Non-profit organizations operate in a much more unique, if not challenging, financial landscape compared to others. That’s because you’re contending with things such as regulatory compliance, meeting donor expectations, and focusing on goals that tie into the organization’s overall mission. Strategic financial oversight is essential when performing bookkeeping for nonprofits.
The Quantify Group understands that nonprofits must maintain accuracy for every financial transaction made throughout the month. There may be times when you need to procure financial records for audits. It’s also important to know the different types of accounting as well (e.g, accrual basis accounting).
Understanding Accrual vs Cash Basis Accounting
What Is Cash Basis Accounting?
To begin, let’s discuss what cash basis accounting is. This accounting method recognizes cash as the sole source of revenue. When paid for, the expenses are recorded. Put it all together, and you have an easy-to-understand idea of what your organization’s cash flow looks like and how each revenue and expense is reported and accounted for.
You also want to make sure both revenue and expenses are recorded in the same month. If revenue is received in June, for example, and costs have been recorded the previous month, the financial performance will be misaligned with the actual economic activity.
What Is Accrual Basis Accounting?
Accrual accounting for non-profits differs from its cash counterparts. This is where revenue is recorded when it’s earned, as well as expenses when incurred. It doesn’t matter when the cash will actually change hands; both figures are recorded accordingly. This method of accounting ensures a more accurate and comprehensive view of the organization’s financial health. This type of accounting is best suited for nonprofits that have recurring revenue, ongoing commitments, or multi-year grants.
Once again, let’s suggest that you ensure both revenue and expenses are recorded for the same month. This will align the financial records with actual economic activity, ensuring everything is more accurate regarding the organization’s performance.
Why Accrual Accounting Is Important for Nonprofits?
Now that you have a good idea of what accrual accounting is and how it works, it’s time to discuss why it’s important for a nonprofit organization like yours. Once you have a deep understanding and require assistance with your bookkeeping needs, The Quantify Group will be happy to help. With this in mind, let’s take a look at the following reasons:
It Provides An Accurate Picture Of Financial Health
Accuracy matters in bookkeeping. Especially if it pertains to the financial health of a nonprofit organization, cash accounting can lead to misleading information and more scrutiny. It can also cause a great mess that will take time to clean up. However, accrual accounting avoids this by making sure that your income and expenses are aligned in the same time period.
Better Decision-Making
Financial data is what makes it easier for non-profits to budget, forecast, and plan for the future. In fact, they depend on it all the time. With the best practices related to monthly accrual bookkeeping for nonprofits, you can be able to have the timely and accurate data ready to procure whenever your organization (specifically the leadership team) intends to make informed decisions. These can include launching new programs, grant applications, and hiring new staff members.
Stronger Donor and Grantor Confidence and Trust
Accurate financials, similar to those found in non-profit monthly financial statements, lay the groundwork for transparency and accountability. This can lead to even greater trust and confidence from those who regularly fund the organizations, including donors and grantors. If the funders know where the contributions are going and how they are used regularly, the money can continue to come in due to that high level of trust.
How Does It Impact Tax and Compliance Reporting
Of course, the question about tax and compliance should also be addressed. How can accrual bookkeeping make it easier? Here are some of the things to know about:
IRS Reporting Requirements
Most nonprofit organizations are required to file a Form 990 annually. The IRS can allow for accrual reporting using statements that contain accurate information compiled by the non-profit reporting best practices you follow. This is crucial for those seeking grant funding or managing a large nonprofit organization.
Consistency in Audit Preparation
Audits can happen for most non-profits on an annual basis. Plus, independent financial reviews are also expected. The important thing to note is that preparation is key, even if the occurrences, audits, and reviews are few and far between for your organization. Nevertheless, accrual for audit preparation will prove helpful in providing accurate financial details, should a review or audit be requested.
State and Local Compliance
Depending on the jurisdiction where your nonprofit is headquartered, there may be additional requirements for financial reporting. As such, accrual accounting will allow you to comply with the regulations set forth by state and local authorities. You may be presenting these reports to boards, state financial agencies, or during regular fundraising campaigns.
Even if it may seem like a tedious task, keeping records of every month of operation will be key. Whether you regularly deal with audits or reviews, maintaining these records handy will be vital if they are needed for review. Not only will it ensure that your nonprofit keeps accurate records on hand, but audits or reviews (when requested) won’t come as a surprise, allowing you to stay organized and prepared, rather than scrambling and panicking to find records for a specific time period.
Strategic Planning Cash Basis vs Accrual Basis: Comparing The Two Methods
Strategic planning, including how funds are disbursed, will require a significant amount of financial data. Here’s a look now at how cash basis and accrual basis compare in terms of this situation:
Cash Basis
On paper, cash-basis financials are the best option due to their simplicity. But if you dig a little deep below the surface, you’ll notice that things are not what they seem. In terms of budget and strategic planning, they don’t seem to fit the bill. That’s because there’s a risk of misleading information, especially when it comes to liabilities and receivables.
