Nonprofit 411: Accounting for Nonprofits: Understanding Your Finances

Nonprofit 411 Jitasa-minBy Jitasa

You didn’t start working in the nonprofit sector to stare at financial documentation, decipher challenging math equations, and file annual tax forms. However, that comes with the territory of nonprofit accounting. 

Especially now, as strategic plans have gone awry in light of the pandemic and resulting economic downturn, non-accountants can benefit tremendously from developing a basic understanding of nonprofit accounting concepts. This general understanding will help you better react to these economic difficulties and help you create forward-thinking plans that take into account financial best practices. 

The aspect of nonprofit accounting that impacts each and every team member is the formation and approval of your annual budget.

Approving your annual budget is one of your nonprofit board’s many responsibilities. Meanwhile, calculating the budget is a job for the finance department, and implementing it falls to your development and programming teams. 

A drop in the expected revenue and cuts in the budgetary expenses are not reflective of the amount of faith in your team members but are the result of a series of complex calculations informed by previous years’ metrics. 

Jitasa’s nonprofit accounting guide explains that your revenue will be informed by either the discount or cutoff methods: 

 

  • Discount method: Using this method, your finance team organizes your expected revenue by source, then multiplies that expected amount by the probability that you’ll receive the revenue. For instance, if you have an 80% chance of receiving a grant worth $10,000, the budgeted revenue for that grant will be $8,000. 
  • Cutoff method: The cutoff method uses a similar approach, but analyzes expected revenue as a whole instead of separate sources. Your finance team multiplies your entire expected revenue by the probability that you’ll receive it. For example, if you expect to raise $1 million in total, but have a 75% chance of fundraising that much, you’ll budget for $750,000 in expected revenue. 

Meanwhile, your expenses can be broken down into specific categories. These categories not only help you understand where finances are going, but also match up with the expense categories listed on your annual Form 990. This ultimately makes it easier to keep accurate records and to file tax forms. These categories include: 

 

  • Fundraising expenses. These are the expenses that you incur to raise additional funds. They can be further broken down into your marketing costs, software investments, event costs, and other expenses that you take on to gain funding. 
  • Administrative expenses. Administrative expenses are often fixed costs that you must pay to keep the doors open at your organization. They include things like employee salary, rent, utilities, and tools for data management.
  • Program expenses. These are the costs that you incur to actually work toward and achieve your organization’s mission in the community. For instance, a dog shelter would lump the veterinary bills and cost of leashes in with program expenses. 

Nonprofit accounting is a multifaceted entity that encompasses a wide range of topics. However, your budgeting process is one of those facets that everyone at your organization should have a grip on so that you can effectively raise funds and allocate them responsibly. 

How Nonprofits Can Foster More Meaningful Virtual Engagement With Their Employees

By YW Boston

2020 was a year that many nonprofits experienced a new and unexpected transition into partially remote or completely remote work. As we continue to face the COVID-19 pandemic and grapple with increasing social unrest, including the recent violent insurrection at the U.S. Capitol, it is as important as ever to prioritize practicing empathy with our employees and colleagues. As we begin the year 2021, it’s important for organizations to re-examine their expectations for employees to continue conducting business as usual. Leaders must allow time for employees to process the impact of such uncertainty in their lives. When having any work-related virtual meetings, nonprofit leaders and supervisors can adjust their practices to foster more meaningful virtual engagement. Keeping employees engaged in online spaces is critical to staying socially connected while physically distant. Here are some things to consider when interacting with your employees using digital mediums.

Redefine (virtual) employee engagement

Employee engagement has transformed in the virtual space. First, let’s define what we mean by “virtual engagement.” Virtual engagement refers to all and any employee interactions that occur online, whether those are “live” and synchronous, such as video conference or voice call, or asynchronous, such as chat or emails.

Account for, and normalize, distractions

In the online realm, active and passive engagement appear a bit differently. It’s important not to confuse passive engagement with active resistance. While someone may have their camera off during a video call, for instance, that does not mean they are not fully engaged. As employees juggle new variables such as sharing their remote workspaces, increased caregiving responsibilities, and other challenges arising from working remotely during a pandemic and political crisis, employers must remain flexible and empathetic during this time.

