Funding is a constant struggle for most nonprofits. Public and private foundations get far more grant applications than they can reasonably fund. Awards often come with contractual terms that limit the extent to which funds may be used for non-program expenses. Donors also take overhead into account when choosing organizations to support. Understandably, management looks for opportunities to trim administrative expenses (e.g., human resources, accounting, payroll) to a bare minimum.

One strategy for cost-containment entails hiring a jack-of-all-trades bookkeeper to manage the day-to-day administrative tasks. Unfortunately, individuals with the necessary experience and knowledge are rare. Even highly-skilled individuals may not bring the depth of knowledge to properly address today’s accounting, reporting and regulatory requirements. And it’s painfully easy for them to get behind under the weight of responsibility. A number of issues tend to emerge:

• They may not understand nonprofit accounting. While accounting is accounting no matter where you go, there are many unique aspects of nonprofit accounting, from receiving contributions and grants to navigating restrictions on those revenue sources.
• They may not be versed in government regulations and specific contract terms governing expense reimbursement. Inaccurate reporting or attempts to recover disallowed expenses could delay payment and threaten future funding streams.
• They may lack training on the accounting system and manually track program and grant expenses rather than let the system do the work for them. Spreadsheets are notoriously prone to human error and are difficult to transition to others when staff assumes new positions within or outside the organization.
• The board of directors and senior management may not receive accurate, timely financial statements with operating results delineated by program and funding source to provide a clear sense of organizational health.
• They may not be prepared for the annual audit and lack the means to support the auditors’ requests. If the books fail to provide the detail necessary to complete a Form 990, the audit will take more time and cost more money.
• The organization may be vulnerable to theft or fraud should it fail to institute appropriate internal controls. Strict segregation of duties and cross-training increases accountability. Enforce a mandatory vacation time to allow others to examine the books.
• The loss of a key employee could be crippling if there’s no one to provide coverage or that individual’s processes remain undocumented.

Knowing the risks and vulnerabilities of attempting to handle accounting and related functions in-house, many nonprofits elect to use third-party service providers. This decision creates the potential to realize several valuable benefits.

A nonprofit accounting specialist designs a customized chart of accounts and a general ledger that will measure all relevant funding sources and track expenses by program and grant. This individual or team also identifies an appropriate accounting solution to process transactions efficiently and create all requisite reports with little to no manual adjustment. The software design allows for a seamless interface with payroll or time tracking software. The accompanying written procedures provide details on how to use these systems to the greatest advantage.

Management gets solid information upon which to base critical decisions. Skilled nonprofit accounting specialists work with management to create operating budgets and render budget-to-actual reports on a monthly or quarterly basis. They ensure that the board of directors and senior management receive timely, accurate financial statements as well as operating results to reflect the performance of various programs and grants. They work with management during the grant application process to determine if the proposed activities are financially viable given the organization’s fiscal health, ability to recover expenses, and access to unrestricted funds.

Through knowledgeable, outsourced professionals, management stays abreast of regulatory requirements to protect their nonprofit status, comply with reporting requirements, and render accurate, timely filings of their Form 990. They’ll also profit from the firm’s handling of property and sales tax exemptions.

With a clean set of books, the annual audit can proceed smoothly with a minimum of effort by all parties. Accurate bookkeeping allows timely tax preparation of annual filings with federal and state tax authorities.

Finally, an integrated accounting, audit and tax firm with a specialization in nonprofits has the breadth and depth of knowledge to meet its clients’ needs on demand. Its subject matter professionals stay current on all the legislative developments that impact not-for-profit regulation and tax law. They also have the resources to provide coverage should a surge in requirements occur (e.g., in the aftermath of a merger), or a change in client personnel create a temporary resource shortfall.

To preserve the organization’s precious financial resources, a hybrid approach could be leveraged to segment the day-to-day transaction processing from activities that rely on specialty knowledge. A cloud-based accounting solution supports this arrangement and provides a convenient means for the outside nonprofit specialists to provide training, oversight, and review.

The selection process for an outsourcer should be as rigorous (if not more so) than the hiring process for an employee. The firm should be able to demonstrate extensive experience in the sector and provide appropriate references who can attest to their knowledge, accuracy, presence and responsiveness.

To compensate for a complete or partial loss of the on-site accounting presence, the outsourcer and management need to work through their communications protocol to ensure that the outsourcer stays current on what’s happening with the organization. Employees must have the means to supply appropriate documentation and information to process all transactions and reports properly.

The right partner frees management from the burden of responsibility for mission-critical accounting, payroll and report tasks while preserving the integrity and reputation of the organization and protecting the board and senior management from unnecessary liability.