Time to Outsource Your Accounting?
Outsourcing your nonprofit’s financial operations can further its mission and improve its bottom line. Here’s how to know if it’s right for you.
If you were to list your top priorities in running your nonprofit, you’d likely say serving your constituents, engaging with your donors, improving your programs, and stewarding your resources.
You might not say, “Elevating the accounting function.” But accounting might be the key to powering the rest of your list.
In fact, if your nonprofit is struggling to enact the items on your priority list, it might be time to tune up your financial operations. And one of the best ways to do that can be outsourcing your accounting.
In this post, we’ll explore key scenarios that indicate it’s time to outsource your accounting rather than trying to perform this function in-house. Here’s that list of scenarios up front:
- When You are Understaffed
- When Your Nonprofit Is Lacking Financial Skill Sets
- When Your Nonprofit is Lacking Controls
- When You Need to Reduce Costs
- When You Need to Grow
Let’s get to it!
When You Are Understaffed
Nonprofit leaders and staff wear multiple hats. Doing the job of more than one person, filling in wherever necessary, making do with less, and generally juggling a lot of balls come with the territory of servant leadership.
But with accounting, nonprofits shouldn’t get too complacent about the balls they’re juggling—and may drop. Those dropped accounting balls can lead to misunderstandings with donors, misallocation of funds, legal challenges, ethical questions, and eventually a fight for survival.
Following are signs that your nonprofit’s accounting function isn’t just garden-variety understaffed, but critically understaffed in a way that demands a solution sooner rather than later:
Key vacancies
Your nonprofit has lost its chief financial officer or the person who manages financial operations. No one with finance skills or knowledge is there to oversee accounting operations and keep them running.
Reporting backlogs and delays
You’re not getting the financial reports you need when they’re due, or your organization can’t meet financial reporting deadlines mandated by the board, governing entities, or other stakeholders.
Limited outlook
You don’t have and can’t put together a longer-term financial forecast, such as for five years, three years, or even one year. Thus you don’t have the confidence you need to pursue opportunities such as expanding a program or hiring a key role.
Limited insight
You don’t know and can’t find out what your nonprofit is paying for various goods and services. You operate day-to-day in the dark about your costs and your financial health in general.
Increasing errors and discrepancies
Your nonprofit’s financial statement errors have exceeded commonplace and acceptable levels. They’re growing in number and severity. You can’t reconcile accounts, pay your bills as they become due, or close the books properly.
When Your Nonprofit Is Lacking Financial Skill Sets
The accounting function at your nonprofit does not require that you have a certified public accountant on staff. However, it does require a set of accounting skills beyond basic bookkeeping.
Ideally, the person in the accounting role at your nonprofit has acquired these skills through some formal accounting training, or at least from previous experience at another nonprofit. If not, they may be able to pick up these skills via the training that you provide for them.
Here are the skills you’re looking for in someone doing your nonprofit’s accounting. If you’re coming up empty, it might be time to outsource your accounting:
Basic financial reporting
For someone on your nonprofit staff to handle the accounting function well, they must be able to perform the basics. This includes managing the balance sheet, cash flow statement, income and expense statements, accounts receivable, and accounts payable. It also includes closing the books at the end of the monthly, quarterly, and annual periods.
Financial analysis
Organized and accurate books are important, but you also need to understand the story they tell. A competent accountant can not only keep records and generate reports, but also convey their meaning so that you can determine how your nonprofit is performing, assess your opportunities and risks, and take the appropriate action. Discerning meaning from numbers requires various types of analysis: budget vs. actual analysis, break-even analysis, cost analysis, trend analysis, and financial ratios analysis.
Specialized financial reporting
Nonprofits have funding structures and financial regulations that aren’t present in private or public companies. Anyone performing the accounting function at a nonprofit must be familiar with these distinct elements to properly manage and report on the finances.
Nonprofit accounting requires fund accounting as opposed to cost accounting. It requires handling restricted and unrestricted funds, donor reporting, valuation of in-kind contributions, overseeing grant compliance, managing nonprofit tax structures, and dual reporting that complies with both Generally Accepted Accounting Principles (GAAP) and specific nonprofit accounting standards.
When Your Nonprofit is Lacking Controls
Controls are the mechanism through which your nonprofit minimizes risks. And controls are implemented and maintained by the accounting function.
With your nonprofit’s responsibility to its mission, its donors, the people it serves, and regulating authorities, it needs airtight controls.
