Bookkeeping for Nonprofits: A Brief Guide

Introduction

Regarding nonprofit bookkeeping, things are different from the routine bookkeeping that firms are generally used to. IRS data from 2022 shows there were approximately 1.5 million 501(c)(3) nonprofits. These organizations adhere to specific rules and procedures to ensure accountability to contributors and donors who want their funds directed toward particular programs and projects. So, nonprofit bookkeeping involves a definite and unique way nonprofits record, plan, and report their finances. Nonprofit bookkeeping is vital since it proves how an organization spends its funds.

In other words, it is entering, recording, and classifying an organization’s finances. Nonprofit organizations generally represent an organization’s financial records in compliance with GAAP and other internationally accepted accounting principles.

Nonprofit organizations have unique financial needs and use specialized terminology in their bookkeeping and accounting. For example, they track donors instead of customers and count volunteer hours instead of vendor transactions. They must show dedication to their charitable missions by properly managing resources and assets rather than focusing on sales.

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However, when it comes to financial audits, nonprofits often need to pause their work to prepare audit-ready books for compliance. Also, since nonprofit organizations are tax-exempt by the IRS, they need to do accurate bookkeeping to maintain this status.

Let’s explore why nonprofits should outsource bookkeeping services to meet their needs. But first, let us understand how nonprofit bookkeeping is different from for-profit bookkeeping:

How Nonprofit Bookkeeping Differs from For-Profit Bookkeeping:

The main difference between nonprofit and for-profit bookkeeping is how these organizations apply fund accounting principles. Nonprofits prepare annual financial statements, which report detailed fund activities to the public.

In contrast, for-profit organizations need not track or report activities by fund. Next, let us understand the critical requirements for nonprofit bookkeeping:

Nonprofit Bookkeeping: Key Requirements

• Annual Financial Statements
  Your nonprofit must prepare annual financial statements to report its activities. These statements are essential for your tax return and for maintaining your tax-exempt status.

   

• Essential Nonprofit Financial Statements

1. The Statement of Financial Position: This statement lists all restricted, temporarily restricted, and unrestricted assets and liabilities. Unlike for-profits, this statement shows net assets instead of retained earnings.
2. The Statement of Activities: This statement is similar to a for-profit income statement; it categorizes annual revenues and expenses into restricted, temporarily restricted, and unrestricted, showing the change in net assets.
3. The Statement of Functional Expenses: This statement provides a detailed breakdown of expenses, including general & administrative, program, and fundraising costs.
4. The Statement of Cash Flows: This statement details cash inflows and outflows, summarizing cash used for operating, investing, and financing activities.

• IRS Form 990
  Tax-exempt nonprofits must file IRS Form 990. Smaller nonprofits may qualify to file simpler forms. Consult the IRS guidelines and consider professional help due to the form’s complexity.

• Budgeting
  Forecast your nonprofit’s expected income and expenses for the year. Include anticipated donations, employee salaries, and costs of fundraisers and events.

What Does a Bookkeeper Do for Your Nonprofit?

A bookkeeper plays a vital role in maintaining your nonprofit’s financial health. They handle all data entry into accounting ledgers or software, ensuring your organization’s financial transactions are accurately recorded. This includes maintaining records, tracking transactions, and creating financial reports. Their duties typically encompass entering, coding, paying bills, allocating costs by program, administrative, and fundraising categories, and reconciling bank and credit card accounts.

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Additionally, they manage accounts payable and receivable and support the executive director and board by preparing work papers for month-end closing and audit support, scanning and attaching documents for tax and audit purposes, and preparing board reporting packages.

Why Outsource Bookkeeping for Nonprofits:

Typically, outsourcing your bookkeeping costs between $500 and $2,500 per month, depending on transaction volume and service complexity. One significant advantage of outsourcing is the flexibility to tailor services to your needs. Also, outsourcing offers benefits that in-house bookkeepers might not. This is especially true as your nonprofit expands and faces various fundraising and program costs.

It can provide comprehensive financial, board, and management reports that support better decision-making. A recent study highlighted that 19% of nonprofits struggle with limited staff, and outsourcing can help alleviate this challenge by easing the workload on your in-house team.

