Why Nonprofits Outgrow Basic Bookkeeping and What to Do Next
ByWhen many nonprofits start, basic bookkeeping is all that is required. The focus is less on setting up robust systems and more on tracking the cash coming into and going out of the bank account. Account reconciliations might even be something done only once a quarter, or not at all. Updating the out-of-the-box QuickBooks Online setup, or basic chart of accounts, is often low on the priority list as the more mission-focused work is being carried out. In some cases, it might be unclear whether the organization operates on a cash or accrual basis, or a mix of both.
In the early stages, the accounting function does its job. Transactions are recorded, bank balances match the statements, and leadership has enough visibility to operate day-to-day.
Then slowly, over time, the organization begins to grow.
Growth often comes in the form of larger and more complex grants. Each grant is different, but many bring additional requirements for tracking expenditures, monitoring fund balances and, in some cases, completing an audit. New grants can often mean hiring more staff to help the program carry out its purpose. The organization’s mission expands as new programs gain traction or entirely new initiatives are launched. This is positive, and it shows the momentum and impact the organization can bring; however, it can introduce financial complexity that basic bookkeeping can’t handle.
As this complexity builds, you may realize their accounting processes have not kept pace with your growth. Soon, you may realize it is no longer just about whether the books are accurate, but “what story are the financials telling us?” Understanding restricted grant spending and unrestricted cash reserves on a monthly, or even weekly basis, becomes essential. Without the right structure, those answers are difficult to get and hard to trust. They are also difficult to communicate clearly to board members who rely on timely financial information to provide oversight and make informed decisions.
What to Do When Your Nonprofit is Growing
Leverage Current Tools
Tools like QuickBooks Online (QBO) have capabilities that often go unused when an organization is just starting out. Features such as classes, projects and locations can help track revenue, expenditures, and other resources by grant or program, providing a timely, clear financial picture. However, using too many can make reporting more complicated rather than more useful. When thoughtfully structured, these tools can provide valuable financial insights.
Processes and Controls
Segregation of duties can often be very difficult for small organizations to implement. Involving the board treasurer or finance committee in appropriate review and approval processes can add another layer of oversight when staffing is limited. Using existing tools more effectively, adding basic new tools and adjusting staff roles can also be surprisingly effective.
New Technology
New technology can also be a cost-effective way to modernize important accounting functions. Many nonprofits begin with checks or cash, but electronic payment systems can offer greater efficiency, stronger approval workflows and better documentation. Expense and receipt capture tools that integrate directly with the accounting system can also streamline the process of coding expenses to the appropriate programs and grants.
Complex Accounting
As funding increases, accounting becomes more complex. Grant tracking is no longer a simple exercise. Organizations deal with restricted grants, unconditional grants, and reimbursement-style grants, each with its own requirements and timing considerations. Payroll costs are often allocated across multiple programs or funding sources, which may require complex journal entries. For organizations using QBO Payroll, its built-in allocation capabilities can significantly reduce the time involved. Leadership also needs timely visibility into grant spending to stay within guidelines and maximize available funding.
Audit Requirements
As organizations grow, audited or reviewed financial statements might become required. These can often be overwhelming experiences for both newer and experienced nonprofits. Having the right tools, processes, controls and knowledge in place can help your organization feel more prepared and confident when going through an audit or review.
How CAS Can Benefit Nonprofits
Client Accounting Services (CAS) help bridge the gap between basic bookkeeping and a fully developed, high-functioning finance operation. At Kernutt Stokes, our CAS team can help build the financial foundation your nonprofit needs as it grows. That may include refining your chart of accounts, using classes and projects more effectively, and developing reliable reports that clearly show grant spending, unrestricted resources and overall financial performance.
We also look for practical ways to strengthen processes and controls, from establishing a consistent monthly close to introducing appropriate internal controls and technology. These improvements can reduce inefficiencies, increase confidence in the numbers and give your team more time to focus on the organization’s mission.
With timely, reliable financial information, nonprofit leaders and board members can better understand the organization’s financial story, make informed decisions and plan for the future. Stronger processes and well-organized records can also make year-end audits or reviews more efficient and less stressful.
If you would like to learn more about how we can support your organization, please contact our CAS team.