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How Skimping on Accounting Services Can Cost Nonprofits Thousands

How Skimping on Accounting Services Can Cost Nonprofits Thousands

Prevent Financial Ruin by Working with Accounting Professionals

Monday, August 3, 2015/Categories: Directors and Officers Insurance

Nonprofit directors often have big concerns about finances for their organization. Many nonprofits have to run on a barebones budget to dedicate most of their resources to the cause they serve.

Unfortunately, this barebones approach can cause some nonprofits to skimp on professional services like accounting and bookkeeping in an effort save money. Here’s why that can end up costing you in the long run.

Prevent Financial Ruin by Working with Accounting Professionals

Many nonprofit directors assume their staff can handle the organization’s finances without any problems. Accounting is pretty much just plugging in numbers in a spreadsheet, right? Not exactly.

People take years of accounting classes in order to be good at their job. While software makes it easy for organizations to track the money that comes in and out of their accounts, good accounting is also about planning for risks, avoiding cash flow problems, and being prepared for financial shocks.

Furthermore, while it will cost you to hire an accountant, many times proper accounting can pay for itself by:

  • Saving you time and stress.
  • Preventing federal audits.
  • Saving money on your tax returns.
  • Helping you avoid cash-flow problems and financial mismanagement issues.

What Does Accounting Have to Do with Nonprofit D&O Liabilities?

Remember that directors and officers of a nonprofit can be sued for financial mismanagement. Say your organization runs out of cash and you aren’t able to throw your lavish annual fundraising dinner. The directors or officers of the organization can be sued if their decisions led to this oversight. (See Directors & Officers Insurance to learn about covering this risk).

Managing business cash flow is hard work, especially at nonprofits, which often don’t have steady month-to-month sources of income. If you rely on a few major grants, donor drives, and other big-ticket fundraising events, your organization could find itself just trying to keep its head above water during lean months. The up-and-down nature of nonprofit funds means it’s crucial to have someone with experience watching over your finances.

To learn more about protecting your nonprofit from lawsuits, check out our resources on social services and nonprofit insurance.

Tips for Finding a Good Accountant for Your Nonprofit

What should you know about hiring an accountant for your nonprofit? Here are three things to keep in mind…

  1. Accounting firms might do pro bono work. While many businesses balk at donating money to nonprofits, a surprising number are willing to donate time to be involved in your project. Consider asking local accounting firms if they’d be willing to help your business. You might get turned down, but it never hurts to ask.
  2. Look for accountants that have worked with nonprofits before. Because your tax returns are complex and quite different than those of for-profit companies, look for accountants who are familiar with IRS Form 990 and other nonprofit-specific accounting issues.
  3. Be careful to avoid conflicts of interest. Nonprofit directors might be tempted to hire friends and friends of associates who are willing to give them a discount on accounting services, but be careful to avoid any conflict of interests. Say you’ve got a board member whose sister-in-law is an accountant. Is it safe to hire her? Probably not. With your D&O liabilities, it’s best to avoid hiring anyone who has a personal or familial relationship with your board.

For other risk management tips, peruse our By the Numbers page, which highlights the biggest threats nonprofits face.

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