There aren’t many people who choose to lead a nonprofit or charity or to sit on its board because they love bookkeeping and accounting.
And yet, while “number crunching” may seem mundane, how well an organization’s numbers are crunched can make the difference between its success or failure. Proper bookkeeping and accounting systems ensure that a nonprofit uses its financial resources according to its mission. They support an organization’s goals, maintain its financial health, and ensure compliance with essential statutory requirements.
These can be heavy responsibilities for staff members with limited financial training or volunteer treasurers with limited time. Thus, it can be helpful to look at the typical accounting functions in a small to mid-size nonprofit, along with ways to ensure these responsibilities are managed effectively.
Bookkeeping
Keeping an organization financially healthy starts with healthy books. While bookkeeping sounds relatively straightforward, it can involve numerous activities and responsibilities, depending upon the size of the organization and the volume and types of transactions. The books or journals, for example, that need to be maintained may include cash receipts journal, cash disbursements journal, accounts receivable and pledge ledgers, accounts payable register, payroll ledger, and investment ledger.
Typically, the bookkeeper is also responsible for reconciling the bank statement to the journals each month and transferring relevant financial information to a general ledger, which is the foundation of the financial statements. Duties vary widely, however, from one organization to another, and may also include preparing cheques, making bank deposits, performing accounts payable and accounts receivable, calculating payroll, compiling budget data, and drafting financial reports and statements.
It’s vital that management ensures bookkeeping staff have the requisite expertise as well as a suitable accounting software program; otherwise, to ensure it is managed effectively, the function should be outsourced to experienced professionals.
Financial controls
Every organization needs a reliable system of financial controls. These are procedures and verifications that protect assets, detect errors, prevent mistakes or the misuse of funds, and provide protection from liability for management and the board.
Controls typically involve procedures for authorization and approval, as well as proper documentation and the physical security of assets. Every nonprofit – no matter how small – should seek qualified accounting expertise to assist in developing, implementing and monitoring an appropriate system of financial controls.
Budgeting
A budget serves as a nonprofit’s financial plan for carrying out its mission. Analyzing income and expenses enables management and the board to make decisions that will maintain the financial health of the nonprofit. The budget also serves as an important internal control. Regularly comparing the budget with results will point out any irregularities. At least quarterly, management and the board should compare the previous year’s budget, the current budget, and actual revenues and expenses. Any significant differences need to be evaluated and if necessary, plans adjusted to address these differences.
If management and the board have limited experience with budgeting and monitoring of results, or if the organization’s finances are becoming more complex, an accounting firm with nonprofit experience can provide assistance with designing and evaluating a budget and educating staff regarding how to carry out the process.
Financial reports
In order to make informed decisions, management and board members need detailed financial information. For this they rely on timely, accurate financial statements such as the balance sheet, income statement, cash flow statement, and statement of changes in net assets. Comparing these documents with the budget as well as with the same documents from the previous year identifies important trends and differences that facilitate astute decisions.
Reliable financial reports are also essential for strategic planning. Nonprofit leaders require accurate financial projections to assess the feasibility of planned activities or projects as well as timely financial information to monitor those strategies.
If staff does not have in-depth understanding of financial statements, management should secure external accounting expertise to prepare financial statements or to train staff in their preparation and interpretation.
Audited statements
When it comes to financial transparency and accountability, funders, the government, lenders, suppliers, even board members, are becoming more demanding of the organizations they support. Audited financial statements are one way of providing reassurance of an organization’s financial integrity to these stakeholders. As well, the Canada Revenue Agency recommends that charities with gross income of more than $250,000 file audited financial statements, and many charitable corporations are required by law to have such statements.
In these situations, a nonprofit would contract at year end with an independent professional accountant or accounting firm to examine the organization’s financial statements and the documents supporting these. The accountant would then provide an informed opinion regarding the fairness of the information. The organization’s treasurer would review and sign these audited statements and the board would also review them.
Taxes and reporting requirements
Directors of nonprofits are responsible for ensuring their organization meets its tax obligations and reporting requirements. These can vary substantially depending upon the complexity of the organization and whether it is incorporated or a registered charity.
Most nonprofits, for example, are required to file information form T1044 annually with the Canada Revenue Agency. Nonprofits in the province of Quebec have additional information filing requirements, while registered charities are required to submit annual information forms and financial statements.
If a nonprofit has employees, there are also filing requirements as well as obligations for remitting government source deductions such as employment insurance, employee income tax deductions, and Canada Pension Plan or other pension plan contributions.
As well, GST and PST registrants must report and remit GST and PST on a regular basis.
An organization’s accounting system must, therefore, be able to capably support the payment of taxes and submission of reports. If management, staff, or the board don’t have the requisite expertise to address these requirements, they should seek professional assistance for preparing returns and assisting with tax planning.
Accessing the appropriate accounting expertise
Charged with protecting the financial health of their organizations, it’s important for nonprofit leaders to understand an organization’s accounting needs, to assess these needs on a regular basis, and to ensure the organization has the necessary staff capabilities or outsourced expertise. An experienced, professional accountant or accounting firm should be able to provide the following support as needed:
- Develop a budget and reporting system
- Prepare financial reports
- Prepare audited financial statements
- Interpret financial results and flag trends and discrepancies
- Improve financial reporting
- Establish internal controls
- Optimize tax efficiency related to commodity taxes and employee withholdings
- Advise on ways to enhance operating performance
- Source and train accounting staff
- Determine capital requirements of plans and projects
- Assess the financial implications of strategic plans
- Monitor the financial results of new activities and projects
When it comes to crunching numbers, shortcuts can be costly; instead, invest in the best accounting expertise available to reduce risks and costs, and to free management to focus on fulfilling the mission of your nonprofit.
Associate Kevin Hearty, CA, leads the outsourcing services division of the Markham office of BDO Dunwoody LLP. He provides nonprofit and for-profit organizations with accounting, tax, and advisory services. You can reach Kevin at 905-946-5430 or khearty@bdo.ca.