Accrual Basis
As mentioned earlier, accrual basis accounting provides you with a comprehensive view. You get a full view of the income, liabilities, and future obligations. Nonprofit leaders will be able to make informed decisions, provide accurate forecasts, and avoid potential financial shortfalls. This will make strategic planning and budgeting a lot easier.
Monthly accrual bookkeeping for nonprofits will enable leaders to become more responsible with the funds their organizations can manage. Once again, it also allows them to provide a full and accurate view of how those funds are being used. Donors and grantors care a lot more about the money that they give to your organization than you think. With transparent and accurate information, you are demonstrating that your nonprofit can be trusted.
How To Implement Monthly Accrual Bookkeeping?
If you are not using the accrual basis approach but currently use the cash method, implementing a change from one accounting approach to another can be a challenge. However, we’ll show you how to make the transition step by step. Here’s what you’ll need to do:
How To Transition From Cash To Accrual
You can manage this transition, despite it seeming intimidating. Here’s what you’ll want to do in a simple approach:
- Assess the current accounting system: This includes determining whether the current software you use can support accrual accounting. Look for any limitations it may have regarding that.
- Reclassifying the transaction: You’ll want to work with a qualified bookkeeper who is familiar with nonprofit financials (such as those at The Quantify Group) to help you reclassify the transactions. They will restate prior period transactions using the accrual method to ensure ongoing consistency.
- Adjust the internal processes: Adjust workflows that are programmed to record revenue and expenses at the time when they are earned or incurred, not just when they get paid. If you have staff, ensure they are trained to perform these tasks.
- Implement monthly routines: Every month, follow routines such as closing the books, reviewing financials, and generating nonprofit monthly financial statements. This way, you’ll have a simple, accurate system to follow.
What Are The Benefits Of A Monthly Close Process?
A monthly close process can benefit nonprofits in so many ways. These include, but are not limited to, the following:
- Understand the performance trends for each month
- Quickly detect errors or fraud
- Make decisions based on real-time data
- Meet the reporting timelines set by the board and donors
What Are The Common Challenges in Accrual Bookkeeping?
While accrual bookkeeping has its advantages, it also presents its challenges. Before adopting this approach, it’s essential to understand the challenges it presents and how to overcome them. Here’s what to know:
Tracking Grants and Pledges May Be Difficult
Grants can span numerous fiscal years, especially when there are reporting requirements to meet and spending restrictions in place. Accrual accounting can help match grant income with related organizational expenses. However, it takes excellent attention to detail and financial expertise to ensure that everything is done accurately.
Complex Payroll and Benefit Allocations
Monthly books can face complications, especially from payroll allocations, PTO accrual tracking, and employer contribution management. However, you may not have to worry about all of that if you are considering outsourced bookkeeping for nonprofits. The professionals you work with are recognized for navigating these complex obstacles, which can make monthly reporting a challenge.
Staff Turnover or Limited Expertise
Small nonprofits will not typically have an in-house financial staff, especially if they have staff members familiar with accrual methods. As a result, they can rely on monthly bookkeeping services for nonprofits, allowing them to maintain compliance and continuity, even with regular staff role changes.
Outsourcing Bookkeeping: What Makes It The Best Option For Non-Profits?
Outsourced bookkeeping for nonprofits is when you partner with a third-party service provider that is tasked to handle the day-to-day accounting for your organization. They often provide financial services to non-profits and understand the specific needs they encounter regularly. They also come with their own set of benefits, including:
- Expertise: You get professionals who are familiar with the best practices in accrual accounting for non-profits.
- Cost-effective: You save money that would otherwise be spent on overhead or hiring a full-time staff.
- Consistency: No more missed deadlines or staff absences/turnovers
- Scalability: You can be able to grow your organization at your own pace, even if you don’t have an in-house financial team handling the accounting duties.
Whether you are a small or large organization, outsourcing bookkeeping duties to The Quantify Group may be the best option. Surprisingly, there are large nonprofits that spend a significant amount of money each year on in-house financial staff. However, they outsource their accounting to us, allowing them to invest more in executing their mission or growing the organization, whichever is the higher priority.
Monthly Reporting That Matters To Your Organization
Now, let’s break down the elements of what a monthly non-profit report looks like. With accrual bookkeeping, you can ensure that every number is present, accounted for, and accurate, reflecting your organization’s financial health. Here’s a look at the following key financial statements:
- Statement of Financial Position (Balance Sheet): This information shows what your organization owns and what it owes at the moment.
- Statement of Activities (Income Statement): Used to track your revenue and expenses. Usually segmented by funding source or program.
- Cash Flow Statement: Provides details on actual cash coming in and out.
What Are Some Additional Reports to Consider?
