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Keeping Track of the Cash -- Top 5 Mistakes Nonprofits Make

Managing the money is an issue for many new nonprofits, with the culprits ranging from establishing no accounting system at all to discounting the importance of staying up-to-date. There are a few errors that are common but easily avoidable with just a little time and attention. The top five, and how to avoid them, are:

1. Lack of nonprofit knowledge

Nonprofits have heavy responsibilities for maintaining accurate accounting and meeting certain "best practice" standards. Every key player in the nonprofit should have at least a basic understanding of what and why the regulations are, and how they apply to your organization's particular circumstances. Problems with the books are an excellent way to put your nonprofit status at risk and will likely reflect in the organization's reputation within the philanthropic community.

2. No accounting system

An accounting system is more than installing a piece of software. Rather, every activity that relates to money in and money out should have formal, written procedures to ensure accuracy and consistency. Everything from accepting a $2 cash donation to overseeing major fundraising events, buying pizza with petty cash to paying employee salaries should follow a logical, comprehensive SOP. To that end, anyone and everyone performing accounting tasks should be doing them the same way, every time, thus ensuring consistency and transparency. In addition, the correct categories must be established and used to track all income and expenses (such as separating earmarked donations, separating each program's expenses, and the like).

3. Inaccurate data entry

Related to developing solid accounting procedures is including steps to verify the accuracy of data entry. Small typos can turn into big problems, and any discrepancy should be addressed as soon as it is identified. Also, select an accounting software that does not allow you to skip over the double-entry method (a debit for every credit, vice-versa). This way, your accounting software will help ensure that the numbers balance and make sense.

4. Failure to budget

Setting a well-researched, realistic budget is essential for controlling the cash in a nonprofit. In addition to increasing your constituents' confidence in your management capabilities, a solid budget will keep the organization on track to accomplish planned objectives. A good budget includes projections based on past performance numbers, cost research, and justifiable assumptions about where the money will come from and where it will go. Avoid overloading vague, undefined categories like "Miscellaneous Expenses"...they are just an indication that your organization suffers from insufficient planning and research.

5. Failure to review

Although an annual financial audit is standard for most nonprofits, not all use this information effectively. In addition, any legitimate accounting software should provide easy-to-create financial statements which should be reviewed frequently by knowledgeable staff and board members. Reviewing and analyzing these reports will help identify ongoing issues (mis-categorization of income or expenses) and one-time problems (data entry errors , embezzlement).

Establishing and maintaining an effective accounting system should be a priority for any nonprofit startup. More than any other type of business, managing the finances of a nonprofit organization can be the difference between longevity and never getting off the ground.

About the Author

LaunchX.com is dedicated to training entrepreneurs to turn their good ideas into great companies. The LaunchX System provides step-by-step education in the mindset and skill set entrepreneurs need to succeed. Our program includes intensive seminar training, key business software, and specialized workbooks that teach you the fundamental skills you need to achieve your financial and worklife goals through entrepreneurship. Register today for our introductory course and see what LaunchX can do for you!