Top 5 Accounting Hurdles for Nonprofits & How to Clear Them

If you work in a nonprofit environment, chances are high that it was the nature of the work or the prospect of making a positive impact that drew you to it. Equally likely: you probably didn't get into it for the love of managing payroll, dealing with all sorts of financial or accounting challenges for nonprofits, or find the month-end close particularly rewarding. Nevertheless, every nonprofit needs to keep the money flowing every bit as much as a for-profit organization does — which means that however you feel about it, you can't ignore the importance of effective and competent nonprofit accounting.

When your work is mission-driven or meets an important unmet need in your community, the day-to-day realities of keeping it running can feel particularly incongruous. Moreover, nonprofits operate in a set of unique circumstances that can further complicate the process, turning common accounting challenges into quagmires that require the attention of a full-time accountant whether you have the resources to bring one on or not.

Today, we're taking a closer look at the main challenges for nonprofits when it comes to bookkeeping and accounting — and exploring solutions you can deploy so you can to get back to making a difference.

What is Non-Profit Accounting: The Basics

At its core, nonprofit accounting serves the same purpose as for-profit accounting does: it literally accounts for the money you're bringing in and how you're spending it. It's important for the records generated by this process to be up-to-date and accurate. And because you're answerable to multiple stakeholders along the way, the reports you use to convey your overall organizational financial health should reflect that.

So, what's different?

Well, nonprofits face different demands on their time and resources than a for-profit business will while being granted certain concessions — tax exempt status, for instance — than their profit-driven counterparts. Donors might place restrictions on how, where and when their contributions can be used, for instance, while compliance watchdogs in the government and elsewhere steward public interest and trust by establishing and enforcing accounting rules unique to nonprofit entities.

For this reason, for-profit businesses often use a "standard" accounting method, while the accounting method most nonprofits use fall under the label of "fund accounting". Fund accounting requires a different approach, different tools and different processes.

Current Issues in Nonprofit Accounting

Like every other industry and sector, nonprofit organizations are navigating the realities of an economic recession and everything that entails, including rising costs, falling revenue and lean labor conditions that exacerbate both. In fact, a recent survey conducted by professional services firm FORVIS found that 35 percent of the nonprofit organizations they surveyed considered the current economic downturn their most significant challenge.

Read more: Recession Proof: How to Harness the Power of Outsourcing to Thrive Through Uncertainty

Perhaps due to that downturn, 68 percent of those nonprofits are experiencing increased demand for their services, offerings and programming, 50 percent are having difficulty meeting that demand due to staffing shortages specifically, and 78 percent of all respondents are currently trying to fill staffing vacancies. But by far what nonprofits stuggle with most — the most pressing challenging nonprofit organizations said they were facing — was "Rising Operating Expenses".

So much of what nonprofits will find challenging this year will come back to this dual resource gap of money and expertise, even when the recession eases up. Those core challenges will contribute to proximate headaches, like:

Minding the GAAP: Trouble with Timely & Accurate Financial Reports

Both nonprofits and for-profit organizations are expected to adhere to the generally Accepted Accounting Principals (GAAP) set forth by the Financial Accounting Standards Board (FASB). A major component of GAAP-compliant accounting is accurate and timely recordkeeping, and for nonprofits, the Internal Revenue Service (IRS) mandates an even higher standard to help ensure public accountability and provide transparency to donors.

Read More: Accounting Reporting Challenges (& How to Fix Them)

That means that nonprofits must regularly complete a standard set of universal documents that help create a complete financial picture: assets, expenditures, liabilities and budgets must all be accounted for in statements that are prepared to specifications unique to nonprofits.

It's easy to see why this kind of recordkeeping — which must meet a higher standard to stay compliant and provide transparency and therefore requires extra time and attention — can be a challenge for nonprofits. Their expertise is much more aligned to the mission at the center of the charitable work they do, not bookkeeping, which can make the task overwhelming to say the least.

Challenges Around Accounting for In-Kind Donations and Grants

Nonprofits draw income from different sources than for-profit organizations. According to Abila's Nonprofit 2023 Trends & Insights study report, services and fees, grants, fundraising and investments each represent about a quarter of a nonprofit's annual income.

Grant funds are a boon to nonprofit organizations, but they also present a significant hurdle: they're often limited to a certain type of expenditure, have application periods without specifying a year-end and become receivable on the grant-provider's timeline, not the nonprofit's. Tracking won grants, receiving them in a timely fashion and accounting for their allowable application means managing a lot of moving parts and that's awfully time-consuming.

