Tax and Finance: Setting up Useful Systems

You must set up useful systems for all of your financial needs. Not only will this save you time, but it will also save you money. Successful groups are held to high accountability standards and must document everything: board decisions, revenue, expenses, and any major activity. Although "audit" may conjure up images of a surprise visit from the IRS, your organization will need audits to prove financial health, and setting up good systems for tracking your finances is the first step to a clean audit.

A shoebox is not enough. You will need an accounting system for financial management. This system includes both the records themselves and the procedures and tools for managing and using them. Your organization must define accounts (assets, liabilities, net assets or balance, revenues, and expenses) and "journals" - systematic records of all transactions. These are used to create an overall picture in a "general ledger."

General ledgers can vary. In a small organization, the checkbook might double as journal and ledger. Most revenues and expenses will pass through the checkbook, and checking-account statements may provide enough information to prepare the reports that a small organization requires. A larger organization may keep a general ledger for the big picture and manage entries directly in specific journals, whose information is used to complete the general ledger.

Procedures must be defined for any size organization. Even if a checkbook is enough for now, your organization should still establish policies and procedures for financial activities. Do you have a cash box for events? Who ensures its safekeeping, and how? Who can sign checks, or make deposits or withdrawals? Is a second signature required for amounts over a certain amount? How often do you review financial information, and who sees it? What filings is your organization responsible for, and when?

Writing it down will be useful every time you have a change in personnel, and having the requirements recorded can make it easier both to make deadlines and to get started with the work as it needs to be done.

Special tracking for nonprofits: 501(c)(3) organizations can receive donations that are tax-deductible to the donor, so they must carefully account for contributions. Nonprofits also receive special treatment for some of their assets in the context of capitalizing and depreciation. Many nonprofits operate on a "cash basis" - accounting for revenues and payments as they are received and made, rather than as they are incurred ("accrual basis"), as for-profit businesses do. Nonprofits must also report their expense by "functional expense classifications," such as program services and support activities.

"Should we computerize our accounting system?"
The answer to this question varies with the size of your organization and the expertise of your members. An organization small enough to use a checkbook as its general ledger may not benefit from a software-based accounting system. Even a larger organization may benefit from paper records if a staff member that really knows how to keep books isn't familiar with software tools.

As your organization grows in size and complexity, however, you will almost certainly switch to a computerized system to make it easier to store information and generate reports. When you switch over, consider some form of financial review to make sure you're starting with "clean" data.

TechSoup has a worksheet to help you decide whether to use accounting software and what kind your organization needs.

"What software should we use?"
This is a large question that, like using software in the first place, is a highly individual choice. If you choose software, though, look at accounting software rather than using simple spreadsheets or hand-built databases. These products do not have controls and make it easy to change data without tracking the changes. (Exporting data from an accounting program to a spreadsheet in order to customize a report may be very useful, however.) Also, "checkbook software," while easy to use, may be outgrown very quickly by even a small nonprofit, which needs to manage entries in a way that most checkbook software can't do.

As you look at software packages, especially if you are comparing products, be sure you are getting the features you need, and consider what you may need as you grow. Packages may offer features you never thought of but can really use. Some software automatically generates thank you notes and acknowledgement letters. This can make it easy to ensure follow-through when donations are received and to manage spikes in donations that may occur after an event, a publicity effort, or in an individual's honor or memory.

TechSoup has a worksheet to help you decide whether to use accounting software and what kind your organization needs.

The US Small Business Administration has detailed information about accounting terms and practices, as well as other business information, both about business in general and about nonprofits.

» Tax and Finance: Financial and Summary Statements