Category

Accounting

Jul 31
0

Staying Calm in the Center of the Storm: How Leaders Mitigate Financial Uncertainty

By | Accounting, Nonprofit | No Comments

As we pass the midyear mark, many nonprofit leaders are pausing to take stock of the current economic and business climate. The turbulence of the last few months has left many pondering ways to mitigate uncertainty. With federal funds shifting, grants changing, and donors’ pocketbooks shrinking, nonprofit leaders must face the future with calm, deep determination, and a sound plan to guide them.

Three essentials form their plan:

  1. Diversifying revenue streams
  2. Delaying or reducing expenses
  3. Accelerating automation
person in office meditating while people yell at her

Nonprofit leaders who focus on these three essentials can weather the storm of uncertainty and lead their organizations to a successful future.

Diversify Revenue Streams

Diversification is the secret to managing uncertainty. There’s an old saying, “Don’t put all your eggs in one basket.” Nonprofits that put all their income “eggs” into one basket—relying on federal funds, for example, or heavily relying on a single grant or donor—may find themselves struggling if something unexpected happens. Federal funds can be cut or put on hold; grants may be awarded to someone else; donors may choose to give their money elsewhere.

To mitigate against this risk, it is vital to ensure that your nonprofit has multiple, diverse income streams. Examine the current revenue patterns; what are the risks? Even something that seems sure, like an annual fundraiser, can be risky if your organization relies on it for its sole source of funding.

Look for small but meaningful ways donors can contribute. Add new events, fundraising campaigns, and resources. Explore alternative grants and program revenues for additional funding. But above all, make sure you aren’t relying on a single revenue stream to support the entire organization.

Reduce or Delay Expenses

Look for ways in which you can reduce current expenses or delay new ones. Some ideas include reviewing recurring expenses and subscriptions and cutting back on duplicative services. Does the marketing department really need two graphic design programs, or can they use only one? You’d be surprised at how expenses can creep up over time. Comparison shop for major expenses, such as rebidding insurance policies and gathering competitive bids for contracted work, to ensure you are getting the best value for your money.

Delaying expenses is another tactic to improve financial stability during times of uncertainty. Can you wait to add new staff or launch a program? Examine upcoming budgets and expenses and identify ways to delay or defer major expenses.

Accelerate Automation

Accelerating automation means using technology to automate as much as possible, reducing manual work for your existing staff. AI is a good example of automation. Many nonprofit accounting systems now include AI components that can schedule invoicing and payment reminders, send documents for approval, and run and email reports to stakeholders without requiring people to key in requests. These rule-based systems save considerable time by performing common tasks without prompting. Explore the automations already built into your existing software.

Or consider adopting a new cloud-based nonprofit accounting system. Sage Intacct and MIP Fund Accounting both offer excellent nonprofit accounting platforms that can help you better manage your finances. These and other accounting and financial management systems can make it much easier to budget, forecast, and prepare for the future.

Navigating the Future

We can’t control the future, but we can take steps today to prepare for anything that comes up. Preparing for financial uncertainties includes diversifying income streams, reducing expenses, and automating as much as possible to free up staff time. When taken together, these three steps can go a long way toward laying the foundation for a solid financial foundation.

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.

Jul 29
0

Payment Matters: Nonprofit Payroll Facts and Fiction

By | Accounting, Nonprofit, Tax | No Comments

Just because you run a nonprofit organization doesn’t mean that you work for free. Nonprofits, like their for-profit counterparts, hire workers and are required to pay all federal and state employment taxes.

Many people have misconceptions about payroll and nonprofits. Such misconceptions can be costly. Let’s look at the myths and facts about nonprofit payroll.

Myth busting: Fact versus Fiction in Nonprofit Payroll

First, how well do you understand the world of nonprofit payroll and employee classification? Answer “true” or “false” for each statement.

  1. Nonprofits’ employees’ pay rates are significantly lower than those of comparable for-profit organizations.
  2. Nonprofits are tax-exempt, so they don’t have to submit federal payroll taxes.
  3. A person who comes into the office, works on-site 40 hours a week, and receives a monthly payment can be declared an independent contractor if they sign an independent contractor agreement.
  4. Employee misclassifications aren’t a big deal; you just pay a fine.
  5. You can discard employee documentation after one year.

Every single answer was false, so if you marked any as true, brush up on your payroll and employee compliance knowledge. Even a small mistake can be costly when it comes to complying with employment classification and taxation rules.

Employee Classification

First, the tricky bit: employee classification. Nonprofits often have four categories of workers: volunteers, independent contractors (or freelancers), part-time, and full-time employees. Proper employee categorization ensures your organization remains fully compliant with federal and state tax and employment laws.

