Nonprofit Accounting from the Ground up with Signature Analytics
Jason Kruger, President & Founder of Signature Analytics, joined the Nonstop Nonprofit podcast to discuss how properly-fitted accounting contributes to the success of your impact, where to start and pitfalls to avoid, and signals that’ll tell you it’s time to professionalize your finance functions.
Building a Solid Financial Foundation for Nonprofits
Money, budgets, funding, and accounting are all critical elements that contribute to the success of nonprofit programs and their overall impact. But when you’re a smaller nonprofit or just starting out, do you really need a CFO?
Jason Kruger brings a wealth of experience and insight into the financial needs of nonprofits. His novel approach allows nonprofits to build an accounting team and processes tailored to their specific needs, rather than overextending their resources prematurely.
Let’s dive into our discussion to get clarity on how properly-fitted accounting contributes to the success of your impact, where to start, pitfalls to avoid, and signals that indicate it’s time to professionalize your finance functions.
Importance of Financial Management in Nonprofits
Effective financial management is the backbone of any successful nonprofit organization. Properly managing money, budgets, funding, and accounting ensures that resources are used efficiently, obligations are met, and the organization remains compliant with various regulatory requirements. Smaller nonprofits often face the challenge of determining whether they need a Chief Financial Officer (CFO) or if there are more suitable, scalable solutions available.
Tailored Solutions for Nonprofit Financial Management
At Signature Analytics, we understand that every nonprofit is unique, with its own set of challenges and needs. Our approach is to provide customized accounting solutions that fit the specific requirements of your organization. Rather than adopting a one-size-fits-all model, we help nonprofits build their accounting teams and processes from the ground up, ensuring they have the right tools and expertise at each stage of their development.
Jason Kruger explains, “A lot of organizations have a bookkeeper or someone handling their accounting, focusing on tasks like paying bills, invoicing donors, managing cash flow, and filing annual 990s or tax returns. However, as these organizations grow, they realize the increasing importance of having good financials for decision-making and communicating with outside parties such as the board, banks, or donors.”
Key Financial Considerations for Nonprofits
1. Audit Requirements:
Understanding and complying with audit requirements is critical for maintaining credibility and trust with donors, stakeholders, and regulatory bodies. Regular audits ensure that financial statements are accurate and transparent.
2. Transparency:
Transparency in financial practices is not just a regulatory requirement but a cornerstone of building trust. Donors and stakeholders are more likely to support organizations that are open and honest about their financial health and use of funds.
3. Timeliness:
Timely completion of financial tasks prevents bottlenecks and ensures smooth operations. Delays in financial reporting or budgeting can lead to missed opportunities and erode stakeholder confidence.
Professionalizing Your Finance Functions
As your nonprofit grows, so do its financial complexities. Recognizing the right time to professionalize your finance functions is crucial. Some signals that it might be time to enhance your financial management capabilities include:
- Increased funding and donations
- Expansion of programs and services
- Greater regulatory and reporting requirements
- Need for detailed financial analysis and strategic planning
Jason highlights, “As organizations grow, they start to realize that the importance of having good financials becomes more critical. Decisions based on accurate financial data are essential for communicating with the board, applying for grants, and building donor confidence.”
The Role of Budgeting
Budgeting is foundational for nonprofit operations. A well-developed budget allows organizations to plan and allocate resources effectively. It involves detailed analysis of both expenses and revenue, engaging program leaders and fundraising teams to understand donor dynamics and grant processes.
Jason emphasizes the importance of breaking down the budget into different areas for analysis. Real-time information is crucial for program heads to make timely decisions. For example, Signature Analytics provides real-time data to clients, which can be sent automatically on a weekly or even daily basis, offering visibility and control over financial performance.
The Ideal Financial Team
For midsize nonprofits, a healthy financial team might include a mix of internal and outsourced resources. This team would typically encompass roles such as:
- Bookkeepers for day-to-day transactions
- Accountants for financial reporting and compliance
- Controllers for oversight and financial strategy
- CFOs for high-level strategic planning and financial leadership
Jason explains, “Most nonprofits don’t need a full-time CFO or controller, but they do need financial leadership. Our role is to provide that expertise on a fractional basis, bringing top talent to the nonprofit sector in a cost-effective way.”
The CFO Misconception
Nonprofit boards often push for the hiring of a CFO, assuming that this single step will ensure financial stability and sophistication. However, Kruger points out that this approach can backfire in two significant ways:
Misaligned Expectations: Organizations may hire someone with the CFO title but without the necessary experience and sophistication. This individual ends up performing lower-level accounting tasks, such as managing the books or speaking to the board about historical numbers, rather than providing strategic financial oversight.
Misallocation of Skills: Conversely, hiring a high-powered CFO and expecting them to handle basic tasks like bank reconciliations and book closings is an inefficient use of their expertise.
Building from the Ground Up
Kruger advocates for a different approach: building the finance team from the ground up. Here’s how:
Start at the Lowest Level: Initially, hire someone to handle data entry and transactional work. This ensures that the fundamental tasks are covered.
Add Oversight: As the organization grows, introduce roles that provide oversight to these lower-level tasks. This can include a controller or an accounting manager.
Gradually Increase Sophistication: Eventually, the organization will reach a point where hiring a CFO is appropriate. At this stage, the CFO can focus on strategic financial planning rather than day-to-day accounting.
This hierarchical approach ensures that the organization’s financial operations are scalable and capable of providing accurate, relevant, and timely information.
The Importance of Strong Financial Reporting
How important is strong accounting and financial reporting to donors? Accurate financial reporting builds credibility and security for donors, ensuring that their contributions are being managed responsibly. If an organization is significantly behind on audits or financial reporting, it raises red flags and can deter potential donors.
Overcoming Cost Concerns
Many nonprofits are concerned about the cost of hiring an external firm like Signature Analytics. Kruger acknowledges this but notes that organizations often reach out after experiencing significant pain points, such as falling behind on audits or financial reporting. Educating the board and potential clients on the long-term benefits of a structured finance function is essential.
Common Pitfalls and Proactive Solutions
Kruger identifies common pitfalls that nonprofits face as they grow:
Over-reliance on a Single Individual: As organizations grow, relying on one person for all accounting tasks can lead to problems if that person’s skills are outgrown or they leave the organization.
Lack of Documentation: Without documented standard operating procedures, organizations struggle when key personnel leave.
Technology Challenges: Outdated or poorly integrated technology systems can hinder financial reporting and management.
To avoid these issues, nonprofits should ensure they have adequate documentation, integrate their systems effectively, and provide necessary oversight and support at all levels of the finance function.
Final Notes
Building a strong financial foundation is vital for nonprofits to achieve their goals. By customizing accounting solutions, recognizing signals for professionalization, and embracing budgeting practices, organizations can adapt and grow while maintaining transparency and trust. Overcoming common challenges such as over-reliance on individuals and outdated technology is essential for long-term success. With proactive financial management, nonprofits can navigate complexities and ensure sustainability in fulfilling their missions.
How Signature Analytics Can Help Your Nonprofit
Signature Analytics’ nonprofit accounting services help you make financial decisions based on the highest quality accounting practices, while our day-to-day outsourced accounting teams implement the highest quality donor and government accounting standards.
For additional assistance with cash flow management, developing detailed nonprofit budgets, and audit support, contact Signature Analytics today.
