When you first start working for your nonprofit, you are most likely passionate about the cause. You are driven by an urge to change things, change smaller communities and to make the planet a much better place. Yet as gratifying as this particular endeavor is, there is one constant in operating a nonprofit. That is managing your finances. Non profit accounting is essential for your organization’s sustainability and transparency.
In case you operate in a nonprofit as an executive, a board member, or a staff member, you should know accounting and bookkeeping in this market. These processes manage the funds raised, track expenses and report on accuracy.
How Nonprofit Accounting Differs from Regular Accounting
Nonprofit accounting is quite different. Where businesses look for profit, nonprofits look for accountability. Your donors and grant providers want their contributions to be utilized for a particular purpose and it is your duty to make that happen. This explains why most nonprofits in India use fund accounting.
Fund accounting lets you separate your cash into “funds” based on the source and intended use. For instance, some funds might be capped on particular projects while others may be more flexible. Usually, nonprofits manage:
- Restricted funds: These can be used only for the donor-specified purposes. For example, a donation could be for creating a school, and you can not use it for other things.
- Unrestricted funds: These may be used more freely for general organization operations.
- Temporarily restricted funds: These are funds which are restricted for some time or until specific circumstances are met before they start to be unrestricted.
Key Financial Statements for Nonprofits
As a nonprofit, you need to document all financial transactions accurately and you’ll need to make some financial statements frequently. The most important are:
- Statement of Financial Position (Balance Sheet): It is your nonprofit’s financial picture at a particular time. It lists your assets, liabilities and net assets. It basically shows what your nonprofit owns and owes. You want to have more assets than liabilities, and thus have positive net assets.
- Statement of Activities (Income Statement): This document tracks your expenses and revenue over time to show your nonprofit made or lost money over a particular period. It shows you exactly where your income has been spent and in which areas you must adjust.
- Statement of Cash Flows: This statement tracks cash movements in and out of the organization. It is essential to determine if you have plenty of cash to cover your present obligations, cover costs and go on operating smoothly.
Each one of these statements will enable you to make sound financial choices regarding your nonprofit.
Best Practices for Nonprofit Accounting
These are good practices to help your nonprofit stay financially healthful and transparent:
A) Regular Budget Reviews
Your nonprofit’s budget is its roadmap. You should prepare an annual budget which contains anticipated revenue from grants, fundraising and donations, and costs for applications, wages and overhead. After the budget is established, you need to review it frequently – maybe each month. This allows you to evaluate actual spending & income against your budget and make adjustments as necessary.
B) Establish Strong Internal Controls
Even in case your nonprofit is small, you must establish strong internal controls to stay away from errors and fraud. This may include:
- Separating financial responsibility so no one person controls all financial procedures. For instance, the person handling donations shouldn’t be making profits using that money.
- Regularly auditing your financial records for reliability and transparency.
- Tracking and managing your accounts with software, making it simpler to create reports and keep records.
C) Don’t Overthink About Overhead Costs
In India, most people still rate nonprofits on how much they spend on Overhead (salaries, office costs, etc.). Yet these costs are essential for the nonprofit to work properly. Therefore do not hesitate to invest in resources like competent staff, ample office space and technology. What matters is your nonprofit making a difference, not the overhead to program spending ratio. Always report your overhead transparently to donors so they know the way it supports your mission.
D) Hiring or Outsourcing Your Accounting
Many Indian nonprofits struggle to hire an in-house accountant or outsource their bookkeeping. The right decision will depend on your nonprofit size and your finances.
- In-house accounting: When your nonprofit has several projects and lots of transactions, a full time accountant could be the ideal choice. This person can concentrate on running your finances and getting everything done right.
- Outsourcing: For smaller nonprofits, outsourcing accounting and bookkeeping might be more affordable. Outsourced firms can offer in depth knowledge of nonprofit accounting – often for less than a full time accountant. They may even help them meet India’s tax and regulatory requirements for nonprofits.
Final Thoughts
With the right tools, nonprofit accounting need not be a manual, tiresome process. Look for accounting software for nonprofits that supports fund tracking and donor management.
Software choices like QuickBooks for Nonprofits, Tally or specialist tools like Zoho Books can make life easier, compliant and help save time.
The finances associated with a nonprofit in India call for attention to detail and accountability. Knowing the major differences in nonprofit accounting, using essential financial statements and following best practices can keep your business transparent, effective and financially healthy. Whether you employ an accountant or outsource bookkeeping, your end goal should be sound financial systems in place for your nonprofit.
For expert accounting and bookkeeping services for your NGO, consult StartupFino for financial management today.
Read also: Integrating Artificial Intelligence in Accounting Practices
FAQs
What accounting does a non profit organization do?
Nonprofit accounting tracks, manages and reports on a company’s money with a focus on transparency rather than profit. It utilizes fund accounting to report income and expenses, separating restricted, temporarily restricted and unrestricted funds according to donor and project need.
What accounting technique is best for nonprofit organizations?
The best accounting technique for nonprofits is fund accounting, which tracks income and expenditures based on donor restrictions. This method ensures donations and grants are utilized for their intended purpose, improving financial accountability and transparency within the organization.
How to do accounting for NGO?
Accounting for an NGO uses fund accounting to classify donations into unrestricted and restricted funds. Regular financial statements including balance sheets, income statements and cash flow reports should be ready and NGOs have to maintain records of donations, grants and costs for transparency and compliance.
Do NGOs use accountants?
Yes, generally NGOs have accountants or bookkeepers handling their finances. A few bigger NGOs employ full time accountants; smaller organizations outsource accounting services to firms which focus on nonprofit accounting, to be economically accurate and in compliance with regulations.
