Monthly Archives

January 2024

Jan 23
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Best Practices and Tips to Prepare the Statement of Functional Expenses

By | Accounting | No Comments

In nonprofit accounting, the Statement of Functional Expenses is a financial statement that provides detailed information about how an organization’s expenses are allocated to different functional categories. This statement is a key component of the financial reporting for nonprofit organizations, offering transparency and accountability regarding the use of resources. It typically categorizes expenses into three main functional areas including program services, management and general expenses, and fundraising.

The purpose of the Statement of Functional Expenses is to provide stakeholders, such as donors, grantors, and the public, with a detailed breakdown of how the organization is utilizing its resources to achieve its mission. This level of detail helps in assessing the efficiency of the organization’s operations and its commitment to fulfilling its nonprofit purposes.

Nonprofit organizations are often required to include this statement in their financial reports, particularly for compliance with accounting standards and regulations. It contributes to the overall transparency and accountability of the organization’s financial activities.

We’ve put together a list of simple steps to help you prepare an effective, clear, and easily understandable Statement of Functional Expenses.

Step 1: Gather Relevant Data

Your first step is to gather the necessary data for the statement. Understand what you are trying to express, and what data you may need to gather. Identify the sources of data available both internally in your organization and possibly from third party sources. This may include reports available from your own systems as well as surveys, data reports from industry experts, constituent interviews, and more.

Step 2: Organize and Validate

Your next step is to organize the data and validate it. Organizing the data electronically into files and folders on a cloud-based system ensures that everyone working on the statement has access to the same information. Depending on how much information you have, consider various organization aids: a hyperlinked table of contents or spreadsheet to find documents can come in handy when working with a large number of files.

Additionally, you’ll need to validate the data. Check all the facts. Cross-reference data. And be sure that any third-party sources you cite are recent. A good rule of thumb is to use data that’s no older than two years, if possible.

Step 3: Analyze and Interpret

Next, analyze and interpret the data. This step may take the longest, and it should be conducted thoughtfully and carefully to ensure that no erroneous conclusions are drawn from the existing data. You may need to conduct statistical analysis, trend analysis, or draw conclusions from the findings.

Classifying Functional Expenses

Every business must classify expenses. Nonprofits face an added challenge because the classification of functional expenses assigns a “why” to every dollar spent. Consider how you classify expenses. A great way to begin is to reference your organization’s mission statement. By identifying the value of each expense as it pertains to your mission, you’ll naturally create direct links between expenditures and mission in an honest and accountable way.

If you organization is undergoing a nonprofit audit, you must present expenses by functional area as part of your accounting. A CPA must include a statement saying that the financial documents were prepared according to generally accepted accounting principles (GAAP).

Tracking functional expenses by category and preparing the statement of functional expenses is both a necessary compliance step and a further step for organizational transparency. By working with your CPA and helping prepare these statements, you’ll help ensure accuracy, transparency, and value for your constituents.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Jan 16
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The Art of the Close: Closing Best Practices

By | Accounting | No Comments
people using a laptop computer, calculator, and clipboard and pointing at screen

Like most accounting tasks, there are best practices pertaining to closing. In a recent presentation, we shared our experience with closing, as well as best practices. This article shares that information, and we’ll continue sharing more next month so that you too can have the latest accounting best practices.

Three Types of Closing

In accounting, there are various approaches to closing financial records, each serving distinct purposes.

The first method is the “No Close” approach, where the books are intentionally left open, allowing for adjustments to be made, as necessary.

Another technique is the “Soft Closing” or “Pre-Closing” of a fiscal year, which safeguards the integrity of account balances by restricting any transaction postings to that specific period. Soft closing permits the reopening of fiscal years or periods if needed.

“Hard Closing” involves permanently preventing any postings to a fiscal year. Lastly, a combination of both “Soft and Hard Closing” strategies may be employed to strike a balance between maintaining flexibility for adjustments and imposing more stringent closure measures for certain periods. Each type of closing method offers its own advantages and is chosen based on the specific requirements and preferences of the organization.

When Should You Close Accounts?

The frequency and due dates for closing procedures in accounting are flexible, allowing organizations to tailor their approach based on specific needs. Not every step in the closing process needs to be completed each month, offering adaptability. Organizations can opt for a monthly, quarterly, or annual close step, depending on factors such as the volume of transactions, the complexity of the organization, and the efficiency of the accounting system(s). This approach ensures that the closing process aligns with the unique requirements and operational characteristics of each organization.

Barriers to Effective Closing

Several potential barriers or hurdles may impede the completion of the closing process in accounting. One significant challenge arises from system or software limitations, where the existing tools may lack the necessary capabilities for a smooth and efficient closing. This can hinder the overall process and necessitate workarounds or additional manual efforts.

Another obstacle is the lack of time to set up a Close checklist. The demands of other priorities may leave little room for the meticulous planning and organization required for an effective closing procedure. This time constraint can result in oversight and errors during the process.

Adjustments pose another challenge in closing the books. Unforeseen changes or corrections may be needed and addressing these adjustments can be time-consuming and complex. Late invoices or receipts further compound the issue by introducing delays and potentially disrupting the entire closing timeline.