While they may not be necessary, you could consider including these additional elements in a report to provide a more accurate picture for audits, independent reviews, and other situations where a report is required. These can include the following:
- Grant tracking reports
- Program cost analysis
- Budget vs actual reports
- Restricted vs Unrestricted Net Assets
Nonetheless, leadership can assess performance, identify trends, and make strategic decisions based on data, all thanks to the monthly reports compiled by accrual bookkeeping.
Best Practices for Non-Profit Financial Reporting
These non-profit financial reporting best practices can help you meet the expectations set by donors, auditors, and board members. These include, but are not limited to, the following:
- Maintain Accurate and Timely Records: Ensure that you close the books monthly and keep updated records for the sake of reliability.
- Segment income and Expenses by Program: Use departments or classes in your accounting system to segment and track the income and expenses for each program.
- Track Restricted vs Unrestricted Funds: Grant compliance and transparency are essential. Thus, ensure that you track both restricted and unrestricted funds so that your donors are aware of what is being accounted for.
- Use Standardized Chart of Accounts: Make sure that your chart of accounts is nonprofit-specific. Also, ensure that they are clean and consistent.
- Schedule Regular Financial Reviews: Meet with a bookkeeper or finance team every month or quarter to review statements and forecasts. The Quantify Group will be happy to schedule a time for you, whether it’s monthly or quarterly, to review your organization’s finances and ensure everything is in order.
What Tools Support Accrual Bookkeeping?
With digital solutions available to you, you can consider using those that support accrual bookkeeping. As such, you’ll want to be aware that not all financial bookkeeping software will have features that support nonprofits. Therefore, it may be a better idea to find a solution that is specially designed for such organizations. These tools include:
- QuickBooks Online (Nonprofit version)
- Aplos
- Xero
- Fund Ez
- Sage Intacct
These platforms are known for their features that make non-profit monthly financial statements and donor reporting more manageable than ever, without the complexities. It can also be integrated with fundraising and CRM solutions such as Bloomerang, DonorPerfect, or Salesforce Nonprofit Cloud.
Best Use Case Examples For Accrual Accounting
To paint a picture of what accrual accounting looks like in a real-world scenario, let’s provide you with a use case example of how it works. Here is the following situation that we’ll use:
Let’s say a nonprofit receives a $100,000 grant in June for a 12-month program that begins in August. If you are using cash accounting, the grant month appears in the June financial report. This may also be mistaken as a possible surplus for the organization, even though the expenses won’t be recorded until they are incurred months later.
Contrast that with accrual accounting for non-profits. The $100,000 will be recognized over the course of the 12 months as it is earned. This allows the revenue and expenses to be aligned accordingly, resulting in more accurate non-profit monthly financial statements. The organization will be able to report to the board with a precise figure, while also enabling a better budgeting strategy and maintaining greater confidence and trust from funders.
Frequently Asked Questions (FAQs)
Lots of our clients at The Quantify Group always have questions about our non-profit bookkeeping services. These are some of the most common ones that we get asked:
Will switching to accrual bookkeeping increase my organization’s administrative burden?
Yes, it can. However, due to certain complexities, it may be compared to cash basis bookkeeping; you can work with a firm that handles monthly accrual bookkeeping for nonprofits. That way, it can make the transition cost-effective and less complex. The Quantify Group is ready to assist you with any additional questions about accrual bookkeeping that you may have.
Can I still use QuickBooks or other financial software for accrual accounting?
You may use QuickBooks or other financial software for accrual accounting. However, there may be limited or no features that can support non-profit financial reporting. Additionally, you may have limited options in terms of features. Alternatively, you can use specialized non-profit software (or features that allow for non-profit financial reports) for accrual accounting.
Is accrual bookkeeping required for nonprofits?
It depends on certain factors. Smaller nonprofits may use cash basis accounting instead. However, financial professionals, auditors, and funders tend to appreciate the accrual basis even more. As such, nonprofits with larger budgets, more employees, or complex grant obligations could greatly benefit from accrual bookkeeping, ensuring that this information is readily available to these parties.
How can monthly accrual bookkeeping help with nonprofit tax compliance?
Many nonprofits are tax-exempt but still need to follow accurate bookkeeping practices. For this reason, accrual accounting is highly recommended for nonprofits that file a Form 990 annually. This also applies to any funder reports and annual audits that are required and consistent with GAAP. Nevertheless, it can also help organizations avoid potential penalties that may be incurred due to misreporting, which is a common risk for those who use the cash basis approach.
Let The Quantify Group Assist You With Accrual Bookkeeping
Nonprofit organizations can benefit greatly from accrual bookkeeping. Not only will it ensure that you have the accurate numbers for your organization, but it will also make it easy to file and present reports to the relevant groups and authorities when needed. You’ll have the entire financial picture on a month-by-month basis, using the data to ensure you can make the most critical, data-driven decisions to move your organization forward. If you need assistance on how we can help with your nonprofit, please contact The Quantify Group today.