The classification that can trip nonprofits up the most is the difference between an independent contractor and an employee (full or part-time). The IRS guidelines for classifying employees have shifted over time, placing the burden squarely on employers to prove their classifications. And, if you misclassify an employee as a contractor, you can face stiff penalties and fines that can put a big dent in your organization’s finances as well as ruin the trust of your donors.

The IRS lists three general categories employers must consider when evaluating contractor versus employment status. There is no one ‘right’ or ‘wrong’ mix of responses. The evaluation considerations vary according to company and industry, but applying the so-called common law rules is important to avoid misclassification.

These common law rules focus on the degree of control and independence of the worker:

  • Behavioral: Does the payer control or have the right to control when and how the worker completes the job? For example, do you require the worker to provide services at your place of business, or, if a remote worker, require them to log on during certain business hours?
  • Financial: Are the business aspects of the person’s job controlled by the payer? In other words, does the payer control how the worker is paid, expense reimbursement, or benefits? Who provides the tools and equipment to the worker? Providing laptops and office space indicates an employment relationship, for example.
  • Relationship: Is there a written contract specifying the nature of the relationship? Does the worker-payer relationship continue indefinitely? Is the work performed a key aspect of the business? For example, an independent contractor is often hired for a specific project or task that no full-time employee can fulfill.

If these categories sound vague, they are – and it’s purposefully vague, since companies, industries, and roles vary considerably. However, using common sense and answering the questions honestly can point you in the right direction. And, when in doubt, treat the worker like an employee. If the IRS ever deems that person misclassified, the penalty is back wages, penalty fees, and more that can accrue to a much higher amount than what you would have paid for the person’s salary in the first place.

Payroll Taxes and Salaries

Another common misconception is that because nonprofits are tax-exempt, they are exempt from paying payroll taxes. This is a myth. You must file and pay relevant federal and state payroll taxes, including unemployment taxes, FICA (Social Security and Medicare taxes), and any relevant state unemployment taxes.

As for salaries, another common myth is that joining a nonprofit is like joining a religious order – in other words, that you are taking a vow of poverty. Nonprofit salaries can be equal to those of the for-profit world. In fact, they often must be to attract the best talent. Boards must often approve salaries, but as long as they are not deemed excessive, they can certainly reflect the ‘going rate’ for talent.

Outsourcing to Professional Payroll Processors

One approach for nonprofits to comply with payroll regulations is to outsource payroll processing to a third-party provider. These companies specifically focus on federal and state compliance, issue employee payments, and ensure appropriate deductions are taken and reported to tax authorities. They can often take a considerable burden from your accounting staff, especially if you work with remote employees and need to juggle multiple tax jurisdictions.

Employment and taxation laws can be complex, so work with someone knowledgeable in both if you have questions about your organization and its employment and tax practices.

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.

Jul 27
0

What’s in a Name? The Differences Between Bookkeepers, Accountants, and CFOs

By | Accounting, Nonprofit | No Comments

Almost every nonprofit eventually reaches a point where it needs help with its accounting beyond what the existing team provides. Deciding which positions to add and who to hire can be challenging. Should you hire a bookkeeper? An accountant? Or do you need a Chief Financial Officer (CFO) and additional accounting support staff?

Each person in the accounting team—bookkeeper, accountant, CFO—performs different functions. Let’s discuss what they do, and how you can figure out which one you need to help your nonprofit grow.

person with speech bubbles: cfo? acountant? bookkeeper?

What Do Bookkeepers, Accountants, and CFOs Do?

Think of bookkeepers, accountants, and CFOs like the musicians in a symphony orchestra. Each plays an important role in keeping an organization’s finances humming. Sometimes you need one role, but as your organization grows, you’ll need the full “symphony” to make beautiful financial music.

  • Bookkeepers process daily transactions. They see that the bills are paid, invoices are sent, and the accounts are reconciled. They also process payroll.
  • Accountants provide similar services to bookkeepers, but also prepare financial statements, ensure compliance with GAAP, and help you understand your organization’s financial information.
  • Chief Financial Officers (CFOs) focus on strategy. They provide advice, strategic direction, prepare and explain budgets, work with lenders, and provide overall financial leadership.

Each person plays an important role in your organization’s growth. Choosing the right role to complement the existing team depends on which growing pains you’re experiencing.

Choosing the Right Role for the Organization’s Needs

One way to assess which position is needed is by examining your current pain points. Where is the organization feeling the pinch?

  • Are you struggling to issue invoices, pay bills, and reconcile accounts each month within two weeks of the end-of-month close? If you answered, “Yes,” you probably need a bookkeeper.
  • Do you need help preparing financial statements? Are you struggling to handle tax season because your accounting system isn’t kept up to date? Do you need more in-depth reports but can’t easily generate them? This indicates another accountant on the team might be needed.
  • Is your organization’s president making all financial decisions? Could leadership use senior-level advice and strategy-setting discussions? Are you struggling with budgeting, forecasting, and planning? These are areas that a CFO would support.

