Why Outsourced Accounting For Nonprofits Is A Good Idea

An irrefutable fact of life is that if you run a business, you need accounting. It can be as little as a bookkeeper checking your records to as much as having an entire accounting department. However, what if you run a nonprofit organization?

Nonprofits need to make money while not making record-breaking profits. It’s a delicate balance to maintain. Another problem is since nonprofits can’t make huge profits, they usually have smaller staffs to try and save money. That becomes an issue when it comes to nonprofit accounting since they have different needs.

That’s where outsourced accounting for nonprofits can help. After reading this blog, you’ll understand the specific accounting needs of nonprofits, the different types of nonprofits, and how outsourced accounting can help.

What’s Different About Nonprofit Accounting?

A major difference between for-profit and nonprofit accounting is that a nonprofit’s budget looks different. The ask is often more while having fewer resources so you need to prioritize what is most important to your organization.

You also need to account for every penny spent in the case of an audit. Since revenue sources for nonprofits can come from grants, government contracts, and donations, they need to keep accurate records so they can accurately report their financial activity.

You also need to keep track of your donations. Whoever handles your financials will need to mark donations as restricted or unrestricted and then keep track of them. Restricted donations are for a specific purpose, like an educational class or capital improvements like a new roof, and cannot be used for anything other than what they’re designated for. Unrestricted donations can be used wherever the need is the greatest.

Nonprofits must be aware of how much money they’re making. Some nonprofits can have a tax-exempt status but are still allowed to make a profit, like a 501(c)3. But they need to keep track of how much they make or they can lose nonprofit status.

Another area where nonprofit accounting is different is that you use different financial statements than a regular for-profit. One of these reports is the statement of activities, also known as an income statement for a for-profit organization. This report shows a nonprofit’s revenue, expenses, and net revenue (surplus or deficit) for all or part of a fiscal year.

Types Of Nonprofits

Not all nonprofits are the same. There are small differences among them that can drastically change their mission and what their financial needs are. Below are the more well-known types of nonprofits.

501(c)3

Charitable, Religious, or Educational Organizations

These are run for religious, charitable, scientific, literary, or educational purposes. Examples include schools, Boys and Girls clubs, churches, and elderly care homes.

501(c)4

Community Social Welfare Organizations

These are community social welfare organizations that don’t earn a profit, like volunteer firefighters associations or civic associations.

501(c)6

Business Leagues

These include business leagues, real estate boards, professional associations, and chamber-of-commerce or board-of-trade organizations. To qualify for 501(c)(6) status, the organization must be supported by membership dues and income related to its exempt purpose.

501(c)(7), 501(c)(8), 501(c)(10)

Lodges, Fraternities, Societies, and Recreation Clubs.

501(c)(7)

These nonprofits are social and recreation clubs. Their primary purpose is social activity. Some examples include college fraternities, alumni associations, hobby clubs, and country clubs.

501(c)(8)

 These types of nonprofits are lodge or fraternal organizations that also provide for the payment of life, sickness, accident, or other benefits to members of a lodge system (an organization made up of local branches and chartered by a parent organization).

501(c)(10)

These organizations devote their earnings to charitable, fraternal, or other purposes existing within a lodge system. They do not provide benefits to their members, such as life or accident insurance.

501(c)(9)

Voluntary Employees’ Beneficiary Associations

These fund the payment of life, sickness, accident, or other benefits to its voluntary members and/or their dependents. They’re made up of members who have a common employer, union, or collective bargaining agreement, but are not required to join or are automatically entered into the organization as part of their employment, like a labor union.

501(c)(11)

Teachers’ Retirement Fund Associations

This type of nonprofit is a teachers’ association created and operated for paying retirement benefits to teachers.

How Outsourced Accounting Can Help?

You might be wondering, “Why outsource my accounting?” and there are several good reasons why you should outsource your nonprofit accounting.

Cost Effective

Saving money is essential in a nonprofit. You need to make every dollar count and outsourcing your accounting can help you do that. You won’t need to stretch your budget to hire an additional staff member or go through a hiring process that can take several months.

Another way it can save you money is by eliminating any DIY accounting dangers. Unless you’re a trained accountant, not everyone knows the nonprofit accounting basics.

It’s easy to make a mistake and sometimes those mistakes come with a heavy price tag. Outsourcing your accounting to a nonprofit accountant or a company that knows nonprofit accounting principles can save you from these potential issues.

Saves Internal Resources

In addition to not hiring that extra staff member, you won’t burden your staff with handling work that isn’t in their job description.

While staff at nonprofits can take on several roles at once, accounting is something that should be a singular focus. Small things like missing an invoice or not returning a phone call to a donor can result in a larger problem down the road.

Gain Expert Advice

Not everyone knows basic accounting principles for a regular business, so it can be difficult to know the ins and outs of nonprofit accounting standards and principles. Outsourcing your accounting means that you have access to a partner who is an expert in it and can help with any problem that comes up.

You also won’t be wasting time trying to come up with an answer on your own and potentially being wrong resulting in fines and extra paperwork.

Outsourced nonprofit accountants can help keep your financial records accurate and compliant with all relevant laws and regulations. This can be especially important for nonprofits that receive government funding or are subject to audits or other forms of financial scrutiny.

Reduce Fraud

While it’s not a pleasant topic to discuss, leaving a single person or a small team in charge of your company’s finances can open the door to fraud.

Having someone outside your company handling your accounting provides an extra set of eyes on your books and notice anomalies and unusual patterns in your accounting more than someone internal. This provides that extra set of eyes to spot discrepancies quicker.

Why Work With A Partner Like Powered By Centri

At Powered by Centri, we aren’t just an advisor, we’re a part of your team. You’ll have access to our experts who are there for you every step of the way and can help navigate through the complicated nonprofit regulations.

We get to know your industry so if you have any questions, we’re prepared. One of our goals is to give you the best possible advice so you can make the right decision for your nonprofit.

We’ll know we did our job correctly when you succeed.

Looking for a partner to help grow your nonprofit? Contact our experts to see how we can help you achieve your vision.