Many aspects of nonprofit and for-profit business accounting and financial management are similar. However, some significant differences exist due to the nonprofit’s duty to direct its resources toward its mission. Not-for-profit accounting requires functional expense tracking, i.e., identifying which expenses relate to program, fundraising, and administrative functions.

This chapter presents financial management best practices relevant to ACE and its affiliates.

ACCOUNTING PRACTICES OVERVIEW

The Financial Accounting Standards Board (FASB) has established accounting practices for nonprofits to follow.

CLICK HERE for details on the practices.

AFFILIATE ACCOUNTING + BUDGETS

For an affiliate to maintain strong financial management, it needs to develop and follow well-conceived, meaningful fiscal policies, and procedures with separation of duties and strong internal controls. They should define the roles and responsibilities of individuals handling an affiliate’s financial affairs and ultimately ensure that its financial data is an accurate, reliable basis for decision making.  It is highly recommended that each affiliate involve  an accounting professional to give advice on fiscal matters for the affiliate.

BOOKKEEPING

Affiliates must maintain their books and financial records. The Treasurer or another designated bookkeeper can use existing software packages such as QuickBooks or devise a recordkeeping system on Excel. Of course, an affiliate has the option to outsource its financial recordkeeping to a business that provides this service.

Income and expenses should be recorded according to the category, or account, of the transaction. A chart of accounts guides what account number to use when posting an entry. An affiliate needs to design its chart of accounts and account numbers. This chart usually has five areas, including assets, liabilities, net assets (or fund balances), revenues, and expenses.

On their tax returns, nonprofits must report account activity according to two classifications – functional (or programs) and natural (or supporting). Program transactions are directly related to providing services to populations an affiliate serves, e.g., students. Supporting transactions are those common to all programs, e.g., general management costs, etc.

SETTING UP THE DIVISION OF FINANCIAL DUTIES

It is important that the affiliate designates a person to oversee all financial responsibilities. Typically, the role is fulfilled by the Treasurer. However, all board members share equal responsibility for their affiliate’s financial health.

A system of checks and balances should be defined, and financial duties should be divided among multiple people (e.g., officers of the Board) to help ensure protection from fraud and error. The division of financial responsibilities can also lead to a higher efficiency of operations.

CHECKS

  1. There should be a written process for requesting checks. 

  2. Outgoing checks must be supported by an invoice or receipt approved by the Treasurer or whomever the Board designates. If a receipt or invoice is not available, a voucher prepared by an affiliate administrator or other person and approved by the Treasurer can support an outgoing check.

  3. If possible, one person should approve and write the check, and a separate person should sign the checks. 

  4. An affiliate may also opt to require two signatures on checks as protection against fraud and error.

DEPOSITS

  1. Deposits should be recorded. Copies and/or scans should be made of all incoming checks and attached to the deposit receipt and included with the monthly reports for documentation purposes.

  2. For deposits, a bank stamp, or handwritten “For deposit only, ABC Bank, Account # 123445”) should be used. The deposit should be made within a week, with no cashback. 

BANK ACCOUNT

  1. Account should have more than one person has an authorized signature.

  2. Bank statements need to be reviewed and reconciled each month.

  3. Reconciliation of the bank statement, along with all documentation, should be part of monthly reporting.

  4. A designated Board officer should review reconciliation report.

FINANCIAL REPORTS

Monthly financial reports should be prepared for distribution by the Treasurer and reviewed with the Board.  CLICK HERE to go to Financial Reports.

Affiliates must maintain their books and financial records. The Treasurer or another designated bookkeeper can use existing software packages such as QuickBooks or devise a recordkeeping system on Excel. Of course, an affiliate has the option to outsource its financial recordkeeping to a business that provides this service.

Income and expenses should be recorded according to the category, or account, of the transaction. A chart of accounts guides what account number to use when posting an entry. An affiliate needs to design its chart of accounts and account numbers. This chart usually has five areas, including assets, liabilities, net assets (or fund balances), revenues, and expenses.