Each position plays an integral role on the team. However, sometimes their job functions do cross into a gray area. For example, an accountant may also perform some bookkeeping functions in a small organization. A CFO may also do some accounting, such as preparing financial statements, depending on their complexity and the organization’s needs.

Should You Outsource or Hire Someone?

This is a great question, and one that you should consider carefully. Many organizations assume that all accounting functions should be handled by a full-time person. However, in a rapidly growing organization, it may make sense to outsource one or more roles. Many nonprofits, for example, outsource some of the strategic accounting decisions to consultants like Welter Consulting. We can bridge the skills gap and provide guidance in many matters.

Others hire a fractional CFO to help build a strategy while their full-time staff handles basic daily accounting. A fractional is a part-time, independent contractor typically hired for their deep industry experience. They work for specified hours each month or on designated projects, adding high-level skills and clarity to the organization without the expense of a full-time hire.

Another way organizations outsource some of their accounting functions is by using a third-party payroll processing firm. As the name suggests, such companies handle payroll and related tasks such as payroll taxes. Any combination of full-time, part-time, and outsourced help may be appropriate. It really depends on your needs, budget, and preferences.

You Have Choices

The good news is that you have many choices. You can hire either part-time or full-time staff or hire a fractional contractor or a consultant. Or you can find an external firm to augment internal resources. By understanding the differences among these positions and how each serves an organization best, you can make better choices on how to improve your accounting and finance areas.

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.

Jun 29
0

Preparing for a Retirement Plan Audit (It’s Not as Bad as It Sounds)

By | Accounting, Audit, Nonprofit | No Comments

The word “audit” generally has unpleasant connotations, but frankly, nonprofits should be used to the term by now! Most nonprofits work with independent auditing firms to ensure compliance with accounting and other rules, and third-party audits build trust with donors. Other audits may be conducted, for example, by the state employment commission to ensure compliance with workers’ compensation laws and payments. Each of these audits focuses on a different aspect of your business, and none of them indicate something is wrong – they are just part of doing business as a nonprofit organization.

There’s another type of audit you may not be as familiar with, especially if your organization is small: a 401K or retirement plan audit. The Department of Labor (DOL) requires organizations to file an annual Form 5500, which reports on the plan’s financial condition.

blurred image of keyboard with crowd of people with an overlay of the word audit and symbols to support the idea

Plan sponsors with fewer than 120 employees participating in the program at the start of the year can file a short Form 5500 and generally do not require an audit. However, once your organization has 121 employees participating in the retirement plan at the start of the year, the longer form must be used, and this automatically triggers an audit.

Who Conducts the Audit and When Is It Due??

If your organization must conduct an audit, you are responsible for hiring an independent accountant or accounting firm to complete the retirement plan audit. Form 5500 is due on the last day of the seventh month of the plan year. The plan sponsor may file for an extension if necessary.

Who Participates in the Audit and What Do They Do?

Generally, the plan administrator or sponsor, recordkeeper, and custodian all participate. Each must provide all required records and answer questions. The investment advisor should also attend, as this professional’s guidance directly impacts the fund. Lastly, the auditor will, of course, lead the audit and work with all participants to gather and analyze the necessary plan records.

How Audits Unfold

A thorough audit can take several months, so it’s best to contact the independent accountant several months before the actual audit is due. The auditor provides a list of documents necessary for the audit, and the plan sponsor and other participants gather and send the documents to the auditor. The auditor then reviews the documents. They may have questions or need clarification on certain items. After they complete their review, they prepare financial statements and the final audit report.

Documents Needed

Many documents are needed to successfully complete a retirement plan audit. These include, but are not limited to:

  • Current IRS letter
  • All plan documents
  • 401K administrative meeting minutes
  • Rollover, distribution, and loan reports that detail transactions by participants
  • Participant Account Summaries
  • Statements of Net Assets Available for Benefits and Statement of Changes to Net Assets Available for Benefits 
  • Draft Form 5500
  • IRC Compliance Testing Results
  • An employee census with details of the plan participants

A second set of documents may be requested. This includes a sample of the employee participants and may require Form I-9, detailed payroll and reporting records or stubs, termination records, and requests for transactions.

Once the audit is complete, you will receive the report and documentation needed to complete your filing.

Audits, Just Part of Running a Nonprofit

Audits can require significant time and effort to gather the necessary documents, but they provide a valuable service. Not only will your audit report help ensure compliance with retirement plan requirements, but the detailed findings and report can be a valuable tool for improvement. With the right approach and planning, your retirement plan audit can go smoothly and will become just another annual milestone for your growing nonprofit.

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.