Setting up a new nonprofit is an inspiring journey focused on positive change, but building a sustainable organization also requires a solid financial foundation. Setting up finances is crucial for any nonprofit’s accountability, transparency, and long-term success, especially when it comes to maintaining compliance, securing funding, and supporting sound decision-making. Here’s a step-by-step guide to help you establish effective bookkeeping from the very beginning.
1. Determine Your Accounting Method
- Cash Basis vs. Accrual Basis: Decide whether you’ll use a cash basis (recording transactions when money changes hands) or accrual basis (recording transactions when they are earned or incurred). Nonprofits commonly use the accrual method because it provides a clearer picture of financial obligations and aligns well with grant and funder reporting requirements.
- Accounting Software: Investing in nonprofit-friendly accounting software like QuickBooks Online, Xero, or Wave Accounting can streamline bookkeeping. These tools are especially helpful for tracking funds, generating reports, and meeting compliance standards.
2. Separate Finances with a Dedicated Bank Account
- Open a Business Bank Account: This is non-negotiable. Keeping finances separate from personal accounts prevents accidental commingling and simplifies auditing and reporting.
- Choose a Nonprofit-Friendly Bank: Look for banks that offer low or no fees for nonprofits, and inquire about special services or perks they might offer, like waived transaction fees or nonprofit-specific resources.
3. Establish a Chart of Accounts (COA)
- Identify Key Categories: A Chart of Accounts organizes all your financial data by categorizing revenue, expenses, assets, and liabilities. Examples of these accounts could include donations, grants, program expenses, administrative costs, and fundraising expenses.
- Customize to Your Needs: Tailor your COA to align with your organization’s structure and reporting requirements, making it as granular as necessary to meet the reporting requirements of any major funders.
4. Track Restricted and Unrestricted Funds
- Set Up Separate Accounts: Nonprofits often receive restricted funds (designated for specific purposes) and unrestricted funds (general use). Make sure these are clearly accounted for separately to avoid issues with misallocated funds.
- Compliance: Misuse of restricted funds can harm donor trust and lead to legal issues, so document each source and restriction clearly in your bookkeeping software and maintain transparency in reports.
5. Implement a Budgeting Process
- Create an Initial Budget: Estimate income and expenses for the year, making adjustments based on typical income sources (like grants and donations) and operating costs.
- Regular Review and Adjustment: Monitor your budget quarterly to adjust for unexpected expenses or income fluctuations. Use your bookkeeping data to guide decisions about program expansions, fundraising efforts, or spending adjustments.
6. Document Internal Controls and Policies
- Define Financial Policies: Internal controls help prevent fraud and maintain accuracy. Set up policies on expense approvals, spending limits, and dual signatures for checks.
- Assign Roles and Responsibilities: Clear role definition prevents overlap and ensures tasks like reconciling bank accounts, reviewing budgets, and approving transactions are regularly completed.
7. Track In-Kind Donations and Volunteer Hours
- Valuing In-Kind Donations: Donated goods or services, like donated equipment or pro bono services, can have a large impact on your finances and require accurate recording to reflect their true value.
- Volunteer Hours Tracking: Although not typically recorded in financial statements, tracking volunteer hours can help with grant applications and measuring overall community impact.
8. Prepare for Financial Reports
- IRS Form 990: Nonprofits are generally required to file Form 990 annually with the IRS, detailing finances, program accomplishments, and governance. Missing deadlines can incur penalties or jeopardize your tax-exempt status. See our article on using QuickBooks Online classes to track functional expenses, which is needed for the 990.
- Annual Audit or Review: Some states and funders require annual audits or reviews, especially for larger nonprofits. Establish a relationship with an accountant familiar with nonprofit compliance early on to streamline this process.
9. Review and Reconcile Monthly
- Bank Reconciliation: At the end of each month, reconcile your bank account(s) to ensure that the records in your bookkeeping software match those of the bank. Regular reconciliations help detect discrepancies or errors early.
- Internal Financial Statements: Review monthly financial statements to monitor your nonprofit’s financial health. Key reports include the balance sheet, income statement, and cash flow statement, which offer insights into current and projected financial standing.
10. Seek Professional Guidance
- Nonprofit Accountant or Bookkeeper: Consider working with a professional who specializes in nonprofit finances, even if it’s just for an annual consultation. Their expertise can help navigate specific rules for finances for a new nonprofit, tax-exemption requirements, and reporting standards.
- Board Treasurer or Finance Committee: If you have a board of directors, consider forming a finance committee or appointing a treasurer with relevant expertise to ensure oversight and good governance.
Final Thoughts
Setting up your finances for a new nonprofit may feel like a daunting task when you’re just starting, but establishing these processes from the beginning will make it easier to fulfill your mission. Sound financial practices not only build trust with donors, partners, and the communities you serve but also lay the groundwork for growth, allowing your organization to flourish for years to come. By following these steps and revisiting your financial practices periodically, you’ll be better prepared to achieve long-term sustainability. Contact us if you would like help to get your nonprofit finances setup right from the start!