6 Steps to Master Nonprofit Accounting Basics

Close-up image of a financial worker analyzing statistical data

By: Whitney Hodge

Published: May 17, 2022

As a charitable organization, your nonprofit enjoys tax-exempt status. It’s a fantastic and appropriate perk for organizations working to make the world cleaner, kinder, and better, but it does come with a few caveats.

The main one is that your organization is held to a high level of fiscal transparency. To maintain that tax-exempt status (and remain on the right side of tax law!), your charity has to be hyper-vigilant in its bookkeeping. And nonprofit accounting is not for the faint of heart.

A charity’s goal is community improvement rather than profit. So, instead of being a for-profit business that provides shareholders accounts of profits, your responsibility is to show your board of directors (and the IRS) that you have been accountable for your funds.

To do this, you need to track every cent donated and every cent that your charity spends. This keeps you tax compliant, but it also instills confidence in your donors that yours is a reputable charity that’s using its gifts appropriately. And from a strategy perspective, detailed nonprofit accounting helps you understand your donor base, set donation goals, and ensure you’re getting the most out of every penny.

1. Start a Separate Bank Account

Complete accountability is your goal when managing your nonprofit finances. You should open a separate bank account for the nonprofit and never use it for personal purchases. 

You may want to explore your bank’s options for different types of accounts. If they offer an account that would allow for fund accounting, this option will allow you to separate your money into different “buckets” for different projects. That way, you can fundraise for specific campaigns, collect those donations into that fund, and then spend from that fund for that project. 

Even if your charitable organization is not incorporated, you should open a bank account for the organization. Opening a separate account will prevent any accidental personal use of charity funds, and it will also make nonprofit bookkeeping and keeping track of donations and spending more manageable. 

2. Commit to Rigorous Donor Management

It is critically important to come up with (and stick to!!) a system of donation tracking for your nonprofit accounting. At a basic level, donation tracking looks like this:

  • Record every donation in one spreadsheet or software
  • For each gift, include all donation data:
    • Donor name
    • Donor address
    • Donation method (online, cash-in-hand, check)
    • Donation type (cash or in-kind)
    • Donation amount
    • Donation date
  • Provide your donors with a receipt for their donation within one week of receiving it and include:
    • Donor name
    • Donation method (online, cash-in-hand, check)
    • Donation type (cash, service, or in-kind)
    • Donation amount
    • Donation date
    • Charity name
    • Charity federal tax identification number and a statement of your charitable status such as 501(c)(3)
    • Charity address
    • Name and signature of a representative of your organization
  • Start a separate spreadsheet for donor information to capture data on each donor:
    • Full name
    • Address
    • Phone number
    • Email address
    • Place of work
    • Any piece of information you have about each donor, including date of birth, name of spouse, names of children
    • Details of the donations they have made, including date, amount, and type

As you grow your donor base, having a lot of information about each donor will help you make connections to improve your donation amounts. For instance, if you notice that you have several donors employed by the same company, you could approach those donors about a corporate sponsorship from their company.

Donation tracking does more than help you avoid tax audits. It enables you to see and understand your donor base. You’ll know the loyal donors, the one-big-gift donors, the monthly-but-small donors. You can start to link donations to marketing campaigns or events you’ve held by tracking your campaign/event dates and the dates and amounts of the gift received.

In nonprofit fundraising, clever donor management is like a decoder ring that tells you which marketing channels or events are compelling for your donor base, how they prefer to give, and how much they’re likely to donate. The more data you record, the better you’ll understand how to deepen your connection with your donors.

3. Record Every Disbursement

Your donors and your board of directors want to see how donations impact your charitable goals. So if, for example, you’re an organization that offers sanctuary for homeless animals, you should be able to give to-the-penny figures on how much you’ve spent on vet bills, animal food, animal bedding/housing, animal toys, or any other product/service you’ve purchased that is directly relevant to your mission.

Recording your mission-specific expenses will help you make an informed fundraising plan. It can even support your marketing efforts by showing you which projects or funds need donations so you can fundraise for that specific goal. 

If your animal bedding costs are high each month, you could start fundraising around the need to create safe, warm beds for the animals in your care. Communicating a genuine mission need in your marketing is a great way to build community support and widen your donation base.

4. Be Vigilant About Off-Mission Spending

Every organization requires a certain amount of spending not directly related to its mission, such as payroll or office supplies. Even though these costs don’t directly support your charity’s mission, they’re still expected and acceptable.

But if you’re not paying close attention, you may not realize where money is being wasted or lost. 

Keep every receipt for every expense, even if it’s just for buying water bottles for the office kitchen. Those expenses add up, and when you balance your books (as described in Step 5), you may see that your off-mission spending is a bit wasteful. 

5. Regularly Balance the Books

Make it a priority each month to sit down with your piles of receipts and your list of donations and make sure that those items match the transactions listed in your bank account.

Doing this regularly helps prevent fraud and bank errors by checking that every transaction is legitimate. It also ensures that any money owed to the organization has been paid. And it gives you a realistic view of whether you’re spending money wisely and on-mission.

6. Provide Monthly Financial Statements

It’s standard for nonprofits to provide periodic financial statements to their board of directors that give an overview of how much money came into and left your bank account each month. These can include high-level spending categories and do not need to be itemized for individual purchases, but you should also be able to provide that upon request. Your financial statements should list your financial assets, subtract the costs of your financial liabilities, and provide an overall net assets figure.

In addition to monthly financial statements, charities also create annual reports. These show your donations and spending at a high level for the entire year. They help your charity see gaps in your funds and help you project the coming year’s fundraising requirements. They also help donors, especially large corporate donors, understand how donations impact your goals and how their contributions will further your efforts.

Stop Worrying About Your Nonprofit Accounting

As we said before, nonprofit accounting is complicated, and many charities feel safer letting a nonprofit CPA handle their accounting. At Lloyd & Hodge, we take care of your daily bookkeeping as well as donor and board of director financial statements, employee payroll, and tax forms. We can even help you create a budget.

Call us (817.831.0097) and join the other organizations that are leaving the nonprofit accounting to us so they can focus on their core mission.

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