Non-Profit, Not-for-Profit & Education Institutions Industry
Non-profits and Not-For-Profits are organizations whose sole purpose is to serve society by furthering a particular social cause or objective. They are tax-exempt entities, which means they do not pay income tax on the earnings that relate to their mission. Contributions made to non-profits by donors or supporters are tax-deductible. They typically fall into religious, scientific, research, and educational categories.
Non-profits (501c3) and Not-For-Profit (501c7), while typically used interchangeably by many people, are not the same type of entity and do have differences. Although both entities are not “for profit,” the income that they each earn is used differently. In a non-profit (501c3) any excess income is returned back to the organization wherein a Not-For-Profit (501c7) the extra income is used to pay those who do work on behalf of the organization.
In addition, nonprofits’ volunteers and employees do not receive money from fundraising operations, however, they may earn a salary for work that is independent of the money that they have fundraised. In a Not-For-Profit, members of the organization can benefit from fundraising efforts.
While Both non-profits and not-for-profits are tax-exempt, each entity has different tax code regulations. A non-profit is tax-exempt under 501(c)(3) if it is classified as religious, charitable, or an educational based organization. Not-for-Profits are tax-exempt under 501(c)(7) if their organization is for pleasure, recreation, or other nonprofit classification.
It is very important that your accounting team knows and understands the distinctions between non-profits and not-for-profit entities.
Industry Challenges
Accounting in the non-profit and not-for-profit space differs from for-profit accounting in many different ways. Some of the key factors that differentiate this sector from the for-profit segment are that there are typically no owners, the purpose of the entity is not to earn a profit for the betterment of owners or shareholders, and a significant amount of earnings comes from donations and contributions from supporters. As a result, accounting in this sector is commonly referred to as “fund accounting” and can be complex for accountants not familiar with these types of businesses.
Fund accounting, commonly used in the non-profit space and government entities, allows organizations to track every dollar that has been used back to the donor’s intention. In other words, Fund accounting allows each entity to determine where the funds came from, what the designated use of the funds is for, and whether the funds were used for the correct purpose if they were intended for a specific use. Unlike a for-profit entity that has a balance sheet, in the non-profit space Net Assets (either “with or without donor restrictions”) is used on a “Statement of Financial Position.”
Compliance with the management and use of funds is paramount for Non-profits, as any appearance of impropriety or mismanagement of funds, even if it is unintentional, may lead to the loss of donors and of the non-profit status. It is more important than ever to make sure you have a financial team on your side that can help guide you through these ever-changing business conditions.
Below are the services we provide to Non-Profits and Not-For-Profits:
- Fund Accounting (Net Assets with donor and without donor restrictions
- Statement of Activities
- Statement of Financial Positions
- Statement of Cash Flows
- Statement of Functional Expenses
- Donations/Funding Goal Reporting
- Donor Pipeline Tracking and Forecasting
- Reporting by program/department
- Cost per fundraising
- Analysis of General and Administrative Expenses
- Developing Key Performance Indicators (KPIs) and Key Risk Indicators (KRIs)
- Board Reporting and Presentations
- Annual Budgets
Other Deliverables we provide to Non-Profit and Not-For-Profit Entities:
| Annual Budget and Financial Business Plan | |||
| Earnings Forecast | General & Administrative (G&A) Expenses Vs. Budget | Accounts Payable Aging | Accounts Receivable Aging |
| Debt Covenant Compliance | Gain/Fade Analysis (Comparison of profit margins from period to period) | Development and analysis of KPIs (Key Performance Indicators) | Evaluation of Internal Controls and Development of Standard Operating Procedures (SOPs) |
| Comparison of actual results to the plan | Other Ad Hoc Reports requested by management |
Additional Services CFO Strategies Provides
| Work with lenders to obtain lines of credit | Identify and develop new banking relationships | Work together with outside 3rd parties (CPAs, Insurance, Regulators, auditors) | Assist in recruiting and training staff |
| Serve as a trusted business advisor | One-off projects such as mergers and acquisitions | Assist in implementing new regulations (PPP, EIDL programs) |