credibility and transparency.

Pay close attention to the CoA, as it can either lead to trouble or lay the foundation for success. Fixing a poorly structured CoA after the fact can prove costly and time-consuming, so get it right from the start.

Avoid the temptation to rely on a well-meaning but inexperienced CPA cousin to set it up for you. More than likely, what they build you will not serve you well. Instead, invest the effort and resources to engage an experienced nonprofit accountant to get your CoA set up right on day one.  Note:  you don’t need them to be a Certified Public Accountant (CPA); nonprofit-specific expertise is more relevant to your needs.

Good training

Prioritize good training and guidance for your board members. Ensure they receive training not only on your organization's mission and vision but also on how to fulfill their financial duties and responsibilities.

Well-informed board members can make informed decisions and effectively oversee the financial aspects of your nonprofit.

If you don’t provide good training, you’ll likely end up with a board that:

·       Has their eyes glaze over while reviewing the financial reports

·       Makes poor financial decisions

·       Lets fear and ignorance guide them rather than the organization’s financial well-being

Instead, provide good training and be sure to provide good, graphic financial dashboards to help include all members of your board (especially because many of them may never feel truly comfortable reading a balance sheet).

 QuickBooks = the gold standard

I recommend QuickBooks to small nonprofits because:

• It’s the top accounting software for small nonprofits and small businesses. 

• You can find more bookkeepers familiar with it than any other software

• You will find many good, free online resources on how to use it

• 501c3s can get Quickbooks for almost free through TechSoup

Yes, Quickbooks has its shortcomings, but for all the reasons above it remains by far the best options for most small nonprofits.

Note:  I prefer Quickbooks Online.  Ten years ago it couldn’t hold a candle to the desktop version; these days, it has equal or better features in addition to the convenience of having it available online. 

Pro Tip:  If you're a micro startup with limited funds, using a simple check register in a spreadsheet might suffice until your organization grows beyond $25-50,000 in revenue. Or you may want to look into WaveHQ, a free option that I’ve heard good things about.

But Quickbooks is not donor management software

Although Quickbooks does a great job with accounting it does a terrible job as a donor database (AKA customer relationship management system).

Yes, it will store donation dates, amounts, names, and the like.  But that doesn’t make it a good database.  It won’t do any of the basic things you need a donor database to do, such as:

• Send a personalized email to your donors

• Create “segmented” lists of donors – so you can easily send different messages to donors who haven’t given for a year compared to those who donated recently

• Tracking relationships – like that board member Terry is friends with 32 specific donors

• Tracking “touch points” – like who attended your gala last year

Yes, you can muddle along for a while.  But it will become increasingly difficult and expensive to do basic fundraising functions through Quickbooks.  And making the eventual transition to the right system will be time-consuming, expensive, and distracting.

So invest in a separate system designed for managing your fundraising and donor relationships effectively.  (TechSoup has good resources for you in this department as well.)

Getting a good bookkeeper

Unless you enjoy working with numbers, you should get a professional bookkeeper. 

(Even if you do enjoy working with numbers, if you’re the founder/executive director your time will be better spent cultivating donors than crunching numbers.)

Just as you’ll find all sorts of vehicles in the world, you’ll also find all sorts of bookkeepers.  You wouldn’t use a motorcycle to take your family of five on a cross-country road trip.  Similarly, some bookkeepers will not serve your nonprofit well (even though they might do wonderful work for other organizations).

At a minimum, look for a bookkeeper who:

• Has many years of experience focused on small nonprofits

• Has good references (check them and even consider a criminal background check)

• Uses modern technology (like cloud-based software)

• Has a backup team (so even if they’re sick or on vacation, you can still get a response and access to your data)

If you’d like an introduction to an established firm, please contact me and let’s talk to find the best match.

Pro Tip:  Fiscal Sponsorship

If your nonprofit hasn't yet obtained its 501(c)(3) status and operates with limited funds, consider engaging a fiscal sponsor instead of rushing to obtain the status.

Running a 501(c)(3) entails significant work, and if you haven't held a top leadership position in a small business or nonprofit before, you'll likely face a steep and potentially painful learning curve while also trying to grow your fundraising and programs.

A fiscal sponsor can handle the administrative and paperwork aspects of your project, allowing you to focus on the work itself.

Who can you get to serve as your fiscal sponsor?  You might start by asking an established organization with a similar mission. Or if you belong to a house of worship, they can do this too.  Your local community foundation may offer this service as well.

Good habits and systems, when set up from the beginning, will help your organization thrive. 

By understanding the unique aspects of nonprofit accounting, ensuring a robust Chart of Accounts, seeking proper training and guidance, and leveraging appropriate tools, you'll lay the foundation for financial success and transparency in your organization.

The choices you make early on will shape your organization's financial health and its ability to make a positive impact in the community you serve.