Accounting and financial reporting is vital to any business or organization’s operations. It is especially crucial for nonprofit organizations as it bolsters their fundraising efforts, without which they cannot achieve their purpose of doing good for people, society, and the environment. Fund accounting is one of the ways organizations can take control of their financial management, enhance financial reporting, and maintain financial health, empowering them to better serve their mission.
This article explains what fund accounting is. It also explores how it can benefit nonprofit organizations while offering a list of best practices to get started.
Fund Accounting Explained
Nonprofits, churches, and multiple charitable organizations commonly use fund accounting. It categorizes funds and donations based on their source and intended purpose. This practice helps nonprofit organizations effectively allocate funds and keep better track of how they are contributing to the organization’s overall success.
This accounting system also helps nonprofit organizations follow all restricted and unrestricted funds guidelines. Suppose a donor stipulates that their funds only be used for one specific project or purpose. In that case, fund accounting helps ensure the nonprofit complies with these donor restrictions and legal obligations.
Each fund has its separate revenue, expense report, and balance sheet in fund accounting, providing the donors with a detailed view of how and what the organization spends its money on.
Benefits of Fund Accounting for Nonprofits
Fund accounting services provide an advanced level of detailing and organization. This, in turn, offers a variety of advantages and benefits to nonprofit organizations, especially in NPO financial reporting and fundraising. Let’s explore some of these benefits and how they could contribute to your organization’s success.
Helps maintain accountability and transparency
Fund accounting provides a categorized breakdown of how your organization uses funds and donations. It highlights the specific program, workshop, or operational purpose your funds support. This level of detail creates transparency that donors appreciate since they can track how the funds are being used. This transparency also helps keep you and your organization accountable. It ensures that you are using your funds and donations effectively and strategically.
Provides a clear view of the nonprofit’s performance
With fund accounting, information is organized to highlight a nonprofit organization’s total funds, their allocation, and their specific purpose. Since this accounting process also provides individual reports and balance sheets for each fund, it offers a clearer view of your organization’s nonprofit budgeting practices and whether the funds are being used effectively. This practice can significantly benefit your NPO financial reporting and fundraising efforts by providing current and prospective donors with a clear view of your organization’s performance, fostering trust, and encouraging them to donate to your cause.
Ensures legal and operational compliance
Incorporating fund accounting into nonprofit accounting practices helps maintain legal and operational compliance. This method of accounting is GAAP compliant and helps ensure that all restrictions and standards put in place by the donors are met. The increased transparency and accountability that fund accounting offers also reduces the likelihood of financial mismanagement or fraud, providing a sense of security to nonprofit leaders and financial managers.
Enhances fundraising efforts
Fund accounting is commonly used to provide leaders with insights that enhance their financial decision-making. In the case of nonprofit organizations, this also extends to donors and grantors. Fund accounting can bolster fundraising efforts by providing a clear, transparent view of the organization’s funds, where they are being used, and their impact on performance. When approaching donors or grantors, fund accounting helps present your organization as transparent, trustworthy, and proactive. As a result, you will stand out from the crowd and are more likely to meet fundraising goals, giving nonprofit leaders a sense of peace of mind.
Getting Started with Fund Accounting
Follow these simple steps to establish your process:
- Create subcategories for your funds depending on whether they are restricted or unrestricted. You can further categorize restricted funds based on your donors’ stipulations. Be sure to label each fund to streamline your financial reporting.
- Assign a fund manager with the skills to manage multiple funds, keep track of the various donor restrictions, and generate accurate financial reports, statements, and balance sheets for each.
- Combine your cash accounts and allocate individual transactions to different funds. This will help simplify your financial management and reporting practices.
The Final Word
Accurate and efficient financial reporting and accounting play a vital role in the success of a nonprofit organization. Since the mission of these organizations is the betterment of people, society, and the environment, nonprofit accounting often faces higher scrutiny than for-profit accounting. With support from experts in fund accounting services for nonprofits, you can streamline your accounting and financial reporting, enhance your fundraising efforts, and continue your noble mission of making the world a better place.
Want to know more about nonprofit accounting? In addition to HR, benefits, recruiting, and payroll through its PeopleOps, Escalon’s Essential Business Services include FinOps (CFO services, taxes, bookkeeping, and accounting) and Risk (business insurance). Talk to an expert today.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal, or accounting advice in this article. If you would like to engage with Escalon, please contact us here.
