NPOs need to manage their money to ensure accountability and transparency. Without good bookkeeping, it’s easy to lose track of donations and expenses, which can lead to mistakes and even legal trouble.
Bookkeeping helps nonprofits stay transparent, accountable, and compliant. In this article, we’ll outline the key steps to keep your nonprofit’s finances clear and running smoothly.
Table of contents
What is bookkeeping for nonprofits?
Nonprofit bookkeeping vs. accounting
4 key components of nonprofit bookkeeping
6 key documents for bookkeeping
5 best practices for bookkeeping for nonprofit organizations
Final words on nonprofit bookkeeping
FAQs on bookkeeping for nonprofits
What is bookkeeping for nonprofits?
Nonprofit bookkeeping is the systematic recording and organization of an organization's financial transactions. It encompasses tracking all monetary inflows (such as donations, grants, and program revenues) and outflows (including expenses, salaries, and program costs).
This meticulous record-keeping is crucial for maintaining financial integrity and fulfilling the organization's mission. Good nonprofit bookkeeping helps you manage your finances and ensures that every dollar is accounted for and that nothing is lost or forgotten.
It shows donors, members, and the government that you are honest and responsible. When everything is recorded properly, it’s easier to create reports, file taxes, and make smart financial decisions.
Bookkeeping helps nonprofits stay organized, avoid mistakes, and build trust with everyone involved. It’s an essential part of managing finances and staying accountable.
Nonprofit bookkeeping vs. accounting
4 key components of nonprofit bookkeeping
1. Payroll
Payroll management is crucial for nonprofits because it ensures that everyone involved gets paid correctly and on time.
To manage payroll effectively, nonprofits need to carefully track the hours employees work and calculate their pay. This includes making sure the right amount of taxes is withheld from each paycheck.
Nonprofits should use payroll systems or software to automate calculations and reduce mistakes. Keeping detailed, regularly updated records of each paycheck helps avoid errors and ensures everyone is paid as agreed.
Proper payroll management also helps nonprofits comply with labor laws and maintain good relationships with staff. It supports smooth operations and helps the nonprofit stay financially healthy.
2. Invoicing
Invoicing is essential for nonprofits to get paid for services or products they provide. A clear invoice includes the date, the amount owed, a description of what is being billed, and how and when payment should be made.
Nonprofits must keep a copy of each invoice sent and received. This helps track payments and manage the organization’s cash flow. Using invoicing software or templates can make the process easier and more accurate.
It’s important to follow up on unpaid invoices to ensure timely payments. This practice helps nonprofits manage their budget effectively and maintain financial stability.
3. Recording and allocating expenses
Recording expenses means keeping track of all the costs a nonprofit incurs, like buying office supplies or paying for utilities. Properly documenting these costs helps maintain accurate financial records.
Allocating expenses means assigning costs to the right areas, such as different programs or departments. This helps show how money is spent and ensures that it is used as intended. For example, expenses related to a specific project should be recorded under that project’s budget.
Accurate expense tracking and allocation are important for creating clear financial reports and staying transparent with donors. It helps nonprofits plan their budgets and use funds effectively.
4. Recording business transactions
Recording business transactions means keeping detailed notes of every financial activity, such as donations received or bills paid. Each transaction should include the date, amount, and purpose.
Using accounting software like QuickBooks can help keep your records organized and easy to review. Regularly updating and checking these records helps prevent mistakes and provides a clear view of the nonprofit’s financial situation.
Having a complete record of all transactions is important for creating a nonprofit financial statement and report. It also helps during audits and ensures that the nonprofit complies with financial regulations.
6 key documents for bookkeeping
1. Nonprofit budget
This document plans out how much money you expect to make and spend over the year.
- Expected revenue: This is how much money you think you'll bring in
- Expense budget: This lists what you plan to spend on different things like fundraising, running the office, and your programs
Example: If you expect $100,000 in donations but think there’s only a 70% chance of getting it, you would plan for $70,000 in your budget.
You can easily manage your budget planning using nonprofit budgeting software.
Note: You can use past data and methods like the cutoff method (multiply the chance of getting each donation by the donation amount) or the discount method (adjust the total expected revenue based on your chance of reaching it).
2. Statement of financial position
Also called a balance sheet, this shows what your nonprofit organization owns and owes at a given point in time.
- Assets: Things you own, like cash and equipment
- Liabilities: Things you owe, like loans
- Net assets: The difference between what you own and what you owe
Example: If your nonprofit organization owns $50,000 in equipment and has $20,000 in loans, your net assets would be $30,000.
3. Statement of activities
This document tracks your nonprofit organization's revenue and expenses over time. It helps you see how much money you made, how much you spent, and how your net assets changed from the start to the end of the year.
Example: If you had $100,000 in donations and spent $70,000, you would see a $30,000 increase in your net assets.
4. Statement of functional expense
This document breaks down your spending into categories like program costs, administrative costs, and fundraising costs. It helps show how each dollar is allocated, which is important for transparency.
Example: If you spent $50,000 on program costs and $20,000 on fundraising, you’ll see these amounts listed separately.
5. Statement of cash flow
This statement shows how cash moves in and out of your nonprofit organization. It tracks cash used for daily operations, investments, and financing. This helps you see if you have enough money to pay bills.
Example: If your nonprofit organization starts the year with $10,000 and ends with $5,000. You can see how cash was used or saved throughout the year.
6. Form 990
This is the tax form that nonprofit organizations must file annually to show how they manage their money. It includes details about your revenue, expenses, and how you use your funds.
Understanding these documents helps ensure your nonprofit stays financially healthy and compliant with regulations.
5 best practices for bookkeeping for nonprofit organizations
- Meticulous record-keeping: Maintain detailed records of all financial transactions
- Specialized software utilization: Choose a dedicated nonprofit accounting software
- Regular auditing: Conduct frequent internal and external audits
- Regulatory compliance: Adhere to nonprofit accounting standards and regulations
- Ongoing financial training: Provide continuous financial management training for staff and board members
Implementing these practices ensures accurate financial reporting, regulatory compliance, and fosters donor trust.
Final words on nonprofit bookkeeping
Robust bookkeeping practices are the foundation of a nonprofit's financial health and operational effectiveness. Accurate and transparent financial records not only ensure regulatory compliance but also enable strategic decision-making and reinforce donor confidence.
Implementing best practices such as regular audits, specialized software, and staff training significantly improves financial management. While bookkeeping can be challenging, various tools are available to simplify the process.
Zeffy, a 100% free fundraising platform for nonprofits, complements bookkeeping efforts by automatically generating tax receipts for donations. This feature streamlines record-keeping, saves time and reduces manual errors.
By staying organized, using appropriate tools, and following best practices, your nonprofit can maintain financial health and transparency, ultimately supporting your ability to make a positive impact in your community.
