When nonprofit leaders call or are referred to me, the first question I often hear is: “What are the best financial/accounting practices for nonprofits?” My usual reply is honest and direct: “Where should I begin and how much time do you have?” A complete answer can take hours, but there are high-impact practices that every nonprofit leader should adopt right away. Below I lay out the top, practical steps I advise executive leaders to prioritize. These are written for busy executives who need clarity, not theory.
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1. Set the tone at the top. Leadership shapes culture.
If the executive team and board treat financial accuracy and transparency as priorities, staff will mirror that behavior. As a nonprofit leader, your words and actions signal what matters. Make financial stewardship part of staff and board conversations.
2. Focus on your role.
Don’t be the accountant. Your job is to lead the organization, not run the ledger. Hire or outsource accounting tasks and ensure accuracy and completeness of the accounting records. For many small-to-mid-sized nonprofits, outsourcing provides them with an accounting team, without the higher cost of hiring and training multiple staff persons. Also, outsourcing can be a part of your plan for continuity and capacity. Outsourcing to a firm that provides team-based coverage rather than relying on one person will allow for operations to continue if an employee is absent.
3. Hire people who understand nonprofit accounting.
Nonprofit accounting has unique needs: fund accounting, restricted vs. unrestricted funds, grant compliance, functional allocations and more. When vetting CPAs or bookkeepers, prioritize nonprofit specific experience over the lowest hourly rate. A wrong hire can create costly problems later.
4. Pick software that fits your needs — and people.
Choose accounting software that supports grant tracking, fund and functional reporting, and audit trails. Expensive isn’t always better; usability matters. Avoid systems so arcane that only one person knows how to run them. Think ahead to contingencies or succession. Your system should enable multiple staff to step in when needed.
5. Understand your reports and demand clarity.
Nonprofit leaders must be able to read the statements of financial position, activities, cash flows and functional expenses. If those four reports are not present every month or don’t tell a clear story, say something. Request the standard nonprofit reports and any other reports you would find useful in decision making. If accounting isn’t your thing, you are not alone. Get training or ask your accountant for a walkthrough. A consistent set of monthly reports and key performance indicators helps the board and leadership make timely decisions.
6. Audit readiness is a year-round practice.
Treat audits and reviews as ongoing processes. Document policies, retain receipts, reconcile accounts monthly and maintain timely accruals. Trying to “magically” prepare at year-end invites material misstatements. If your organization reports on an accrual basis, use it consistently throughout the year.
7. Document everything.
Good documentation is nonnegotiable. Keep receipts for every purchase, retain written donor commitments of pledges (email suffices), and maintain a clear file for grants and contracts. Not documented means not done.
8. Adopt written financial policies and review annually.
Start with IRS-recommended policies and expand to include general policies, such as capitalization thresholds and internal control processes. You will need other policies as you grow such procurement processes and investment and spending guidelines. Review your policies annually and update as needed.
9. Design internal controls to prevent and detect problems.
Nothing will take the place of a proper segregation of duties. Limit any individual’s control over entire transactions and set up checks and balances that make fraud or errors harder to make or hide. A proper segregation of duties involves three persons assigned in some capacity for every accounting process.
10. Make the board an active financial partner.
Every board member shares fiduciary responsibilities. Encourage the full board to engage, not just the finance committee. Invite the CPA who performs the audit or review to present the financials and report any findings or red flags. Ask the CPA who prepares your Form 990 to walk the board through the key information in the 990; it’s long and complex, and there’s no shame in asking for explanations.
11. Prioritize timeliness and accuracy.
Aim to close the prior month’s books within 3 to 4 weeks. Annual closes may take longer but typically should be complete within 6 to 8 weeks of the fiscal year close. Closes not made in a timely manner indicate understaffing, process gaps or skill shortages. Timely and accurate financials allow for prudent decision making.
12. Know reporting and compliance deadlines.
State filings, grant reports and the Form 990 have different deadlines and requirements. Build them into an annual compliance calendar and assign ownership.
If you’re a nonprofit leader looking to build immediate momentum, start with this condensed checklist to get started:
• Confirm your accounting department is set up for success with software and staffing.
• Ensure bank reconciliations, month end processes and financial reports are current.
• Consider risk areas and design internal controls to ensure proper segregation of duties for key processes.
• Develop written financial policies; start with the five IRS recommended ones. (See page six of IRS form 990)
• Engage your board by scheduling a financial literacy training and invite your CPA to present.
• Create a financial reporting calendar for reporting and filing due dates.
These key elements will reduce risk, improve decision-making and free you to focus on what matters most, your mission.
My upcoming book, “Nonprofit Lifecycles: Finances Made Easy for Board Members,” provides a practical guide with tools to help boards and executives fulfill their financial stewardship responsibilities. If your board needs a financial policy checklist or tailored training session, I’m happy to help. Contact NPO Accountants for more information.
Author: Lisa Stevenson, MBA, CPA, is the managing partner and founder of NPO Accountants, a firm that works exclusively with nonprofits. She and her team provide consulting services, monthly accounting support and Form 990 preparation.
