Not for Profit Financial Reporting; what you need to know

It may seem obvious that bookkeeping and accounting are different in the Not for Profit world, but not every not for profit seems to have received the memo. At the core of every not for profit, in order to function successfully, is to establish trust with a donor base.

One way to accomplish this is to establish a solid bookkeeping and record keeping system that is transparent to donors, board members, and governing agencies. It isn’t uncommon for one to see reports in the news of poor accounting principles that have allowed for poor human behavior. Even the smallest organizations, such as sports booster clubs, or other groups, can and should adhere to strict guidelines when it comes to financial management. If you are involved in a not for profit, either as a donor, or a board member, here are four questions to ask of the organization.

1. Are Internal controls put into place, which enable the organization to safeguard its assets?

Examples would be requiring two signatures on all checks payable to an outside party, or having one person write the check, while a separate person signs the check. Another example would be to have the person who ordered goods or services approve an invoice, but to have the invoice paid by the person who oversees the entire budget. The more segregated the duties are internally; the less likely an error or misappropriation of funds will occur.

2. Are external resources utilized to complement or support the internal processes, when the organization is of a size or volume that exceeds the internal capacity?

An organization, which reaches a size or capacity where internal controls are no longer sufficient, does not justify inadequate controls. It emphasizes the need to constantly evaluate the cost of the internal controls to make sure resources are used efficiently and to seek outside resources.

3. Is there an external oversight or audit of all financial activity?

Depending upon the status of the not for profit, an external audit may be mandated by the state or federal government. However, there are numerous small charitable organizations that do not fall within this framework. Having some type of accounting audit is a good idea no matter the size or organization type. Not only does it encourage ethical guidelines, whomever is providing the services can give good feedback on how processes should be set up, or achieved to ensure the safety and security of the organization’s finances.

4. Has the organization developed governance and policy guidelines?

The role of a board of directors is to govern the organization, and with the governance the expectation is that it will lead the organization by respecting all the bylaws, abide by strict ethical standards and be accountable for the organization’s actions. To achieve this boards develop bylaws and guidelines for everything including budgeting and financial activity and reporting. It is this governance, which leads the organization to earn the public’s trust.

Inherent in managing a not for profit organization is the necessity to earn and retain trust. Once it is damaged it can be very difficult to gain back. For that reason, solid accounting and record keeping practices are vital to the health of all not for profit organizations.

Back to Basics: why setting up your financials properly is critical to your success.

If you, like millions of other adventuresome Americans have started the journey of owning and running your own business, critical to your success is to start out on the right foot with your financial reporting and record keeping. Why, you ask? There are numerous reasons.

Setting up a good reporting system, keeping good records, and establishing a sound financial system isn’t just good business, it’s also important for your emotional and mental well being! That is not something most business owners think about. But, there is enough to worry about, without the added stress of a poor bookkeeping or accounting system. There is almost nothing worse than not having a good understanding of your financial standing at any given time during the course of your business lifespan. To accomplish this, you need to set up some basic record keeping and accounting systems in order to generate important reports.

In addition to your financial wellbeing, you need to be able to report accurately to municipal, state and federal taxing authorities. Without proper record keeping, you risk two scenarios that will harm your business when it comes to taxing authorities: not paying the right or enough taxes, or paying too much!

In addition to reports generated to government entities, it may be necessary for you to report to a lending institution. Ultimately you want to know how your business is doing, so does your bank, investors, or the government.

There are three reports that every business, no matter how large or small needs to be able to generate and refer to. They are; a balance sheet, an income statement, sometimes referred to as a financial statement, and a cash flow statement.

What does each tell you, and why are they important?

1. A Balance Sheet gives you the big picture of the financial status of your business. The balance sheet includes the assets, liabilities and shows your equity as an owner. Also included in this report are your cash balance and your liabilities.

2. The Income Statement is probably more familiar to most business owners. It shows revenue, expense and the profit or loss of your company for a specific period of time. The income statement gives you an idea of how profitable the company is overall. It can be very interesting to look at an income statement for the same period of time from one year to the next, or from year to year. This will help you identify trends in your business as well.

3. The Cash Flow Statement is the most important report for small businesses and startups. It shows how readily a company can meet its debt, interest payments, and operational expenses such as payroll and rent.

To generate any or all of these reports, a solid bookkeeping system must be developed. It doesn’t need to be complicated; it just needs to adhere to good practices such as accurately posting payments, balancing the business checkbook,
generating and tracking invoices and accounts receivable. Once the system is put into place and adhered to, the reporting becomes much easier.

If you own are thinking about starting a small business, it’s not too early and it’s never too late to get your financial records and reporting in order.
For help getting started, or to set up your bookkeeping systems, contact us at ATW Miller Group.

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