Nonprofit Accounting Basics

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Endowments

Endowment funds are permanently restricted and the principal cannot be used for operating, cash flow, or even emergency purposes. For small and midsized organizations, having a good deal of money in hand but out of reach may prove particularly frustrating if fully funding current operations presents a serious challenge. In addition, managing endowments can be complicated and involve some risk if long term investments are involved.

The Disaggregated Statement of Financial Position: Recommended Internal Report Format

A well-formatted Statement of Financial Position (SOFP) report provides accurate and relevant information with enough context for the board and other stakeholders to thoroughly understand what’s going on with your organization financially. The most useful SOFP reports include columns showing restricted and designated funds separately from unrestricted. They include a prior year comparative and narrative that explains the contents of each line item and any significant changes or unusual balances. (See also Statement of Financial Position.)

Special funds

Once adequate working capital and operating reserves are in place, along with any necessary equipment/building maintenance/replacement funds, your organization may want to consider establishing funds to support special program activities and strategic initiatives.

Facilities: Building Acquisition and Construction Projects

A typical capital campaign supporting a bricks-and-mortar building project is a familiar scenario. Such an endeavor is a huge commitment for a small or midsize organization and should be undertaken only after a great deal of preparation. An organizational self-examination to ensure that the staff and board infrastructure can sustain the additional workload and fundraising effort is highly advised, in addition to a thorough feasibility study to ensure that the community can, and is willing to, support the endeavor.

Assets

The Statement of Financial Position (SOFP) is the correct nonprofit term for the balance sheet. The SOFP comprises three sections: assets, liabilities, and net assets.

Facilities: Maintenance, Repair, & Replacement

Whether your organization owns or rents its space, you may find it necessary to make improvements to the property (leasehold improvements, if renting). For example, you may be responsible for maintenance and repair as the owner, or as part of the conditions of the lease. Anticipating what repairs or improvements may be necessary, researching and estimating the related costs, determining the target amount needed and the approximate timing of the expenditures are all part of the capital budgeting process, along with developing funding strategies.

Furniture, Equipment, and Technology

For an organization not in financial crisis, investing in equipment and software upgrades or replacements is one of the next priority items to consider for a capital budget. Don't forget ample storage and decent chairs! Keeping staff well-equipped can make them more efficient and happier, leading to staff retention and loyalty while improving program outcomes. It's win-win. Some foundation and corporate funders and government agencies explicitly support fixed asset acquisition and technology improvements in addition to project and operating funding. 

Good Debt, Bad Debt

It is an admirable goal for small and midsized nonprofits to be completely free of debt, but this is not always possible or, in some cases, even advisable. Debt is different from having an accumulated deficit. For instance, having a mortgage or vehicle loan to own rather than rent those assets can build equity and predictability for cash flow needs. Good cash flow management may, on occasion, require an organization to access a cash flow loan or a line of credit.

Deficit Reduction

An occasional deficit is not the end of the world. However, an organization where operating shortfalls are chronic and the balance of net assets without donor restrictions is persistently negative and worsening, will find itself in a financially precarious position. Staff will be stressed. Donors may be wary of investing in such an organization. It will be difficult or impossible to build or replenish an operating reserve. Deficit reduction will need to be a top priority, and the organization should set a deficit reduction schedule and include specific funding strategies in its budget.

Building and maintaining a Board-designated Operating Reserve

Boards may use accumulated operating surpluses that are not invested in fixed assets or subject to donor restrictions or other board designations to create an operating reserve. The presence of an operating reserve increases an organization's ability to take mission-related risks and to absorb or respond to temporary changes in its environment or circumstances, for example, significant unbudgeted increases in operating expenses or losses in operating revenues.

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