Accounting Basics for Nonprofits - A Primer for Non-Finance Leaders
When you’re busy leading a nonprofit—developing program strategies, cultivating donors, supporting staff—thinking about accounting and finance can feel like an afterthought. But to be successful, nonprofit leaders need a functional grasp of the basics of nonprofit accounting and financial management.
To give us a primer, I asked Katie Gaddis to share her wisdom. Katie has been an independent accountant for over 25 years, the last 15 of which she’s focused primarily on working with nonprofits.
I have personally worked with Katie since 2008 when I landed my first executive director role with NARAL NC. Katie was a godsend and helped our 501(c)(3), 501(c)(4) and PAC keep organized—while she helped keep me sane! In 2022, Katie and Anna Koltchagova formed AKG Business Solutions which provides a tailored approach to the unique needs of nonprofit organizations.
To understand more about how financial management fits into a nonprofit executive director’s job description, you can check out this piece on what nonprofit executive directors do. Then read on for that nonprofit finance and accounting refresher we all need!
In three sentences, what is the most important thing for leaders to know about nonprofit accounting?
On a global level, accounting for nonprofits follows the same accounting principles (formally, Generally Accepted Accounting Principles) as for-profit businesses; however, it focuses on accountability and transparency to the nonprofit donor base and board of directors rather than profitability for its stakeholders. In many instances, nonprofit accounting is more complicated and more scrutinized than, for example, a small business because financial statements and tax returns are publicly available.
On a more granular level, nonprofit accounting is the process of accurately documenting every transaction where money or in-kind resources come in and out of the organization in the form of revenue (donations, grants, etc.) and expenditures (expenses).
Accurate, clear, and timely accounting helps organizations tell stories, seek funding, see gaps, and make mission-driven decisions.
“Accurate, clear, and timely accounting helps organizations tell stories, seek funding, see gaps, and make mission-driven decisions.”
Can you share an overview of the full scope involved in accounting for a nonprofit?
The full scope of nonprofit accounting actually begins with an evaluation of the organization: understanding its personnel, operations, and programmatic work.
Then you select accounting software that can track not only revenue and expense transactions, but (if necessary) captures restricted grants, programs/campaigns, departmental spending, or any other organization-specific requirements, and ultimately provides clear and concise financial statements.
Finally, you must ensure that all transactional data is recorded and reconciled promptly, systematically, and accurately. Financial data finds its way into your state and federal tax filings and is examined in audits. These reports rely on accuracy, honesty, and consistency.
Is nonprofit accounting different than accounting in for-profit businesses? If so, how?
Even though both types of organizations are governed by the same basic accounting principles, there are many subtle differences. For example, nonprofit tax returns require a lot of detailed expense information that must be tracked throughout the year. And many nonprofit organizations require or elect to have an annual audit or review.
Why is having professional accounting important for nonprofits?
Having a solid financial foundation is of utmost importance to the leadership and board of every fiscally sound nonprofit. It begins with hiring a professional accountant who has an understanding of accounting principles and accounting software to track and report nonprofit financial information.
Nonprofit accounting is also fundamental to nonprofit functioning. An important function of nonprofit boards is to create and pass a budget every year. Budgets are regularly based on financial data from the prior year. Boards must then show due diligence by monitoring, with the executive director, the financial health and compliance of the organization.
Also, most funders will request financial information and, in some instances, an audit report, so accounting is critical to fundraising.
Accounting is data, which means that it provides valuable information to make decisions. A board may feel like the organization is doing really well or really poorly but they don’t know until they look at the data.
For these and many other reasons, professional accounting is a must-have for nonprofits.
What are the risks of not having a professional do a nonprofit’s accounting?
The biggest risk of not having a professional nonprofit accountant is the potential for reporting incorrect financial information to the board of directors, funders, and the public.
But ultimately, it's very difficult to run an organization if you don’t really know how much it's costing you or how much you have to spend because that information isn’t captured correctly or readily available.
