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How to Avoid These Common Nonprofit Accounting Mistakes

September 11th, 2014 No comments

Nonprofits are dedicated to pursuing altruistic missions aimed at serving the public, but that doesn’t stop many from falling victim to common accounting mistakes. According to a 2013 study by Jeffrey J. Burks at the University of Notre Dame, nonprofit organizations make almost twice as many accounting errors as for-profit companies of similar size.medium_6757849129

Easily avoided mistakes (such as data entry errors) can derail an entire nonprofit’s mission. An improperly categorized expense or a mismanaged account may attract attention from the IRS and cause donors to lose trust in your organization.

Here’s a list of some of the most common nonprofit accounting mistakes, along with some pointers on how to avoid them.

Data Entry Errors

A misplaced zero can wreak havoc on a financial report. Small errors have a way of coming back to bite you, so make sure every entry is double checked every time. Compare accounts with bank statements and maintain the utmost attention to detail, even if you are using accounting software that does many operations automatically.

Failure to Follow Appropriate Accounting Procedures

Every nonprofit organization, big or small, should have clear and effective accounting procedures that all employees are required to follow to the letter. If any procedures are ignored or followed improperly, it can confuse the IRS and set you up for an audit.

For instance, implementing a single platform for your nonprofit accounting software with automated workflows can ensure that policies on purchasing and expense processing are enforced, while maintaining audit trails.

Lack of a Complete Review Process

Without a robust review process, it’s easier for small mistakes to fall through the cracks. Make sure every accounting transaction is reviewed by a second pair of eyes at the very least.

Relying on Volunteers and Untrained Personnel

Budgeting restrictions can make it difficult to hire professional staff for your nonprofit organization, but accounting is one of the areas where you shouldn’t rely on volunteers or untrained personnel.

Accurate and complete accounting from a professional accountant helps you avoid costly errors. It will also help your fundraising efforts, since donors will be more likely to trust you when you have professional and accurate financial reporting in place.

Improper Categorization of Revenues and Expenses

Unless you categorize every single source of revenue and every expense, it’s difficult to determine how donations and grants are being used. Many donations are restricted, which means they have to be used in for specific purposes. Categorizing all revenues and expenses allows you to show a complete paper trail for all money flowing through your organization.

Losing Track of Petty Cash

For most nonprofit organizations, having some cash on hand is necessary when small expenses pop up (such as buying office supplies as the need arises). However, a petty cash fund needs to be as meticulously monitored as any other expense.

Make sure only a few employees have access to petty cash, that it’s under lock and key at all times, and that you keep receipts for all transactions.

Avoiding These Errors Helps Your Nonprofit Achieve Its Overall Mission

When you avoid simple accounting errors, you help your nonprofit achieve these three objectives: save time and money, help build a relationship of trust with donors, and give managers and board members the information they need to make strategic decisions.

Of course, the ultimate goal is to achieve your organization’s mission, and that is what nonprofit accounting is all about.

Photo courtesy of: 401K