An extra wrinkle? For many nonprofits, in-kind donations are absolutely crucial. Donors and volunteers offer up their time, services and physical goods to help nonprofits meet their programming and resource goals, and each and every one must be identified, reported, assigned a value and accounted for. The process and controls that make this possible can be complex. It's a significant hurdle for nonprofits to clear and managing it all requires a skilled accounting professional or investments in expensive accounting software technology.

Taxes are Trickier for Nonprofits & Audits are Tougher, Too

If there's a common thread that runs through nonprofit accounting tasks and their associated challenges, it's accountability. It all comes down to a need to preserve public trust, donor money and protecting the populations nonprofits serve. Nonprofits are answerable to the government and yes, even the IRS, despite being tax-exempt.

Exemption from taxes allows nonprofits to divert a larger share of the dollars they work so hard to raise toward their mission, but it also requires meeting a certain set of operating standards and being able to prove that they're still eligible each year.

This means filing an annual 990 return form with the IRS that accounts for exempt and non-exempt activities for the year, compliance and governance and any compensation paid to employees. And yes, nonprofit organizations are responsible for meeting payroll tax obligations just like their for-profit counterparts. Nonprofits may also be responsible for sales tax and other state or federal obligations depending upon how they operate and where they operate from.

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Audits and compliance checks are also part and parcel of nonprofit work and can be conducted by everyone from the IRS to charity watchdog groups. To keep the auditing process from consuming valuable time and attention, nonprofits need to be prepared to provide accurate and up-to-date records that demonstrate compliance and internal controls.

Even when you've accepted audits as a fact of nonprofit work, they can be stressful and represent a major time sink. An experienced CPA can handle the heavy lifting if you have money in the budget to bring one on — if you can find one, of course. Which brings us to one of the biggest weaknesses in nonprofit finance functions.

Accounting Resources for Nonprofits, Talent Challenges & Knowledge Gaps

Nonprofits and charities know how to stretch a dollar and make the best use of every last volunteered minute of time. It's all about maximizing impact, getting creative and going all in on a mission that matters, specifically for undersupplied services to people that live anywhere from halfway across the world to just down the street.

One thing that makes the work so rewarding is that for practically every cause or mission resonates with someone, and resonates enough to draw donations in dollars and delivered expertise. It's work to connect with that community, and it must be done outside of the day-to-day labor that's core to the cause. There's no guarantee that the resources required to meet even the year's programming and growth goals will be readily available, to say nothing of stocking the cupboards for "nice-to-have" initiatives or improvements like automated accounting software or accounting talent that's already hard to come by.

That leaves a lot of nonprofits with gaps that complicate already complex systems for accountability, transparency, stewardship and strategy.

More Stakeholders Make for Higher Stakes

Nonprofit work depends on managing multiple relationships well over the long-term. There are the people who have places their faith and trust in your central mission, backed by their own money or time. Then there's the board of directors, tasked with financial oversight and strategy and often coming to the table with for-profit experience and differing managerial styles. There are the beneficiaries of the programming you provide and of course, multiple state, local and independent governing bodies and watchdog groups.

What all these stakeholders have in common is that they come to your organization invested in ensuring it will make the most impact. Whether that takes the form of supplying manpower, grant money, measuring nonprofit effectiveness or more transparency for donors will vary, and so will the way you manage those relationships.

It's worth the effort, of course and doing it well will protect your reputation, resources and work. Transparency and accountability that's backed up by accurate and up-to-date accounting of where your resource go is key, but being pulled in so many directions can take a toll on even the most dedicated nonprofit leader.

What's the Easiest Solution for Accounting Challenges for Nonprofits?

Rising to meet these challenges isn't just possible — it can be easier than you think. Many nonprofits end up navigating a learning curve that's simply too steep or taking a DIY approach that's either "good enough" but inefficient, error-prone and a source of major stress or falls well short of your nonprofit's needs. Sometimes the helpers need, well, help.

With Personiv, you can bring as few as a single bookkeeping or accounting professional into the mix, and move manual work like payroll and invoicing off of your accounting team's plate so they can focus on governance and compliance or work with one of our seasoned CPAs to get ahead of critical tax, audit and reporting requirements.

We source, train, develop and retain our talented accounting professionals for a dedicated extension of your team — often at cost-savings as high as 50 percent — because we know your hard-won fundraising dollars have more important work to do than data entry. See our pricing structure here, and get in touch today to see how we can help you clear these common accounting challenges affecting nonprofits across the globe … and more.