Without accurate and transparent accounting you can also lose the public trust about where resources are allocated.
Where have you seen nonprofits’ financial management go awry?
Mostly, I’ve seen incorrect financial information being used to run an organization. And by incorrect, I mean income or expenses are showing too high or too low or allocations have been made to the wrong department/campaign or a restricted grant. If a nonprofit has an affiliate such as C4 or PAC, it is essential that resources are tracked and shared among the entities.
Providing the wrong or untimely information to government agencies can result in huge fines or revocation of nonprofit status; therefore, it is imperative to maintain solid financial policies and procedures guiding your fiscal health.
What are some pros and cons of outsourcing accounting vs hiring a staff accountant?
The biggest decision-makers are cost and experience. If you have a large nonprofit that needs full-time help AND can afford the salary and benefits of a staff accountant AND you can find a candidate with nonprofit experience, then an employee is a good route.
But most nonprofits don’t need a full-time accountant and generally speaking, employees are expensive. Therefore, a firm like ours can be hired to help out! We have staff with nonprofit experience and can be hired at every level of accounting, from basic bookkeeping to fractional CFO. So you’re getting many years of experience at a much more affordable cost.
How much does it cost for nonprofits to outsource accounting?
It depends on the scope of work and complexity of the nonprofit. Some nonprofits need only basic bookkeeping (monthly entries, bill pay, reconciliations, etc.), while others need a full scope of services, from bookkeeping to financial services such as budgeting and financial reporting.
Generally speaking, firms like ours charge on average 20% less than a full-time staff, thus saving a lot of money to the nonprofits and simultaneously providing expertise not guaranteed by a newly hired accountant. For a smaller nonprofit organization that needs a part-time accountant, our firm charges a flat fee based on the number of hours needed to complete the tasks outlined in the scope of work.
How much do staff accountants generally make in nonprofit organizations?
Staff accountants in nonprofit organizations typically earn a bit less than those in for-profit companies, but the salaries can still be quite competitive depending on factors like location, experience, education, and the organization's size and budget. On average:
Entry-Level Staff Accountants: Annual salaries generally range from $45,000 to $55,000.
Mid-Level Staff Accountants (3-5 years of experience): Salaries typically fall between $55,000 and $65,000.
Senior Staff Accountants (5+ years of experience): Senior accountants or those in specialized nonprofit areas, such as grant accounting, can earn $65,000 to $80,000 or more, depending on the region and the organization's budget.
Large organizations may even have a Finance Manager or Director, which is a more sophisticated role overseeing all financial compliance and recordkeeping.
In addition to salaries, nonprofit organizations should consider factors such as benefits, payroll taxes, workers' compensation, etc. These can account for an additional 10-30% of the total compensation.
What should a nonprofit leader specifically look for when hiring and interviewing accountants, either on-staff or outsourced?
When choosing a nonprofit accountant, we recommend ensuring they have the following qualifications:
Bachelor’s degree in accounting, finance, or related field.
Comprehensive knowledge of accounting principles, practices, and US GAAP, with progressive accounting and bookkeeping experience.
Advanced proficiency with QuickBooks Online or any other accounting software.
Advanced proficiency with Microsoft Office Suite (particularly Excel) and the ability to learn applicable department/organization-specific software.
Exceptional analytical, reporting, and communication skills.
Detail-oriented and organized with a strong commitment to follow through and meeting deadlines.
Thorough knowledge of and experience with processing payroll, including garnishments and benefits deduction.
Experience with auditing, day-to-day accounting, month-end/year-end close, financial reporting, and cash flow forecasting.
Commitment to the mission of the hiring nonprofit organization.
What should nonprofits know about accounting software?
The software we see nonprofits use more often is Quick Books Online (QBO). It provides the necessary functionality for small to medium-sized nonprofits. Other software for large nonprofits include Sage and Net Suite. Points to consider are cost, user-friendliness, and integration with other apps for bill pay or expense tracking as well as CRM.
