The guidelines allow donors and grantors to see that their funds are going toward a financially sustainable organization, and that they’re being used for the right reasons. Following these guidelines is also essential for your NPO to keep its tax-exempt status. Usually, it’s best to recognize revenue the moment it is pledged to your NPO, as it becomes usable revenue as soon as you receive it. Grant accounting involves recording and monitoring all types of grants to track their use and ensure they comply with regulations. Proper grant management includes transparent reporting that shows the funds are used for the intended purpose. Reimbursable grants are a unique category of funding that nonprofit organizations may encounter https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ in their pursuit of financial support.
Implement a Robust Grant Management System
Regular reviews can also help identify potential issues early, allowing for corrective action before they escalate. Common grant sources include family, independent, community and other foundations, government endowments and councils, public charities, and corporate philanthropy divisions. Using lessons learned and relationships built during previous grant lifecycles, your nonprofit can continually streamline the entire process. “It’s something that people who get government grants will have to watch for,” Zygmunt said. When donors give to the United Way without specifying a particular beneficiary, the United Way chapter can record that revenue. External financial audits can be expensive; however, your nonprofit may not need an audit.
Understanding Types of Nonprofit Grants
Accounting for government and nonprofit entities presents unique challenges distinct from traditional business accounting. These organizations prioritize public service over profit, requiring specialized accounting practices to ensure transparency and accountability. Improper allocation of grant money can lead to significant liabilities, including non-compliance with funder restrictions, penalties from the IRS, and a damaged reputation. To mitigate these risks, ensure that funds are correctly assigned to their intended purpose by implementing strict internal controls and regularly reviewing your organization’s financial position.
- An efficient tracking and reporting system is a must-have in order to ensure accuracy and compliance when accounting for grants.
- It’s important for all nonprofit finance and accounting professionals to understand this key concept as they continue to advance their careers.
- Let’s start by breaking down the principles and processes that define nonprofit revenue recognition and how they shape your financial strategy.
- This means that everyone should understand the procedures, deadlines, and any other expectations related to accounting for grants.
- After all, projects can be complex, requiring multiple sources of funding that are not ring-fenced when used in practice.
Compliance and Reporting Requirements
Organizations must develop allocation methods that are fair, defensible, and consistently applied across all programs 5 Main Benefits of Accounting Services for Nonprofit Organizations and funding sources. This delicate balancing act requires technical expertise and careful documentation to satisfy various stakeholder requirements. Many nonprofits struggle to properly separate duties because their staff frequently take on multiple responsibilities. When budgets are constrained, professional development and training frequently become the first areas to face reductions, resulting in staff struggling to adapt. For instance, a low program expense ratio might mean you’re investing in technology that will improve efficiency later.
State charitable registrations need regular updating, while donor restriction compliance demands ongoing documentation. Board members expect regular financial updates, and program managers need budget reports. Finding qualified replacements who understand both accounting principles and nonprofit-specific requirements is challenging.
Sage makes no representations or warranties of any kind, express or implied, about the completeness or accuracy of this article and related content. Once you’ve got these policies and procedures in place, you need an organized and systemic approach to recording financial transactions. You want everyone to know why and how they should report expenses so that tracking grant expenses is easier for everyone involved. Establishing a transparent revenue stream is crucial for accurately allocating expenses and maintaining financial integrity. Following these guidelines is imperative if you want to have a sustainable funding agreement for your nonprofit. This is made even more challenging by the time constraints that many nonprofits operate under.
For example, the terminology of “exchange transaction” will be superseded by “contract with a customer,” but the concept will remain the same. Sometimes a not-for-profit acts as an agent, trustee, or intermediary for another not-for-profit, helping donors contribute to the third-party charity. As an example, Zygmunt cited a donor who said a not-for-profit would receive a specific amount in his will. Ordinarily, this would just be an intention, not an unconditional promise, and the revenue would not be recorded. But when the promise was backed up with a binding, legally enforceable document committing to the donation, the revenue was correctly recorded, Zygmunt said. With centralized documentation and reporting, nonprofits can easily demonstrate accountability to donors and stakeholders.
Keep detailed and accurate records
With the right tools and understanding, you can turn this challenge into an opportunity for clarity and strengthened trust. Managing a nonprofit’s grants and contracts process is a multifaceted and complex task. Learn four best practices that any organization receiving grants should adhere to and the roles and responsibilities of the various staff and team members. Bureau of Labor Statistics, there are approximately 65,000 people working in accounting and finance fields at nonprofit organizations. For instance, quarterly reviews of financial statements provide opportunities to assess trends and make strategic adjustments. Board finance committees should also review financial reports at least quarterly to maintain proper oversight.
