Nonprofits in every stage, from growth to maturity, can benefit greatly from outsourced accounting services. In this article, NFP Partners details the most fundamental financial management components at each stage with an emphasis on the growth cycle. Additionally, if you’d like more information on the benefits of outsourced accounting services, read Outsourced Nonprofit Accounting Benefits – Beyond The Money. The most critical stage for a nonprofit, or a business, is the growth stage. Successful growth moves the organization to the maturity stage, sometimes referred to in the nonprofit world as “sustainability.” Nonprofits in the mature stage, and who have good financial management, are characterized by strong leadership, efficient practices, and financial reports to stakeholders that are accurate, relevant, and timely.
Growth stage theory applied to nonprofit organizationsGrowth stage or lifecycle theory has been around for a long time but is primarily used to describe the behavior and dynamics of business entities. The same model applies to nonprofit organizations. For more information, check out a previous blog article Know Where You Are in the Nonprofit Lifecycle and Get Ahead of the Game. For a deeper dive, check out the book, Nonprofit Lifecycles by Susan Kenny Stevens. It’s a fascinating and illuminating read.
Nonprofits in the startup stageThe primary focus of a startup nonprofit organization is on its mission and fundraising. Financial management is necessary, but rudimentary, and scaled to what is needed while ensuring legal compliance. More specifically, a minimalist financial management approach would include the following:
- A person with some accounting and finance credentials oversees the finances (a Board member or qualified volunteer).
- A paid, part-time bookkeeper or volunteer with accounting skills is retained.
- Simple financial reports are prepared monthly for the executive director and Board consisting of an income statement and balance sheet.
- Revenues are identified by source and whether or not they are restricted.
- Separation of duties in the handling of cash.
- Monthly bank reconciliations are done by a person other than the executive director or accountant.
- A decision-maker adopts basic expenditure approval guidelines.
- Accounting automation is done in-house using basic software (e.g., QuickBooks Online)
- Federal, state and local tax compliance gets special attention.
- Annual compilation or review by a CPA.
Outsourced accounting for nonprofits in the startup stageIt’s critical that startup nonprofits manage their finances as they gain traction and migrate to the growth stage. The major challenges are legal and regulatory compliance, internal control, and financial reporting. Expecting a volunteer or paid in-house bookkeeper with inadequate supervision to accomplish all of the necessary tasks effectively is unrealistic and exposes the organization to unnecessary risk. Because of such, outsourcing becomes a viable alternative.
- One model is a complete turnkey service with two different accountants deployed. One accountant does day-to-day tasks. The other accountant, a more senior controller-level professional, provides oversight. This includes internal control measures, month-end financial review, reporting, interpretation, and counseling to the Executive Director and the Board.
- On the other hand, a variation of the above can also exist. In this scenario, the nonprofit retains the day-to-day accountant, while an outsourced accounting provider provides oversight.
Nonprofits in the growth stageThe transition from startup to the growth cycle starts when an organization’s mission and programs gain market acceptance and demand for program services exceeds its ability to supply. Meeting the challenges of growth requires moving to a different management model to build capacity and lay the groundwork to reach maturity. Typical challenges include staff hiring and development, creating an organizational structure, and delegating responsibility along organizational lines. Similarly, an organization in the growth stage may also have a hard time formalizing and documenting processes, expanding and developing its Board and taking a more strategic view.
Characteristics of a progressive nonprofitFinancial management now becomes more than a necessity, but a critical driver of the organization’s progress toward maturity. Even more, it’s on a fast-track to becoming more robust and professional but still very formative. Some of the characteristics that one can expect in a progressive nonprofit are the following:
- An experienced accountant manages the accounting and finance function but may not be trained as, or have the experience of, a CFO or controller (but may carry an exaggerated title)
- As an alternative all, or part, of the accounting function is outsourced to a professional accounting services company.
- The Board expands and creates a finance and/or audit committee.
- The accounting becomes complex, tracking revenue and expenditures by funding source, programs, and function.
- Annual budgets are prepared for revenues and expenditures and incorporated into the financial statements.
- Internal controls are implemented and documented standardize processes, and prevent fraud and embezzlement.
- Expenditure approval is formalized.
- Financial statements are more customized for the stakeholders, including the top- and middle-management, the Board, and funders.
- Accounting automation migrates to a more sophisticated nonprofit specialized software application hosted in the cloud (e.g., Abila MIP Fund Accounting™).
- Key Performance Indicators (KPI’s) are defined and incorporated into financial performance reporting. For more information on KPI’s, visit our article, “Does your organization track performance?.”
- The organization receives an audit of its financial statements that attest to it’s compliance with generally accepted accounting principles (GAAP).
Outsourced accounting for nonprofits in the growth-stageWith growth comes complexity and new challenges in performing and managing finances. The organization requires high performance of day-to-day accounting tasks, having internal controls in place, strong financial reporting and analysis, and strategic planning. Additionally, an organization needs a “nuts and bolts” accountant, a controller, and sometimes a CFO. Finding all of these attributes in one or two people is a tall order. Therefore, outsourcing all or some of the work can provide the skills required and assure continuity as a nonprofit matures. This is the sweet spot for outsourcing with alternative deployment scenarios:
- A total turnkey arrangement with all functions outsourced may be more appropriate earlier in the growth stage where executive management remains highly focused on meeting demand.
- At some point, having a one- or two-person, in-house accounting staff to perform day-to-day and month-end tasks becomes a perceived need. Because of such, an outsourced accounting provider performs specialized functions (e.g., payroll or accounts payable), review, analysis, budgeting assistance, audit preparation, and strategic planning counseling.