“You can’t fulfill your nonprofit mission if you don’t understand your books.” Nonprofit organizations have to deal with the finances day in and day out. Donation funds from different sources make nonprofit accounting and bookkeeping complex. Furthermore, taxation and tax-exempt regulations also need a thorough understanding and a robust strategy. Nonprofit outsourced accounting services can lead the way for charities to manage financial processes.
This blog explores the transformative potential of managed accounting services, exploring how this strategic approach can significantly impact financial management in the nonprofit sector.
What is a Nonprofit Organization?
A nonprofit organization, often referred to as a not-for-profit organization, is a type of entity that operates for purposes other than making a profit. The funds collected by a nonprofit must be allocated to achieve the mission objectives and to manage the running costs.
Generally, philanthropic agencies are tax-exempt charities or public organizations working for the betterment of a particular community or sector. According to the IRS code 501(c), 29 types of organizations are designated as nonprofits which are exempt from taxation.
The management of a nonprofit organization is overseen by a board of directors. Regarding the operational activities of the organization, they are vetted by governmental agencies and also by the public. The following characteristics define a nonprofit organization:
- Mission-driven
- No profit distribution
- Publicly accountable
- Board of Directors (BoD) governance
- Tax-exempt status
- Community-oriented
- Volunteer engagement
- Social development
Outsourced Accounting Services – 101
In the financial world, outsourced accounting services refer to the practice of offloading the financial operations of a business entity to a third-party accounting firm. Outsourcing of business processes is quite common nowadays and is done to optimize the overall working of the firm. In particular, financial accounting is outsourced mainly because it is both time-consuming and resource-intensive.
With the outsourcing of financial matters, business executives can divert focus on increasing revenues and operational efficiency. Likewise, nonprofit organizations can also capitalize on managed bookkeeping and accounting services.
Nonprofit outsourced accounting services can help the agency manage and utilize the funds optimally and in accordance with the regulations. Outsourcing the finance segment has proven to be a booster in the functioning of the organization.
Why Rely on Nonprofit Outsourced Accounting Services?
Outsourcing accounting and bookkeeping operations allows nonprofits to enhance efficiency, reduce costs, and focus on their core objective. Have a look at the compelling reasons why philanthropic agencies should consider outsourcing financial functioning.
Diverse Revenue Sources
The revenue streams are multidimensional for nonprofit agencies. Depending on the scope and the operational jurisdiction of the organization, the donation sources vary. Some of the most common charity sources are:
- Donations
- Fundraising
- Grants
- Membership fees
- Corporate sponsorships
- Crowdfunding
- Private/Government contracts
- Special events
- Merchandising
Managing funds from a series of different sources and recording them per the accounting standards is overly complicated. This calls for an expert professional accountancy firm to steer the operations.
IRS Form 990 – Nonprofit Outsourced Accounting Services
Since most of the charitable institutes fall under the category of tax-exempt status, they are bound to file IRS Form 990 annually. Complexities involved in filing the IRS Form 990 per the type of nonprofit organization.
There are grass-root-level complexities involved in the preparation of Form 990. Additionally, the sub-types of Form 990 are designated based on the type of non-profit organization. This, in particular, is a challenging part of ascertaining the type of form required to be filed per the category of organization.
In short, nonprofits will have to rely on third-party accounting solutions to deal with these cumbersome regulations. With seamless conformance to the laws, nonprofit organizations can operate at the full scale.
Budget Constraints
When the major chunk of funds is from donations, nonprofit agencies have to be very careful in budget planning to cover the operational costs. Raising the funds is one challenge and efficiently utilizing them is another challenge.
Navigating within tight budgetary constraints is only possible when you have a clear picture of all the financial insights. The input of financial experts is crucial in budgetary decision-making. Professional accountants will use transaction records to estimate and prepare a budget within the required limitations.
Lack of Resources
Many nonprofits lack the budget to maintain an in-house accounting team as it is very costly. Moreover, constant supervision is also required when you have an on-site accounting and bookkeeping team. The budget limits alone are enough to rule out the possibility of an internal finance department.
The goal of nonprofits is to use limited resources to achieve their goals while also complying with the financial regulations. Better resource management directly relates to the nonprofit outsourced accounting services. When outsourced, they will cut costs and thus, allocate more to the mission.
Accountability and Compliance
Meeting donor expectations and maintaining public trust is tantamount to the success of a charitable organization. Moreover, governmental agencies also audit nonprofits in light of different regulatory laws.
Compliance is extremely important to maintain the tax-exempt status. Hence, any errors in conformance to laws will strip the organization of the special exemption. The laws and regulations governing nonprofit entities are complex, demanding the assistance of accounting professionals. Top-notch accounting firms will manage compliance and keep the wheel rolling for the nonprofit.
Key Impact Areas of Nonprofit Outsourced Accounting Services
Financial Transparency and Accuracy
Access to real-time financial data is a game-changer for informed decision-making. The outsourced accounting solutions will provide detailed financial insights based on the transactions of the nonprofit agency.
Furthermore, outsourcing the financial processes also increases transparency. Minimizing inaccuracies through automated and expert-driven processes will elevate the reliability of the nonprofit among the donors. Consequently, more funds will pour in to meet the targets.
Cost-Efficiency – Nonprofit Outsourced Accounting Services
Nonprofits majorly depend on the donations that put them in a tight spot when it comes to budget. In such cases, outsourced accounting has a greatly positive impact. With directives from finance specialists, nonprofits can scale down on operational costs to a great extent.
Additionally, third-party outsourced accounting services are also more economically viable than having an in-house team. Having outsourced the accounting services, the board of directors can redirect the finances to the core objectives.
Compliance and Risk Management
Accessing specialized knowledge in nonprofit financial regulations is mandatory to be compliant. Compliance is also significant to maintain the non-exempt tax status. Nonprofit outsourced accounting services will play a decisive role in ensuring compliance.
Risk management is also an important factor that goes in parallel with regulatory compliance. Based on financial forecasts, the professional accounting agency tasked with the responsibility can mitigate risks.
The Bottom Line
Nonprofit Outsourced Accounting Services devise a strategic plan for overcoming financial challenges, enhancing transparency, and optimizing resources. By implementing outsourcing, nonprofits can position themselves for sustained success in an ever-evolving financial landscape.
From accounting to bookkeeping to tax-exemption, outsourced accounting solutions pave the way for perfect management of the philanthropics. Lastly, it also ensures compliance and accountability.
