Not-for-profit accounting is a unique process by which not-for-profit organizations plan, record, and report their finances to a committee or Board of Directors. Associations are a type of not-for-profit organization, and so the focus is on the accountability aspect of the accounting. They follow a set of standards that guide them to stay accountable and transparent to their members.
How Not-for-Profit Accounting is Different
Voting members of an association approve the annual financial statements and may have some limited input into other financial matters. Not-for-profit organizations will commonly separate their funds into groups. For example, restricted funds must be spent on a certain project or activities at your organization. As for unrestricted funds, they can be spent on what your organization requires.
Another aspect of association accounting helps to stay accountable. Unlike for-profit or private companies, not-for-profits are restricted from paying out the net earning to the leaders of the organizations.
Association Accounting Statements and Reports
Accounting professionals who work with associations must follow specific guidelines known as the Generally Accepted Accounting Principles (GAAP) standards.
The budget is created by an association’s finance team using information from volunteer leaders and historic spending habits of the organization. The budget is the planning document used to estimate and predict expenses and allocate your income for the association. It details both the costs that the association will have as well as the revenue you expect to receive over your fiscal year.
Statement of Financial Position
A Balance Sheet is also known as the Statement of Financial Position. On this report you can find the lists of assets and liabilities for your association. By understanding that “Net Assets = Assets – Liabilities”, you will be able to better understand the general health of your association. Positive net assets indicate healthier financials while negative net assets mean that the association may have to do some reprioritizing to do on your expenses and budget.
Statement of Operations
An association’s Statement of Operations is also known as the Income Statement. It is used to categorize your different revenue sources and expenses. This will breakdown the expenditures into different categories, providing a “function” for each expense. Normally this categorization is separated into three operational functions: program expense, administrative expense, and event activity expense. Providing detailed information on your Statement of Operations also helps you to see if the association is over or under budget so that you can adapt your expense prior to year-end. Also, having detailed information helps you prepare your next fiscal year’s budget by seeing where you may need to increase or decrease certain expense lines.
Statement of Cashflow
The Statement of Cashflow shows how funds and cash moves in and out of your association. It allows you to gauge what funds are available to pay your expenses at any given time. This accounting statement breaks down the operating and financing activities to show how cash moves in your association. It allows you to easily see how your association uses the funds it receives by analyzing this statement.
Read my colleague’s article to learn the financial responsibilities of an association board.
Some Best Practices for Not-for-Profit
An association’s accountant is responsible for reviewing the bookkeeping entries, performing reconciliations of the accounts on the Balance Sheet, and preparing financial statements and reports reviewing the financials prior to closing the monthly period or year end. This is so that the best financial decisions can be made to manage your association.
Don’t Overthink the Overhead Expenses
Some public views on overhead expenses hurt the not-for-profit industry. Overhead includes administration cost, marketing for fundraising, and the internal expenses that help the organization grow. Basically, overhead expenses are those that your association uses to pay anything that isn’t directly program related.
As with for-profit businesses, overhead is necessary for any not-for-profit organization, such as an association, to function.
Reference Your Budget Frequently
Board members must approve the annual budget before the start of the fiscal year. They should also review the finances and budget throughout the year. This allows the association to adapt and make changes as necessary. If funding falls through or increases, you can address the issue and adapt your strategy right away by either increasing or decreasing your spending.
Establish Concrete Internal Controls
Internal controls not only limit cases of fraud but often aid in catching errors. Even if the association consists of only two employees or board members there should be ‘check and balances’ in place. No matter how big or small the organization is, internal controls are necessary for effective not-for-profit accounting.
Small associations might especially struggle with implementing internal controls, but here are some more specific guidelines:
- Share financial duties. If your finance person records all income revenue, someone else in the organization should be the one to approve the write offs.
- Cybersecurity can easily become a major risk. Implement specific policies at your organization for handling of this data.
- Take inventory of fixed assets. Take regular inventory of computers, cell phones, and other items that you allow your staff members to work with.
Internal controls don’t mean that you don’t trust your staff members. It really helps to catch any mistakes and prevent any wrongdoing.
Conduct Regular Audits
A not-for-profit audit is meant to ensure the accuracy of the association’s financials as well as the financial health of the association. It also helps in the financial transparency with your current and future membership.
In addition, audits provide insight into your association’s opportunities for financial stability and recording improvements. By addressing their opportunities for improvement now, you will keep your financial data secure and well-reported in the future.
Not-for-profit accounting is a unique field of finance. Understanding the key aspects of accounting will help your association better recognize the financial situation of your association.
For more on accounting for associations, read my colleague’s article, Understanding Accounting to Better Manage Your Association.