It all comes down to the measurement of success. Regardless of a for profit’s mission statement, the number one goal is to make money. But, to a nonprofit organization, the answer is not so simple.
Success is not measured in terms of profits, but in how your nonprofit fulfills its mission.
The main purpose of your nonprofit is to raise money to serve those in need and advance your causes. Your profits stay in the organization to be used to sustain your mission. The biggest difference between nonprofits and for profits is how you use the money that you raise.
As a nonprofit, you don’t just have a bottom line you have a double bottom line. The first bottom line is fulfilling your stated mission. The second one is having the necessary funding to support bottom line one now and in the future.
Nonprofit organizations are considered public benefit corporations that receive their revenue from a combination of:
- Donations or grant income
- Donated facilities and equipment
- Low paid or volunteer staffs
IRS Form 990
While all for-profit businesses must pay taxes on their net income, nonprofits are not required to pay income taxes. Nonprofits are only assessed for taxes such as real estate or sales taxes and are required to file IRS Form 990. Filing the Nonprofit Form 990 ensures that charitable organizations are accountable to funding sources.
Viewing a nonprofit’s 990 answers important questions such as revenue sources, sustainability, and how well the organization pays its employees. Potential board members can see who else is on the board and what the cash reserves look like.
For-profit businesses prepare balance sheets listing it’s owner’s equity. This is broken down by assets, everything the company owns, and liabilities, everything the company owes. A nonprofit generates nonprofit financial statements. They do not use a balance sheet because there are no “owners”. Instead of a balance sheet, a nonprofit generates a statement of financial position, which details assets and liabilities. An accountant can determine the size of the nonprofit by reviewing its net assets.
A for-profit business will prepare an income statement each quarter. This lists its revenue, gains, expenses and losses. This information is used to assess how profitable the company is on a quarterly basis. Since nonprofits are not concerned with profits, they prepare a statement of activities on a quarterly basis. This report lists its revenue minus expenses plus net assets.
Nonprofits are required to track revenue sources and this is the second key difference between nonprofits and for profits.
This is what is known as ACCOUNTABILITY.
Your nonprofit must be accountable to all your funding sources. You need to be able to show evidence of how you are using your revenue to fulfill your mission.
I’m going to use a for-profit business to demonstrate this. Let’s say you buy a loaf of bread from a local bakery. All you care about is getting a fresh, delicious loaf of bread. You are not concerned with how the bakery uses your money.
What about a nonprofit? Let’s say you make a donation, which is the equivalent of buying a loaf of bread from you local bakery. Your nonprofit must report how your donation was used. For example, it may be used to buy medical supplies for a missionary in Kenya, new computers for a local community center or for funding research to fight cancer.
That’s what’s meant by ACCOUNTABILITY. But how can you provide evidence of accountability? By using specialized software tools that can break down the segments or funds that nonprofits receive through donations and grants.
Accounting for Nonprofits
Off-the-shelf accounting software is a one-size-fits-all solution designed for for-profit use. Since it is not designed for nonprofit accountability, it is extremely limited and restricted for a nonprofit.
You will need to become a magician to make this work for your nonprofit. You know what I’m talking about. How many tricks up your sleeve do you need to get your accounting system to do what you need. And after all that, you still have to take an extra step to dump all your data into a spreadsheet to generate financial reports.
You can either do this the hard way, or you can choose the easy route by getting the right tools for the job.
When evaluating a software solution, make sure it provides the tools for the unique requirements of nonprofit organizations. This is how you can become more accountable, cultivate better relationships with your donors, raise more funds and help your nonprofit fulfill its mission.
We value your comments! Feel free to ask questions, suggestions or leave feedback.