Maximizing Social Impact Through Effective Financial Accounting in Nonprofits

Nonprofits are just like any other business. They have money that needs managing. Budgets that need to be set. Books that need to be kept — and kept meticulously. Managing these finances can be difficult for the layperson.

Financial accountants make the job much easier. In this article, we take a look at the benefits nonprofit organizations will receive from a financial accountant.

What is Financial Accounting

Financial accounting is essentially a story. A financial accountant takes a sweeping look at your financial numbers and uses them to generate highly detailed reports about how your nonprofit is doing. These reports can be used internally to strategize and plan for the future.

They are also often used by third parties to assess risk. For example, a creditor may wish to see a financial accounting report before issuing a loan. An investor may wish to see a financial accounting report before providing capital. And so on.

Managing Financial Records

Acquiring a financial accountant means better record management. They will understand what information is relevant. How to store it. When said information is ok to dispose of, and what to use it for.

These records can be important in the context of maintaining your tax-exempt status, but they can also just be valuable touchpoints for evaluating your nonprofit's standing. You can’t serve the community very well with poor financial organization.

Better Budgeting

Like any accountant, a financial accountant is also excellent at helping you establish a budget. Often, this involves creating budgetary forecasts. The accountant takes a look at what you’ve had coming in and going out in recent years. Using that information, they make a detailed financial forecast that can help you plan out when to spend money.

For example, as a nonprofit, you may experience the majority of your donations around November and December, when people are feeling charitable. Those donations may slow to a trickle in January and February as people take a spending break. You’ve sensed these things before, but with a budgetary forecast, you can get a more detailed understanding of what to expect.

The report may indicate that the November and December donations can be used to hold you over in January and February. Then in March when things start to pick up again, you can start looking at making a bigger financial move.

Internal Auditing

Ah! The favorite word of any business. Audit. But notice we said internal. Internal auditing is a good pre-emptive measure that helps to ensure there won’t be any surprises if the IRS ever comes knocking at your door. And they probably will.

Internal audits also are just a general catchall for any financial inconsistencies in your record keeping. Often these will be harmless. A sum went to this account when it should have gone to that one. A payment was made but not processed. And so on.

Regardless, you need to have an authoritative understanding of your finances. A financial accountant can help make sure that happens.

It Lets You Focus on the Stuff You Care About

You didn’t start a nonprofit because you wanted to play bookkeeper. You did it because you want to serve your community. Now, any business owner quickly finds that they wear many hats. You have to—particularly if you don’t want to spend a fortune outsourcing.

But you’ll also learn that there are some jobs you can do yourself, and some that are better left to the professionals.

Accounting falls decidedly in the latter category. As you hire someone to provide you with all of the benefits described above, you’re allowed to focus more on the things that brought you to the point of opening a nonprofit in the first place. Serving your community. 

The Psychological Experience of Running a Nonprofit

People who start nonprofits are businesses overs. This cause-centric world often feels at least a step or two removed from American capitalism. No profit? J.P. Morgan would roll over in his grave! But at the end of the day, nonprofits operate in the same crowded and complicated marketplaces as any other industry.

There is a psychological experience that most small business owners go through at some point. They call it “imposter syndrome.” The idea that everyone in the room knows what they are doing except for you.

Basically, it’s a combination of self-awareness and insecurity. An uncomfortably high-school-like feeling. You know that your knowledge is limited. That’s a fact. But you assume that everyone else knows exactly what to do. That’s not a fact.

Neil Gaiman has a famous story about imposter syndrome. He was invited to a social event for people who have made significant contributions to the world. He felt uncomfortable with this concept right from the start. His books sold well, sure. But had he made a “significant contribution to the world”?

On the first evening the event put on a cocktail party. Gaiman was chatting with a gentleman, making small talk about how they happened to share a first name. Finally, the man sighed.

“I don’t know what I’m doing here. All of these people—they made things, you know? I just went where they sent me.”
Gaiman paused for a moment. Finally, “Perhaps, Neil. But you were the first person to go to the moon. That has to count for something.”

Ahem. Your point?

In the context of running a not-for-profit, imposter syndrome, or the broader anxiety that comes from striking out on your own, can be useful if understand how to channel it correctly.

Fear is an evolutionary response to negative stimulation. It’s a trigger warning. This might be bad. Be careful. Because humans have evolved into self-awareness, that “warning” goes off unprovoked all the time.

Learn to listen to and interpret it, however, and it can be used to your benefit. This is especially true in the context of accounting work. Amateur bookkeeping is possible, and even appealing for nonprofits that are protective of their tight budgets.

And yet the old saying persists. It takes money to make money. An effective financial accountant can provide well-informed budgetary input that not only puts you right in a tax perspective but also helps you to plan well into the future. It’s well worth the money you pay for it.