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The Ultimate Guide to CPA for Nonprofits: What You Need to Know

Accounting is an essential aspect of any business. CPAs can help nonprofits manage their finances and meet compliance requirements.

Financial statements are essential for management, boards of directors, and external users like donor agencies or lending institutions. A CPA can provide various services, including preparation, compilation, review, and audit engagements.

1. Know Your Financials

Nonprofits must follow generally accepted accounting principles to create financial transparency for donors and the public. This ensures the organization uses its incoming funds responsibly to advance its mission. If the nonprofit manages its money correctly, it may retain its tax-exempt status and face hefty fines.

Additionally,  professionals CPA for nonprofits help nonprofits improve their accounting skills, handle unique accounting challenges, and stay compliant. They can also help you set goals and create a budget to track your expenses and income over time.

Your nonprofit’s statement of activities shows how your net assets have changed over the year. It helps you categorize different incomes and expenditures and shows whether any restricted assets have been released (such as scholarships given to students). You can also see how much your operational expenses have changed over the year. These are the costs of running your nonprofit, such as salaries, utilities, and fundraising.

2. Set Goals

Nonprofits need to set realistic metrics and goals for their financial management. This can help them track how their income and expenses compare to their budget.

Large nonprofits may have thousands of accounts, including endowments, grants, scholarships, programs, capital projects, and operating funds. Each has its rules and must be carefully segregated from other net assets.

Nonprofit-friendly accounting software should handle this and other unique financial management concerns. It should also easily create a financial report that meets GAAP standards.

Nonprofits should review their budget regularly to ensure they are on track to meet their financial goals. They should also create short-term budgets for special events and campaigns and compare their results to their annual budget. This will help them avoid overspending and meet their budgetary objectives. It will also allow them to make appropriate adjustments if they stray from their plan.

3. Create a Budget

Nonprofits use budgets to forecast revenue and expenses. They are a vital tool for nonprofit boards and staff. Budgets help organizations stay on track to reach their financial goals, provide transparency to donors, and ensure that every dollar makes a difference.

Nonprofit budgets typically break down revenues into categories based on funding sources and operating costs into program, fundraising, and administrative cost functional areas. This enables organizations to see where they are strongest and where to focus more energy.

Creating a capital budget for construction projects and other big, one-time spending that usually takes more than a year to pay for is also essential. This will help you plan for unforeseen expenses and avoid running out of cash before completing the project. Nonprofits should also include a “known risk” or “what if” budget. This document helps nonprofits prepare for the worst-case scenario to make sound decisions quickly and move forward with their mission.

4. Create a Donor List

The key to raising money for your nonprofit is properly tracking your donations. Nonprofits should use financial management software to ensure their records are accurate and consistent with IRS guidelines. This helps them satisfy compliance obligations and avoid hefty penalties.

Reviewing your donor lists to identify major donors and other high-level supporters is a great starting point. This can be done by placing past giving patterns, using prospect research to find potential donors who demonstrate warmth toward your cause and capacity for more significant donations, or focusing on business affiliations to reach potential donors in the corporate world.

Donors want to know that their money is being handled responsibly and that the nonprofit they’re supporting is working toward making a difference in the world. With rigorous accounting practices, your donors will trust that you are spending their money wisely and will be able to continue doing good work. They may even be inspired to support other nonprofits, too!

5. Track Your Donations

As a nonprofit, you must carefully document charitable donations and provide donors with the proper documentation for tax filing purposes. Whether your donation is a jacket to a homeless shelter or a laptop for an NGO, the IRS expects you to have reliable documentation of what you donated and its value.

You can use a spreadsheet to track your yearly donations and add them up at tax time. For more complex needs, you can opt for software designed specifically for nonprofits.

This accounting platform organizes your donations into different funds to ensure donor restrictions are respected. It also helps with traditional accounting and invoicing requirements. If you need more time to be ready to invest in a software solution, free tools are available to keep your records organized. For example, you can designate a folder for receipts and photos and update them regularly throughout the year.

6. Track Your Grants

As a nonprofit, you are not required to pay taxes, but if you do, you must follow specific guidelines. For example, your nonprofit can’t profit from activities unrelated to your initial purpose and must not engage in political campaigning. In addition, you must pay your employer’s portion of Social Security and Medicare and sales tax if your organization sells goods.

A CPA who specializes in nonprofits can help you save time, make informed financial decisions, and stay compliant. They can also help you understand your finances and handle unique accounting challenges.

A CPA for a nonprofit is different from a bookkeeper because a CPA has a higher level of education and specialization and can provide a more detailed analysis of your finances. They can also help you know whether your nonprofit needs an independent audit. Additionally, they can recommend qualified firms that can conduct the audit.

Alex Carey
Alex Carey is working as a Content Marketing Specialist at The Technoverts. He loves to write and share content related to the latest technical research. He is also a soccer lover.

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