Continuously gauge engagement and adjust accordingly

Measuring virtual engagement is a necessary step for readjusting and making modifications that will improve the quality of your interactions. As a meeting facilitator, check in with participants to see how they are feeling, what their energy level is like, and to learn whether they feel prepared for the meeting or virtual presentation they are about to participate in. If you are providing new information, be sure to check for understanding. And at the end of the meeting, check in again to see if people’s disposition or feelings have changed, and to see if they want to provide any feedback. Make note of your own observations, such as how many people participated, how often did people participate, did anyone seem to dominate the conversation, and so on.

Practice and improve your virtual facilitation skills

As a leader or supervisor, you have a responsibility to foster more meaningful engagement during virtual meetings. It’s a good practice to familiarize yourself with virtual platforms before facilitating or participating in a meeting. As much as possible, avoid troubleshooting during a meeting or presentation. If necessary, host a practice run, review a tutorial, or identify a virtual assistant who can help you. You must also commit to facilitation and be present by minimizing as many distractions as possible. Turn off email and other notifications, silence your phone, maximize the virtual meeting to full screen, etc. Practice active listening. Acknowledge people when they speak, make “eye contact” by looking at your webcam, nod or provide reaffirmations via chat, etc.

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About YW Boston

As the first YWCA in the nation, YW Boston has been at the forefront of advancing equity for over 150 years. Through our DE&I services—InclusionBoston and LeadBoston—as well as our advocacy work and youth programming, we help individuals and organizations change policies, practices, attitudes, and behaviors with a goal of creating more inclusive environments where women, people of color, and especially women of color can succeed.

As part of that work, we are helping organizations prioritize Diversity, Equity & Inclusion and become socially connected while staying physically distant. During this time, YW Boston is providing organizations with digital workshops and resources to help them better understand the challenges faced by their employees. For more information, please contact Sheera Bornstein at sheera@ywboston.org.

Nonprofit 411: Top Five Things Every Nonprofit Leader Should Know About Finance

Nonprofit 411 Night Heron-min

By Ellen Sturgis, Principal of Night Heron Consulting

People don’t get involved in nonprofits because they love finance! It’s about the mission right? But Executive Directors and Board members still hold fiduciary responsibility to ensure that resources are managed, protected, and used well. Here is my list of the questions you should ask about five key financial reports.

  1. Balance Sheet: The easiest number to understand is the cash balances, right? But what’s the right amount for your organization? A simple test: Divide your annual expense budget by 12. Divide your cash balances by that number. The result is the value of the months’ cash on hand. Is it under 6 months? That may be a concern. Look back to last year to observe cash fluctuations. This is your short term insurance against unforeseen events.
  2. Operating (P&L) Statement: Income. Understand where your revenues come from. Compared to last year, are you seeing a similar pattern of, for example, 50% donations and 50% grants? How likely are you to get the same grants every year? If there is a concentration in one area, how reliable is that year to year? I worked with one organization that depended on their annual Gala for over 70% of their annual revenue. Not good, especially when a pandemic forces the event’s cancellation.
  3. Operating (P&L) Statement: Expenses. As a leader of the organization, get comfortable with the general mix of expenses. Most nonprofits reflect a people-heavy budget: 70% in personnel and related costs isn’t terribly unusual—so don’t freak out. If you’re used to a commercial business, it may look odd, but it’s okay.
  4. Cash Flow: For many nonprofits that don’t have a cash reserve, this is the most critical report, and you may not even get one. Based on the income mix, are there certain months that are flush with cash (often December with year end appeals, for example)? Are there tight months (often summer) where expenses continue but revenue does not? Ask to see a monthly summary, from the previous year or two. Is that cash balance calculated above enough to get you through tight months?
  5. Budget: Most nonprofits have and vote on an annual budget. But remember, this is your roadmap to meeting your mission: no resources = no growth. If your organization wants to start a new program, is now the time if you’ve had losses in the last two years? Are new funding sources available? Will you have the cash or need a line of credit? These are the questions to consider, not just “do we break even”.

A PS about your annual audit—this isn’t just a requirement, it’s a terrific opportunity to get an independent assessment of your financial operations. Whether a review or full audit, two key suggestions: make sure the Board meets with the auditors without staff present, for a frank conversation. And I suggest changing audit firms at least every five years, especially if your staff stays the same.
 

A final word about all this in the time of COVID. When it comes to finance, the key concern should be the separation of duties. Talk to your auditors for suggestions. If only one person is opening and depositing donations, are you finding other ways to protect your organization’s gifts? Scanning and recording all documentation is critical. This protects everyone involved.