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’ll move to an accrual-based system, for which you’ll 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, meaning you’ll track enough information to generate a financial statement. There are many programs that can help you keep your records.
Once you’ve converted to the accrual system, you’ll want to keep tabs on assets, liabilities, net assets or fund balances, revenues and expenses. Nonprofits have to report account 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.
Keep an 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. As much as possible, 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’re operating according to plan and where you might need to cut expenses and build revenue.
For small, recurring expenses that you pay right away, you’ll work from 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out a voucher that describes who took the money, how much was taken, what it was needed for and on what date it was withdrawn.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. In it, you will report your total assets, subtract your total liabilities and report the resulting net assets.
Numbers in isolation are helpful, but it’s 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, for instance.
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. Work closely with financial and legal professionals to make sure your financial systems are appropriate and efficient for your situation.
To learn more about how our firm can serve your nonprofit organization, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
©2024
