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What is an efficient way for small nonprofits to run financial operations?

Accounting consultant Shelley Parnes discusses the roles and processes required for small nonprofits to be successful in managing its financial operations.

To answer this question, it is helpful to review the accounting functions that must be performed:

  • Cash disbursements
  • Cash receipts
  • Payroll
  • Cash management and projections
  • Month-end closing including recording journal entries, accounting review and account reconciliations
  • Financial reporting
  • Budget preparation and reporting
  • Grant reimbursements and reporting
  • Annual audit and IRS form 990 assistance to the outside CPA firm
  • 1099/1096 preparation

Other functions are also commonly assigned to the financial operations in a small nonprofit. This is done because other staff do not have the time or capability to perform them. Furthermore, in many small nonprofits, the accounting functions alone do not warrant the hiring of a full-time staff person. These additional functions may include:

Human Resources:

  • Hiring, terminations, resignations
  • Benefits
  • Compliance with regulatory requirements

Information Technology:

  • Maintenance and upgrade of computer systems including hiring and directing IT contractors

Office Management:

  • Responsible for the maintenance and upgrade of all office equipment and vehicles
  • Order and maintain office supplies
  • Risk Management
  • All insurance matters

How to ensure all of the above functions are adequately covered depends on many factors. Please note the size of the organization’s operating budget alone may be a poor predictor of what is required. Here are some factors to consider:

Volume of transactions—of course, the number of receipts that are deposited, disbursements paid and employees on staff will have a great impact on the time requirements of the accounting function

Source of funding—unrestricted contributions are much easier and quicker to account for than restricted contributions and government funding

Efficiency of accounting procedures—using time-saving procedures (such as scanning deposits rather than taking deposits to the bank, or preparing reports from the accounting software rather than creating reports from scratch using Excel worksheets) will have an impact on the time requirements of the accounting function

Accounting software—using accounting software, such as QuickBooks, that is easy to use and designed for non-accountants to use, will allow for someone with less accounting expertise to use than more complex accounting software

The condition of the financial records (both computer and physical)—if the financial records need improvement, the accounting function will be more time consuming. Additionally, someone with more accounting expertise will be needed to make the necessary improvements

Reporting requirements— including those from outside agencies and the Board, may add to the complexity and time requirements of the position

Involvement of the Board Treasurer—some Treasurers of small nonprofits may provide additional support to the financial operations above the normal Treasurer responsibilities

Segregation of duties—a key component of effective internal controls—should also be considered in structuring the financial operations. In general no one person should:

  • Initiate a transaction
  • Approve a transaction
  • Process or record a transaction
  • Reconcile balances
  • Handle assets
  • Review reports

For many small nonprofits, segregation of duties may not be possible.

With all this in mind, here are some ways to structure the financial operations:

Position time requirements:

  • Full-time employee
  • Full-time employee with additional part-time clerical help from another employee (such as a receptionist), a part-time employee or an intern
  • Part-time employee
  • Part-time independent contractor (such as a bookkeeper or accountant)
  • Any of the above along with a part-time contract degreed accountant

Position qualifications:

  • Degreed accountant
  • Non-degreed accountant who has accounting experience
  • Someone with no accounting degree or little or no experience, but who is willing and able to learn from an experienced accountant

Typically, having a full-time degreed or an experienced accountant on staff is too expensive for most small nonprofits. The most common structure I have seen in small nonprofits is to hire a full-time employee with a little accounting experience plus use a part-time contract degreed accountant anywhere from two to sixteen hours a month to perform such work as account reconciliation, preparation of financials, and year-end activities and provide accounting technical support to the employee. The benefit with this arrangement is that most of the accounting work can be done with the staff person. The organization is only paying for an accountant to do the more challenging accounting work. This arrangement also enhances segregation of duties as there is another person involved in the accounting function.

Another common option is to outsource most of the accounting functions to an outside contractor who is a bookkeeper or an accountant. Typically, an employee of the organization will initiate and approve of all transactions and the outside accountant will record all the transactions in the accounting software. This is a good option because it is likely the work will be done more accurately and efficiently by someone whose specialty is accounting. Also, it will enhance segregation of duties as there is another person involved in the accounting function.

In my opinion, one thing that should be avoided is having the Executive Director perform such accounting functions as processing and recording transactions. While the ED performs such functions, he/she is not available for functions that are a much better use of his/her time, such as program work or fundraising. Also, segregation of duties is usually significantly weakened since the Executive Director is also typically involved in approving accounting transactions and reviewing reports.

Shelley Parnes is a CPA with over 20 years of accounting experience, providing independent accounting and consulting services to nonprofits and small businesses.

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