On their tax returns, nonprofits must report account activity according to two classifications – functional (or programs) and natural (or supporting). Program transactions are directly related to providing services to populations an affiliate serves, e.g., students. Supporting transactions are those common to all programs, e.g., general management costs, etc.

CLICK HERE for more information regarding budgeting.

The following financial reports are extremely useful tools for an affiliate and its Board to understand its financial health and make projections. Further, if an affiliate applies for a grant, a funder may require submission of this financial data. Each type of report below has a link to a dummy example.

ACE National does need to collect the balance sheet and profit & loss for all affiliates in order to report to the insurance carriers and IRS. Please upload both documents in the affiliate section of the database when the final versions are prepared for your tax filing.

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

SAMPLE BALANCE SHEET (.pdf)

This report is a snapshot of an affiliate’s financial position at a point in time. The report summarizes an affiliate’s assets, liabilities, and net assets at a specified date. Net assets are reported in terms of unrestricted, temporarily restricted, and permanently restricted assets.

To be in compliance, an affiliate must send ACE National a copy of its year-end Balance Sheet.  The balance sheet for each affiliate needs to be shared with the insurance carrier to determine the exposure for financial coverage insurance.

STATEMENT OF ACTIVITY (PROFIT and LOSS)

SAMPLE PROFIT and LOSS (.pdf)

Also known as an income and expense statement, this report reflects an affiliate’s financial activity over a period of time. It shows income minus expenses, which results in either a profit or a loss.

Affiliates annually must send ACE National a copy for their year-end P&L statement.

STATEMENT OF CASH FLOW

SAMPLE CASH FLOW (.xlsx)

This report summarizes the resources that become available to an affiliate during the reporting period and the uses made of such resources. It is especially useful in real-time because it reports income that has been received and expenses that have been paid. For planning purposes, a statement of projected cash flow enables an affiliate and its Board to anticipate any shortfalls.

STATEMENT OF FUNCTIONAL EXPENSES

SAMPLE FUNCTIONAL EXPENSES (.xlsx)

Functional expenses are reported by their functional classification. All nonprofit organizations are now required to report their expenses based on their functional classification and by the natural classification, as per Financial Accounting Standards Board guidelines.

Nonprofit organizations report their expenses by both functional and natural class. Organizations record expenses according to these functional classifications:

PROGRAM

Program expenses are any costs related to running the various programs and services offered by a nonprofit organization, as per its mission. For established nonprofits, program expenses often make up the majority of their overall costs.

MANAGEMENT AND GENERAL

Management and general costs are supporting expenses associated with funding the day-to-day operations of the organization. These expenses don’t directly relate to the mission of the nonprofit and usually include costs like governance, bookkeeping and management.

FUNDRAISING

Fundraising costs are supporting expenses associated with an organization’s call for financial support or monetary contributions. This would include all expenses related to fundraising events, direct mail campaigns requesting donations and the salaries of

Cash reserves (that is, cash on hand or, more formally, operating reserves) are critical for an affiliate’s long-term financial stability. Most experts recommend maintaining enough reserves to cover six months of operating expenses. All affiliates should have an absolute bare minimum of one month’s reserves.

As a target, affiliates should set a goal of a reserve fund minimum equal to three months of average operating expenses. The calculation of average monthly operating costs includes all recurring, predictable expenses as discussed in the budgeting chapter.  At the end of the fiscal year, any surplus unrestricted operating funds should be allocated to the operating reserve.

MANAGING CONTRIBUTIONS

All donation or contributions should be tracked in a reliable system. Refer to Chapter 13 on Fundraising for more insight on managing contributions and donations.

- CHAPTER 13 | FUNDRAISING

FILINGS

All tax-exempt organizations are required to file an annual IRS information return (Form 990, 990-EZ, 990-N, etc.).  In addition, most states also require filings and renewals.  Failure to file the necessary forms can lead to tax exempt status being revoked.

- FILINGS | ADDITIONAL INFORMATION

AUDIT

A financial audit is different from an IRS audit.  A financial audit is an examination of your accounting records and financial statements by an independent auditor—normally, a certified professional accountant (CPA). The auditor is an independent professional hired and paid by your nonprofit.

- AUDITS | ADDITIONAL INFORMATION