Given technological advancements, transitioning to outsourced bookkeeping is becoming increasingly practical and cost-effective. It can offer more advanced services than part-time or in-house options, helping your organization focus on its mission while ensuring your financial management is in expert hands.

Some Benefits of Outsourcing Nonprofit Bookkeeping Services:

1. Cost Efficiency: 

This is one of the most compelling reasons nonprofits outsource their bookkeeping and other back-office tasks. Outsourcing helps nonprofits to reduce the costs associated with hiring full-time staff. This includes salaries, benefits, and training expenses. Smaller nonprofits can benefit from outsourcing as they may not have the budget to hire specialized staff. With the help of outsourcing, they can obtain professional services at a fraction of the cost by employing a full-time resource.

2. Expertise:

Nonprofits can improve their bookkeeping efforts through outsourcing as outsourcing firms have access to a team of experts with deep knowledge and experience in managing financial tasks such as bookkeeping.

This expertise ensures that work is high quality and complies with the latest regulations and standards. This can be achieved without the need to invest in extensive training for their staff. Just be careful that the provider you partner with understands the nonprofit sector deeply.

3. Helps Focus on Strategic Objectives:

By outsourcing bookkeeping and other functions like payroll, accounts receivable, and accounts payable, nonprofit leaders and staff can focus entirely on their strategic objectives. It allows them to concentrate on their core activities rather than getting bogged down in administrative functions.

4. Scalability:

Outsourcing offers nonprofits significant scalability and flexibility. As your organization grows or goes through seasonal variations, the outsourcing partner adjusts the level of service accordingly. Therefore, you pay for just the services you need as a nonprofit.

5. Improved Efficiency:

With the help of the latest technology and access to advanced tools and processes, outsourcing firms can significantly increase the efficiency of back-office functions, which can dramatically improve from associated advancements. You do not have to invest in or maintain new technologies as a nonprofit.

6. Enhanced Reporting:

Reputed outsourced service providers offer advanced reporting and analytics facilities. These can be invaluable for decision-making as nonprofits gain valuable insights into their financial health, budget management, and other vital metrics. Such reports can be used to make informed strategic decisions.

7. Staffing Continuity:

Nonprofits can struggle with staffing, particularly in specialized roles like bookkeeping. Outsourcing ensures a steady level of service, even if staff or management changes. This goes a long way in helping to keep financial records and reports consistent.

8. Enhanced Compliance:

Nonprofits often struggle to keep up with changing financial regulations. Outsourced providers stay updated on these changes. This ensures the nonprofit remains compliant and reduces the risk of legal or financial problems.

Bookkeeping Services at KMK

Outsourcing your bookkeeping needs to KMK offers a reliable and cost-effective solution for managing your financial records. Our experienced team will handle tasks like ledger maintenance, financial statement preparation, and bank account reconciliation, ensuring your records are accurate and up to date. At KMK, we specialize in offshore bookkeeping services customized to your specific needs, providing expert guidance on financial matters for your peace of mind. Outsourcing saves you time and money compared to hiring an in-house bookkeeper, giving you access to high-quality services without the overhead of an internal team. Our services include:

• Daily transactional work and general ledger maintenance

• Month-end and periodic closing, with US GAAP-compliant financial statements

• Bank reconciliation and treasury management support

• Sales tax management and compliance

• Maintenance of prepaid, accrual, depreciation, and amortization schedules

• Management reporting

Conclusion:

Effective bookkeeping is essential for nonprofits to maintain their tax-exempt status, ensure financial transparency, and build trust with donors and stakeholders. Given the unique financial requirements and regulations that nonprofits must adhere to, outsourcing bookkeeping services can be a practical and efficient solution. By leveraging the expertise of specialized providers, nonprofits can ensure compliance, improve financial reporting, and focus more on their core mission.

Whether it’s maintaining daily transactions or preparing for audits, a reliable bookkeeping service like KMK can help your nonprofit navigate the complexities of financial management, allowing you to dedicate more time and resources to the causes that matter most.