Making the Switch: What For-Profit CFOs Need to Know About Nonprofit Accounting

You worked your way up through the normal accounting roles. You cut your teeth on accounts payable and have managed more than your fair share of audits. You can run a profit and loss statement in your sleep. But you are tired of the for-profit world. You want to use your accounting skills for an organization that makes a difference. So, you apply for and land a role leading the finance team at a nonprofit. Congratulations!

Now, be prepared to re-think a lot of what you know about accounting.

From the goal of your organization to how finances are managed, it’s important to understand how for-profit accounting and nonprofit accounting differ so you can help drive success for your new organization.

Here are three major differences between for-profit and nonprofit accounting that CFOs new to the nonprofit sector should know before their first day.

1. The Goal of Your Finances

The goal of a for-profit organization is to drive revenue for the business. This isn’t the case with nonprofit organizations. There are no shareholders. But there are donors and government entities that have given you money. Instead of increased profit, your focus becomes the expenses—and the transparency around those—because your stakeholders now care more about how your funding is spent instead of increasing revenue.

As a nonprofit organization, you aren’t working to improve a stock price or the bottom line. Your focus is financing your mission. Whether that is mental health outreach or serving under-resourced elementary schools, the goal is to stretch every cent to help your community.

Along the same lines, your stakeholder relationship is very different. While for-profits tend to have shareholders and other investors, the nonprofit space sees donors, funders, volunteers, and those you serve as the key stakeholders. Rather than focusing on driving value for shareholders, you’ll be focused on managing a continued flow of donations, grant funding, and program fees so your staff and volunteers have the tools to properly serve the community and accomplish your mission.

2. Tracking Your Income

While it’s true the goal of your income is different at a nonprofit organization, you still want revenue. Having good tracking for this will ensure no dollar is missed or wasted. The differences, however, arise when looking at what and how the tracking occurs.

In the nonprofit space, you’ll be tracking both unrestricted and restricted funds as part of your overall organizational income. Unrestricted funds are incoming funds that aren’t earmarked for a specific program or initiative. General donations through your website are often unrestricted. This will feel familiar to your for-profit experience. Your organization can use these in any way you see fit towards reaching your organizational goal, as long as the donation is used in good faith.

Restricted funds, however, are donations tied to a specific purpose or time. For example, perhaps a donor gave a large gift for the construction of a new shelter for people experiencing homelessness. Those funds can only be used for expenses tied to that construction, not for mental health services or food for the population the organization serves. If the organization needs to use the donation differently, they must get permission from the donor.

Outside of fund type, you’ll also be tracking the organization’s income by funding source. Whether that funding source is a grant, a restricted donation, or an endowed fund, you will be responsible for tracking not only the income, but also how it was used. To do this, you need an accounting system that can hold this information on a unique record, not as part of an account string. A good fund accounting system will also allow you to put guardrails around that funding source so that it can only be associated with expenses that meet the restrictions.

3. Reporting

Both for-profit and nonprofit accounting rely heavily on reporting. Whether to give information to the board, track the success of a specific campaign or event, or just to close the books, your organization needs accurate reports. With this, it’s important to know the specifics of nonprofit financial reporting. Some key takeaways:

• Some reports go by different names. While for-profit accountants may be used to profit and loss statements and balance sheets, nonprofit accountants use statement of activities and statement of financial position reports. While much of the information is the same, the change in terminology allows for the reports to specify where you may see more information specific to the nonprofit space, like grants, donations, and program fees.
• Your nonprofit statement of financial position/balance sheet won’t have an equity section. Instead, you’ll notice a net asset section.

It’s also especially important to note that in the nonprofit space, transparency in reporting is paramount. You need to be able to show your staff, your board, your funders, and your community that you are stewarding the funds responsibly. This is important for nonprofit regulations and to maintain the trust of your constituent donor base.

The Right Software is Key

The best way to ensure you and your staff are prepared to properly maintain your financials is to have the right software.

Nonprofit accounting software, also called fund accounting software, is designed specifically to help nonprofits conserve capital and maintain fiscal accuracy. When organizations get accounting systems specifically tailored for nonprofits, they can:

• Provide actionable data to use in strategic decision making
• Ensure that donor and grant restrictions and intent are met
• Provide internal accountability to safeguard assets
• Meet unique financial reporting requirements
• Have a clear and concise net asset roll forward

Nonprofit specific accounting software will also help you maintain compliance with nonprofit financial regulations and standards. You can track and manage items like grants and endowments more efficiently. Selecting and using nonprofit accounting software is a huge step towards success for your organization.

Be Prepared to Lead the Nonprofit

You’ve decided to make the move and become a CFO at a nonprofit. It’s an exciting step in your career, and likely a very fulfilling one. But understand that a lot of the processes you use in for-profit accounting will be different in your nonprofit role. By understanding the key differences in the goal of your finances, tracking your income, and reporting—as well as using a nonprofit accounting system—you’re already firmly on the road to success for your new organization.

Did you recently start a new accounting role only to realize that you’ve inherited a less-than-optimal accounting situation? Check out our white paper to help you analyze and identify problem areas, with suggestions on how to get your nonprofit accounting office running smoothly.