I’m often asked when is the best time to bring on an accountant. My answer is at the beginning. While you may not need a full accounting department or an accountant on retainer, you need to have your accounting system and financial reporting set up correctly in the beginning. It can be very costly to clean up mistakes. You also bear the risk of making decisions based off of incorrect financial data. If you want clean, digestible , and accurate data, avoid these mistakes.
Crowded Chart of Accounts
Creating a chart of accounts is one of the most basic accounting steps. However, it's one of the steps that many people get wrong but is very important. A clean and organized chart of accounts helps to keep your financials organized as well. Too often I’ve seen organizations adding an account for each transaction that flows through their business. As a result, the chart of accounts becomes overcrowded.
Not implementing internal controls
A lack of internal controls is very common in nonprofits due to the nature of the business. Nonprofits are tasked with keeping overhead costs down and the staff wearing many hats. This causes a lack of segregation of duties. By not implementing internal controls, the likelihood of fraud increases. I once consulted with a nonprofit in which the departments operated very independently of each other. There was no accountability to leadership or the organization. After assessing the accounting department and its gaps, I discovered that the CFO had been operating his own business on the nonprofit’s premises and using the accounting staff for his own benefit. Furthermore, he was concealing how terrible the financials of the organization were in an effort to receive a satisfactory audit report.
Having internal controls and checks and balances would highlight inconsistencies and reveal fraud. “Fraud occurs when you have 1) opportunity, 2) need, and 3) rationale. While you cannot directly safeguard against an employee's need and rationale, internal controls focus on minimizing opportunities for fraud. - Guidestar”
Failing to Prepare Management Reports
Management reports are just as important as financial statements. The difference is that they’re more detailed and highlight the performance of different business areas (programs, departments, business lines, etc.) Management reports enables leadership to make more informed decisions based on substantiated data. By looking at operational data along with financial data, you have a complete view of how the organization is performing.
Failing to prepare management reports leaves you in the dark in regards to operations. You won't be able to speak to how certain departments and business lines are performing or be able to measure the impact of the programs your organization is managing. According to Data Pine, “Reporting for management provides insights on how the company is doing, empowering decision-makers to find the right path to increase operating efficiency and make pertinent decisions to remain competitive.”
Recording financial data incorrectly
As you run your organization, you will encounter different types of transactions. These include: fixed assets, in kind contributions, expenses, income, etc. A common mistake is miscategorizing transactions and therefore causing the financial statements to have errors and be misleading. This type of mistake normally occurs when you have an inexperienced staff member managing the finances. To combat this mistake, you should work with a competent and experienced accounting professional and have monthly reviews put in place to review financials and address any outliers/errors.
Working without a budget
A budget is crucial to the nonprofit financial management process. Yet so many have outdated budgets or they don't keep up and update with the current one. Working without a budget is like walking with your eyes closed. You’re bound to crash or walk into a wall. Having a budget in place helps you to manage funding and create financial controls. Without a budget it will be difficult to achieve financial stability. Take heed and establish a budget ahead of your fiscal year and implement consistent check-ins to determine how the organization is performing in comparison to the budget.
Nonprofits are assets to the communities they operate in and provide great resources. In order to remain impactful and reduce the possibility of scandals or running out of funds, you have to avoid these financial mistakes. I’ve worked in house at a nonprofit and witnessed many breakdowns in the financial process. It’s my mission to ensure that Visionary Accounting Group serves as a resource to the nonprofit community and provides services that will improve financial reporting.