The experts in
not for profit

New NFP financial management

Accounting team discussing financial report data

In 2017, the Australian Federal Treasury estimated that there were approximately 257,000 not for profit (NFP) organisations operating in the country. The Australian Charities and Not-for-profits Commission (ACNC) registered 175 new charities during December 2020… averaging more than eight new registrations every business day!

Growth in the sector is impressive, but it’s important for new non-profit organisations to have a strong foundation in financial management to ensure success. We look at some of the key elements a new association or charity should consider when managing their not for profit accounting.

Just like setting up a new business within the private sector, a new non-profit needs to start with a sustainable financial model. Without this blueprint, it will be difficult to meet objectives and financial resources could be mismanaged.

Woman sitting at table in office and reading few paper work

NFP and charity governance

Specific to the operation of charities are the ACNC Governance Standards. These are the standards that underpin the way in which an organisation runs and they cover elements such as purpose, accountability and compliance. They also highlight the obligations of the charity’s Responsible Person.

NSW Fair Trading also has guidelines in relation to running an association and provides extensive instruction about member numbers, management and commercial activities. Plus, there is helpful information relating to the appointment of the Public Officer.

All State regulators provide similar information, and Not-for-profit Law has some great resources on getting started as a new entity along with plenty of resources on governance and running the organisation.

Business team meeting

Problems and solutions

Along with the basics of paying staff and suppliers correctly, achieving your tax compliance obligations and providing accurate financial reports to your stakeholders, there are a few ‘big ticket’ financial issues that new NFPs need to guard against – insolvency, fraud and inefficiencies.

Insolvency is the inability to pay your debts when they are due. It can be a civil or criminal offence to trade while insolvent, so if you have a concern, it is critical that you determine your position as soon as possible and immediately take action to not incur any further expenses.

Cash flow can be tight when an organisation is starting out and doesn’t have secure income streams – this is when you need to keep an eye on your cash forecast, to actively know that you can pay bills as they fall due, and your balance sheet to maintain an understanding of your liabilities.

It is rare for an insolvency situation to be ‘black and white’, so if you suspect you may not be able to pay your debts – and that includes payroll and supplier bills – when they are due, please seek out an insolvency specialist as soon as possible. ASIC also has some helpful online resources, if you need more information.

Fraud is a deliberate deception that results in the loss or misuse of funds. The nature of fraud can be challenging to identify so it is vital that you utilise a range of different accounting controls. Set a budget that you can measure against, regularly review Profit & Loss reports against the budget and check that bank statements match reconciliation reports.

Woman give business presentation at office conference meeting

Ensure that no single person has control of the whole finance process and implement two-to-sign processes and set delegation limits. We know that it’s unlikely that you’ll have an extensive finance team… you’ll probably have one or two people operating across multiple departments, but it’s still important to be wary of team members involved in the organisation’s finances who don’t take leave! The ACNC has a great resource outlining how to protect your charity from fraud.

Inefficiencies can also cause financial losses. Whether it be from poor processes that just take up too much of your limited time, inexpert bookkeepers making errors or misdirected spending due to inaccurate financial information, you need to be able to recognise the problem and find solutions to reduce financial strains.

Set clear policies and processes and have a means of checking they are being followed correctly. Keep an eye on expenses that aren’t in line with the budget or any unexpected loss and monitor activities if your targets aren’t being achieved. Bear in mind that under-spending can be almost as unhelpful as over-spending if you have tied funding, so don’t just be led by the figures in red.

Businessman working with statistic

Financial systems

Investing in your financial systems and setup at the beginning will be highly beneficial as your organisation grows. A good setup will allow you to scale up painlessly and good accounting software makes reporting much easier, especially when you need to provide detailed financial information to your Board, funders, regulator and the ATO.

Utilising a cloud based program, such as Xero, takes away much of the laborious finance tasks and for small NFP organisations that don’t have in-house accounting specialists, they are often the most efficient and economical option.

A wide range of detailed reports are all easily accessible within these types of systems. As an example, Xero is cheap to own, it is highly efficient and completely transparent. It also has the ability to connect with other tools such as a CRM, reporting, point-of-sale or inventory management system.

Rather than having piles of paper receipts and invoices to go through, or manually typing expense figures into a spreadsheet, cloud based accounting is quick and easy and reduces the possibility of human error. Cloud accounting systems make it easy to manage your own accounts when you are small and lean, and position you well to seek external professional support or outsource your accounting as the organisation grows and becomes more complex. Cloud systems provide great transparency and opportunities for collaboration.

Businessman wearing glasses writing financial report

When to consider outsourcing

Not for profit accounting can be complex – your revenue may be considered to be from contracts with customers in line with AASB Standards and even if you pay a ‘peppercorn’ rent, you must value it and comply with the Leases standard. Salary packaging and Fringe Benefits Tax are another whole story on their own.

There are many technical accounting nuances that are specific to the sector. For small non-profits, a regular accountant should be able to provide you with the services you need, but as your organisation grows you might consider outsourcing your finances to a not for profit specialist.

Engaging an expert in NFP accounting services can help improve your strategic financial management and set you up for continued growth well into the future.

How we can help

The team at Accounting For Good has been working with non-profit organisations for over 25 years. We understand the challenges faced by NFPs and know how to navigate the industry-specific accounting obligations. Our accounting handover checklist helps CEOs manage internal changes. Plus, we utilise and implement the best technology and provide training and quality financial information so you can focus on your mission.

If you’d like to find out more about how we can help you, please contact us today.

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