The existence of separate systems that do not interface and require manual entry creates a considerable barrier. This not only adds to the workload but also increases the likelihood of errors, as information must be transferred manually between systems.

Closing isn’t for perfectionists. Although you want to be as accurate as possible, perfection isn’t the goal, and striving for absolute accuracy may lead to excessive scrutiny and time spent on minor details, potentially delaying the overall completion of the books.

Moreover, a lack of understanding about reconciliations and closing procedures among team members can impede progress. Adequate training and communication are essential to ensure that everyone involved comprehends the importance and intricacies of the closing process.

Staff shortages or absences during key times can be a significant hurdle. The unavailability of essential team members can disrupt the workflow and lead to delays in completing the necessary tasks.

Finally, if it takes too long to close the books each month, it can become a substantial barrier. Inefficiencies in the closing process may result in a drain on resources and can hinder the organization’s ability to respond promptly to financial insights and changes. Addressing these potential barriers requires a proactive approach, including system improvements, time management strategies, and ongoing training to enhance overall efficiency in the closing process.

More Tips for Effective Closing

In our next installment, we’ll share best practices for effective closing. If you have any questions about closing your accounts, let us know. We’re here to help!

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Jan 09
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Major Nonprofit Trends for 2024 – With Some Surprises

By | Nonprofit | No Comments

The cheering from the crowds in Times Square barely faded away before the trend pieces hit the internet. This is one of them. However, unlike anything you’ve read before, these trends for 2024 are focused on nonprofit organizations. We’ve followed the major news stories of the past several months to bring you a glimpse of what we believe to be the most significant trends of the new year for nonprofits. Most affect human resources and management. Which of the following do you think are most applicable to your organization?

Five Trends for the New Year Affecting Nonprofits

  1. Unionization
  2. Remote Work and Management
  3. Shortage of Experienced Executives
  4. Reporting Improvements
  5. AI

Trend 1: Unionization

The Hollywood screen writer’s strike of 2023 brought the notion of unionization to the forefront of public consciousness once again. Formerly the purview of manufacturing, the notion of workers banding together to ensure fair treatment has now percolated through all industries—including nonprofits. And while the writers’ strike was more about fair payment and ensuring their intellectual property was respected, nonprofits are also facing rumbles from their workforce. Most of these rumbles come from workers who feel their requests for additional resources aren’t being met. Management—and Boards— may recognize the need for additional help, but with the current economic environment, many managers have asked staff to wait for added resources. Whether or not this waiting period ends with a further push for unionization or not remains to be seen, but the signs are there that even nonprofits may find themselves discussing the pros and cons of unionization soon.

Trend 2: Remote Work and Management

Since the start of the pandemic, the topic of remote work (and management) has been a permanent fixture in the news. Whether its companies announcing they’re moving back on campus or workers demanding more flexible arrangements, remote work has increased and is here to stay.

Nonprofits should embrace this trend. Not only is remote work better for workers, but it can also be better for organizations, too. Organizations can tap into a wider employee pool by offering remote work options. Workers who never considered joining a nonprofit may be open to it if they view remote work options as a bonus.

Online project management systems, daily check ins, and better virtual communication through instant messaging apps and cloud-based software can all make remote work a seamless and effective option for nonprofits.

Trend 3: Shortage of Experienced Executives

Baby Boomers have retired, or will retire soon, and Gen X is following quickly on their heels. Additionally, many people in positions of leadership are experiencing significant burnout. Fewer want the added responsibility of executive positions. This has led to a shrinking pool of experienced people willing to lead nonprofits. If you’re recruiting for senior leadership positions this year, allow extra time, as it can be tough to find the right candidate. As always, consider grooming qualified candidates from within—the more you provide a stable promotion track and help employees gain the necessary skills for leadership, the better your organization will be.

Trend 4: Reporting Improvements

Gone are the days when some organizations tweaked their reports to allow some “flexibility” in financing. With both an emphasis on audits and modern computing, fuzzy reporting logic is a thing of the past. Instead, look for improvements in reporting including enhanced accuracy, greater accountability, and improved analytics thanks to affordable cloud computing and public demands for transparency.

Trend 5: AI

Artificial intelligence (AI) burst into public consciousness last year, and it continues to dominate headlines. The explosion and proliferation of generative AI tools has made them more accessible than ever, but should your organization avail itself of these innovations? There are many ethical, legal, and similar considerations around the smart use of generative AI. If your organization doesn’t have an AI policy in place, it’s time to think about one. Your board and legal advisors may wish to weigh in on the ethical and legal aspects of utilizing public generative AI tools, such as ChatGPT, and ensuring that proprietary information isn’t compromised in the tool. Because what ChatGPT ingests in the form of content or queries becomes its property, not yours. This is just one small example of the many gray areas surrounding this new tool, and one which your organization must consider before employees start using it without guidance. So, for the new year, consider guidelines for employees in the use of external AI tools, and whether adding AI-based platforms to your software stack can be a help or a hindrance.

Move Ahead with Confidence into the Future

As we move ahead into the new year, we look forward to the future. Even if some of these trends are unsettling, one thing is certain: nonprofits continue to add valuable contributions to society and to the economy. Each of these trends may contribute more than first meets the eye. It’s all in how you look at things.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.