The Fundamentals of Nonprofit Accounting

Working or volunteering in a nonprofit organization can be a rewarding opportunity for many. Whether you are excited by the prospect of creating new positive change, or simply contributing to an established organization’s mission in the world, nonprofits offer a lot of promise to do something meaningful.

Whether one is making a career switch from a corporate job to a leadership role in a nonprofit organization or has been selected to fill a board of directors’ position, there are some crucial differences to be aware of between corporate accounting and nonprofit accounting. To maximize the impact of your organization’s financial resources, it is important to understand how everything from the terms, to the key goals and objectives for these two types of organizations are different. 

The Mission is Different

In the corporate world, profit is the main concern. Maximizing cost-effective funding sources to drive profit and growth is the primary focus. With a nonprofit, the objective is not to create a surplus. The mission is very different, and therefore it is executed differently. 

For nonprofits looking to serve the world, it is paramount that they use funds with the purpose of delivering program services in order to achieve the organization’s mission to the best of their ability. The goal on paper, financially speaking, is to break even and to keep expenses as low as possible. Keep in mind, the goal of a nonprofit is to use all the resources at your disposal to make the biggest impact. In alignment with these different missions, the corporate and nonprofit world utilize different language that reinforces their distinct goals. 

The Language of Nonprofit Accounting

One of the first things that can be confusing about nonprofit accounting is the terminology. Many seasoned professionals aren’t aware of some of the language distinctions because nonprofit accounting generally isn’t taught in most university Accounting programs. 

In a for-profit company, corporations are focused on two key numbers: income and expenses.  Whereas in a nonprofit company, you have revenue and expenditures. Since you aren’t actually tallying income in a nonprofit, you’ll only focus on how much revenue comes in and how much goes out. The exclusion of the word income is important because it eliminates focusing on income because that’s not the goal. There are also many differences in how these get reported. 

In a for-profit corporation, a Profit & Loss statement (P&L) is used as a financial benchmark. However, within a nonprofit organization, there is no P&L because the goal isn’t to turn a profit. Instead, this is called a Statement of Activities. Similarly, for-profit companies have a balance sheet, but nonprofits will have what is called a Statement of Financial Position because they are not interested in having leftover revenue. This concept is furthered by the fact that nonprofits don’t have a “net profit.” Instead, they have what is called a fund balance, because they are stewards of donor funds, rather than companies looking to turn a profit.

Primary Funding Sources Differ 

Funding sources look vastly different in these two organizational structures. While corporate funding is used to fulfill the mission, there are usually fewer strings attached to the money. For nonprofits, the funds are given to them by donors that are to be used strictly for accomplishing the mission of the organization. These funds need to be used effectively in order to continue getting donations in the future. One thing to make sure of is that the majority of funding is going towards programmatic spending. Minimizing management expenses is an easy way to look good to funders. However, it’s not just private donations that keep nonprofits running. 

Specialized government loans and grants specifically for NPOs are also major funding sources for nonprofits. The government has very specific guidelines and requirements, so make sure you are writing your program narrative and budget narratives to meet the stringent guidelines. Additionally, this may require you to hire additional staff or combine with other nonprofits to pay the staff you have. It is not uncommon for there to be strict requirements for how much can be paid to each staff member. Often, positions are funded from multiple sources, with each organization being allocated a portion of employee time under the agreements in exchange for a set percentage of income. Always plan accordingly to make sure that you can meet all requirements before you apply for additional funding. 

Questions to Consider for Nonprofit Accounting Success:

To ensure that your nonprofit is able to make the most of the financial resources available to you, please consider the following questions to incorporate in your funding strategy.
  • What are the resources you are going to need to meet the objectives under your funding requirements? 
  • What resources will you need (personnel, partnerships, etc) to fulfill the program narrative guidelines?
  • Is it realistic that you will be able to hire someone within the time period?
  • Does the funding you are going after align with your mission? 
  • Do the deliverables attached to the funding meet the needs and goals of your organization?

Tentho Can Help 

Tentho is an expert in helping clients understand nonprofit bookkeeping and accounting. Tentho works with clients to create a sustainable, long-term approach to money management, investing, and financial planning. We can also work with you to create a foolproof nonprofit accounting strategy in order to maximize the effectiveness of your organization. Tentho encourages nonprofits to ask questions that can help to improve their financial future by planning ahead for necessary funding needs and available resources to accomplish the mission of your organization. If you are ready for a dedicated financial team to help you navigate your non-profit finances, visit our website to learn more or contact us today.

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