Archive | February, 2013

Why do so many nonprofits have problems with their accounting?

17 Feb

Here is a troubling observation: many nonprofits, certainly more than half, have problems with their accounting and financial reporting. I would further maintain that the real number of underperforming accounting departments in the nonprofit world is closer to 70% or 80%.

These problems manifest themselves in financial reporting that is often inaccurate, late, or not available at all. The for-profit world has its problems too, but not on this scale.

This is an important issue for the nonprofit sector to address. Most of the data that boards and executive directors rely on to run their organizations comes from their accounting departments. Data that is late, erroneous, or nonexistent will have a deleterious effect on decision-making. It hinders an organization’s ability to operate efficiently and effectively and thwarts the organization’s ability to properly execute and deliver on its nonprofit mission. All of this worries the funders of these organizations too.

Why is this problem so pervasive? In our work with hundreds of nonprofit organizations over the years, we see the following patterns repeat themselves over and over.

(1) Nonprofits have a remarkable propensity for hiring people who do not know accounting to do their accounting.

These nonprofits typically do not have sufficient funds to be able to pay a more qualified employee to get the job done. Or they may skimp when it comes to paying up for a qualified person in order to use these scarce resources elsewhere. But you know the saying: you get what you pay for.

There is also, however, a mistaken belief that all you have to do is sit a non-accountant in front of a computer with some accounting software and he or she can learn what they need to know in a few hours or days. The reality is that no matter what accounting software is used, if the user does not know debits and credits, he or she will not be able to properly support your organization as you try to fulfill your mission. Your accounting software, no matter how good, will not correct for bad data input. There is another saying for this: garbage in, garbage out.

(2) Accounting rules for nonprofits are more complicated to understand and to apply than for-profit accounting rules.

Nonprofit accounting rules regarding the recording of restricted funds and for handling multi-year grants are just two examples of rules with an added degree of complexity for a nonprofit organization. Your accountant or bookkeeper either knows these rules or they don’t. If they don’t know them, their ability to produce accurate financial reports is compromised.

(3) There is, in general, greater demand for financial data in a nonprofit environment, so expectations of your accounting department are greater.

All nonprofit organizations have a board of directors. Most also have some combination of finance committees, executive committees, development committees, audit committees, and investment committees. When these committees meet they need reports to look at, and many of these reports are financial reports that come from your accounting department. In addition, data needs to be provided with some regularity to funders, donors, contributors, lenders, and various government agencies. The organization’s internal department and program managers also need financial reports with comparisons to budget and other metrics with which to run their areas.

In addition, many jurisdictions around the country require nonprofits above certain sizes to have an annual audit. Even in jurisdictions without such requirements, many nonprofits have audits done anyway if their boards or outside funders require it, or because they consider it to be a good practice. If your organization receives federal funding above a certain threshold, it is required to submit to still stricter audit oversight.

In addition to all else, your financial information on Federal Form 990 is required to be publicly available.

Consider the implications of this informational demand on a $2 million nonprofit compared with a $2 million for-profit. The nonprofit has to crank out a high volume of accurate, timely information, usually in various formats and levels of detail, while following more complex accounting rules. The $2M for-profit is probably a single owner without all these committees, needs, and demands. He or she simply gets the information they need to run their business.  As a result, the nonprofit has a much greater need for a skilled accountant, or group of accountants, to keep its books.

Moral of the story: Jim Collins, author of “Good to Great,” says you need to get the right people on the bus. More specifically, if you want your accounting and financial reporting to be done right, you must get the right people with the right skills and the right experience.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

Can two sets of books be better than one?

3 Feb

All organizations, from start-up nonprofits to the biggest corporations, need to maintain a “set of books” for recording their financial transactions.  If one set of books is necessary, can multiple sets be better?*

I present here three true stories of nonprofits with two or more sets of books.  These organizations contacted our firm because they were unable to generate timely monthly financial reports and had difficulties preparing for their year-end audits.

In the first organization a staff member was given the responsibility to pay the bills and another staff member the responsibility to record deposits.  These two people got together and decided the best thing to do was to set up two separate files in their accounting software; one company file for bill paying and one company file for deposits.  Both staff members busily went about their work entering their accounting transactions in their separate files.  Lo and behold, not only were they unable to generate a financial report for the organization, they could not even tell how much cash they had in the bank.

Another organization delegated bookkeeping responsibilities for certain programs to several board members, one board member per program.  Each board member had a copy of QuickBooks installed on a computer at their homes where they recorded the receipts and disbursements for their particular program.  When we first met with these very nice people, they told us that they could not generate an organization-wide financial report from QuickBooks.  They thought they might need new software.

In a third example, the executive director was accustomed to maintaining financial records using Quicken.  When the auditors recommended that they switch to a more appropriate accounting package, the organization bought QuickBooks.  The executive director, comfortable with how to find information in Quicken, did not want to discontinue its use.  What was the ED’s solution?  Maintain two sets of books.  Most of the day-to-day transactions continued to be recorded in Quicken, but then the organization had one of their employees rekey all the data each month into QuickBooks.   Month-end journal entries, accruals, and payroll were posted directly to the QuickBooks version.  In neither place was there a complete record of all transactions.

All three organizations were puzzled as to why, if they were using computerized accounting software, they could not just “press a button” and generate month-end financials.  The answer by now is obvious: multiple sets of books made this impossible.  Why did they create multiple sets in the first place?  Because non-accountants were doing the accounting.

Moral of the story: having multiple sets of books is somewhat similar to three people driving a car where one person’s job is to steer the car straight, a second person is in charge of right turns, and a third handles the left turns.  Except in some special situations (see the asterisked comment below), keeping multiple sets of books is not recommended.  More generally, using non-accountants to do your accounting does not typically result in the best outcomes for your organization if your goal is to have timely accurate financial reports.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

* Referring to accounting data as residing in a “set of books” originated in the pre-computer days when organizations maintained their accounting records in an actual set of physical bound paper based ledgers, journals, and registers.  Computerized accounting software programs (for example QuickBooks) have replaced all of this paper, but the terminology remains (at least for now).  For-profit enterprises are sometimes said to keep two sets of books: one for their regular financial reporting, and one for tax purposes.  There are other legal reasons why a for-profit entity might maintain additional sets of books.  Nonprofits might also want to use more than one set of books if, for example, they have more than one legal entity.  Each entity may require its own set.

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