Four Tips for NonProfit Accounting

In 1993, I did something bad. I moonlighted. However, I never asked if I could or couldn’t moonlight; I just did.

To provide some context, I was a W2 employee working in a financial management position. I got lucky to have the chance to work on a $10k consulting project, and I jumped at it, but I had to do it on my own time (evenings and weekends). I was both the architect and implementor of the work to be done. As I look back on my career, it’s one of the projects I’m most proud of.

My client was a small injection molding organization that needed help with LOC financing and setting up an accounting system. Regarding accounting, I needed to create SOPs for every imaginable administrative and reporting activity.

I’m highlighting this project because it serves as a personal north star for accounting in any nonprofit organization, which I’ll mention later.

The Number One Job in NonProfit Accounting

Former baseball players who grew up in rural Missouri don’t cry, or so I thought. When Beth told me she was moving on (from The Ronald McDonald House), I nearly cried, at least I did in my heart.

Beth didn’t have an accounting degree, but she was smart and could follow checklists. She wasn’t just a mini robot doing the work. She always asked, “Why am I doing this?” Once it was explained, she did what needed to be done. Sometimes, she even improved the process.

Beth was our in-house bookkeeper at a local charity in Columbia, MO. People who refer me to others know that I’m an architect in marketing, sales, operations, and finance (in my world, we call this finops). Since this charity was always dealing with missed deadlines in all things finance, I was seen as the guy to diagnose and fix the problem.

In retrospect, we didn’t have a people problem. We didn’t have a ‘drive’ or motivation issue, either. Lack of intelligence was not a driving force either. The heart of the matter was a lack of direction and the ‘how’ part of getting work done well before it was due.

Within four weeks, we had new systems and processes in place for daily, weekly, and monthly administrative requirements. Beth made those checklists even better. I was most proud that Beth completed the 990 PBCs (audit-speak for the required client-prepared list of documents) by the end of the first month of the new year.

Looking back, I don’t get or deserve a gold star; Beth does. The number one job in most NonProfits is to have at least one Beth in their finance departments. Without a Beth-type person, quality work cannot get done.

The Secret to Smart Back Office Accounting

I’ve hired many accounting managers and controllers. One of the tests they have to complete is to present their current month-end accounting schedule to me. If not, I have them create one based on a large company’s general ledger, which I show them.

I both teach and expect a one-day close. Ten years ago, it was a five-day close. With better tools and technology, the perpetual close is not difficult unless a missing ingredient is present.

That missing ingredient is a commitment to excellence and relentless tenacity in following the processes and systems designed by a seasoned financial architect.

In short, the missing month-end checklist is a red flag that other aspects of accounting and finance will likely be inconsistent, incomplete, or delayed.

WIP reporting is not just for general contractors. WIP reporting applies to retailers, SaaS organizations, professional services firms, and even NonProfits. WIP reporting for all areas of the NonProfit should be done either on Fridays or Mondays. Show me a NonProfit without a month-end closing schedule where the reporting is done by the first day of the month, and I bet I can show you an organization lacking in its WIP reporting. Without simple and actionable WIP reporting, how do our managers get work done?

To summarize, a well-constructed month-end closing schedule is the key to smart back-office accounting practices. But the bigger secret lies in the other architectural systems and processes that are discovered and created through this checklist.

The Biggest Lesson Learned During My First Consulting Project

Earlier, I mentioned my first consulting project. While I was thankful for my two checks from NMC, my greatest reward was seeing Les, our quality manager, ultimately become a controller.

When I implemented our accounting system and daily, weekly, and monthly administrative practices, I needed someone to serve as the internal accountant. Les was the person for the job because he checked all of the boxes. A few years later, he became the company’s controller thanks in part to additional education.

My stupid little trick for teaching Les how to do the work was starting with Post-it notes. I used Post-it notes to help Les visualize the workflow. That flow led to about 15 checklists that were easy to read, follow, and replicate. While Les was not an accounting and financial architect, he was a phenomenal manager. He ensured the work was completed on time and to the highest possible quality.

My big takeaway? Process, process, process.

As a bonus, remember to ask me about The Three Minds of Accounting and Finance as they apply to this lesson I learned early in my career.

A Word of Caution on Outsourced Accounting

Anytime a writer shares an opinion, the first question I have is, “What is their bias?” Or, what ax do they have to grind?

I’m not a fan of outsourced accounting, except in very limited and specific situations. Am I biased? I used to run an outsourced controllership practice when very few firms even knew that was a thing. I’ve also been a long-time corporate controller. Accordingly, I think I bring a balanced mindset to this discussion.

I will not address outsourcing directly, but indirectly through a few simple questions:

1. Who is in charge of daily treasury management if you outsource accounting? If you have to ask what daily treasury management is, that’s concerning.
2. Who owns the daily and weekly administrative practices that are typically owned by accounting and finance?
3. Who is in charge of the most important weekly WIP planning, reporting, and analysis?
4. Is all financial reporting completed by the first day of the month?
5. Who owns the ‘C’ and ‘L’ in CAMELS, and how often is this work done?
6. Is the NonProfit audit and compliance ready 24x7x365?

We live in a world that says, “Let’s outsource this.” But are we outsourcing accounting for any of the following reasons:

• It’s a headache, so let’s have someone else do this work.
• It’s over my head, so let’s have another firm do this.
• It’s cheaper (probably not if you address the incomplete list above).

For smaller organizations that bring in little cash and write only a few checks a month, outsourcing is fine. The cost of insourcing accounting may seem high. However, if the Executive Director can find a volunteer with a financial leadership background, they can be the architect of key processes and systems. If so, that minimizes the cost of keeping accounting in-house.

I do, however, recommend that the Board’s finance committee hire a smaller CPA firm perform agreed-upon control and anti-fraud tests. The cost will not be exorbitant, and I certainly would not skimp on this step.

Majoring In the Majors

I’d be remiss if I didn’t share a few words from Democracy in America:

When citizens can associate only in certain cases, they regard association as a rare and singular process, and they hardly think of it.

When you allow them to associate freely in everything, they end up seeing in association the universal and, so to speak, unique means that men can use to attain the various ends that they propose. Each new need immediately awakens the idea of association. The art of association then becomes, as I said above, the mother science; everyone studies it and applies it.

Alexis de Tocqueville

So, while the topic has been less important than what’s most vital in a voluntary association, as de Tocqueville called them, just know that I admire and appreciate every person serving in these very special organizations.