Here are the signs that your controls are lacking, which means your nonprofit is vulnerable to risk. An outsourced accountant would help you mitigate these:
Little to no separation of duties
Each step in the financial process—from initiating transactions to recording them and reconciling accounts—should be handled by different people. This prevents a single person from having too much control over financial operations.
Little to no fund tracking
Managing restricted and unrestricted funds according to donor and grant requirements is one of the critical responsibilities that your nonprofit has. Without proper fund accounting, your nonprofit’s status could be at risk for misuse of donor-restricted funds.
Loose approval processes
The criteria and guidelines for authorizing expenses and financial transactions should be documented and clear. Expenditures over a certain amount should require multiple levels of approval. Unmonitored expenses, overspending, and bank statement surprises are signs that your nonprofit’s financial approval processes are lacking.
Sporadic financial reconciliation
Bank accounts, receivables, payables, and all other balance sheet accounts must be reconciled on a regular basis. This is how you identify discrepancies, distinguish errors from trends, and take any necessary remedial action.
No formal records retention or security policy
Your nonprofit needs procedures for maintaining financial documents. They must be archived, secure, and accessible in compliance with legal and regulatory requirements. They must also be prepared and ready for both internal and external audits.
When You Need to Reduce Costs
Outsourcing your nonprofit’s accounting function can sound like yet another item for the expense column. And it does, in fact, go into the expense column: the cost of outsourcing your accounting is about 3-4% of gross revenue. But this cost is lower than having a full staff in your accounting department.
Further, outsourcing the accounting function in a nonprofit reduces so many other expenses and risks that it tends to generate cost savings and open more opportunities in the long run.
If the following costs are pain points for your nonprofit, it might be time to outsource your accounting:
Talent
Hiring and supporting a full-time finance professional or finance team requires paying each person a salary plus 35% for employer taxes, health insurance, retirement, and other benefits. It also requires salaries commensurate with the cost of living in your geographic area. If you’re a nonprofit in a high-cost-of-living state, outsourcing your accounting gives you access to a geographically limitless pool of talent at much more affordable rates.
Technology
In-house accountants require the latest versions of powerful financial software. This drives up your fixed costs through perennial subscriptions, the need for computers with robust processing and storage capacity, and the need for access to IT experts. In contrast, outsourced accountants bring their own technology and tools to the job. And these technologies and tools are usually best-in-class. Their price tag would likely dissuade your nonprofit from purchasing and maintaining them in-house.
Inefficiencies
When your team is challenged to perform accounting functions that they don’t have the time, training, or resources to do, a lot of inefficiencies result. The more obvious ones are backlogs, delays, and errors. And these will show up not only in the accounting functions themselves, but in all the other functions that your employees can’t spend time on.
The less obvious (but arguably more critical) inefficiencies caused by the absence of a trained accountant are the opportunities that your nonprofit never pursues and the benefits it never realizes. These are things like:
- Cost-saving measures or performance improvements that an in-depth financial analysis would reveal.
- Systems integration that accountants can perform to eliminate duplicate entries. For example, integrating donor management and accounting systems allows for a single-entry process and increased efficiencies for both departments.
- Streamlined and time-saving financial operations. Outsourced accountants bring a lot of best practices and valuable shortcuts to the table. They can dramatically reduce the time from your (or your board’s) questions to the answers you need. And that frees you to enact your priorities much faster.
- When your expenses are tied up in inefficient financial practices, you have a reduced number of resources to launch new programs or create strategic partnerships.
When You Need to Grow
If your nonprofit is struggling to gain traction, expand its programs, or scale its reach, you need to focus on strategic planning.
Ideally, you need experienced leadership to steer the strategic planning process. A strong and seasoned leader can provide vision and direction for your mission, plus support for the forecasting and budgeting required to execute on the mission.
When you outsource your accounting for a growth push, you do the following:
- Free up the resources required to bring in talented leadership.
- Give yourself access to the professional forecasting and budgeting that this leadership will demand. Strategic decisions require fast access to financial information and a clear picture of in-depth financial analysis.
The outcome is that your nonprofit will grow faster and will be able to support this growth over the long term.
Some Final Thoughts on Outsourcing Accounting in Nonprofits
Nonprofits who are already concerned about their expenses often hesitate to outsource the accounting function. It’s another expense, and it seems like cold comfort for the underserved people you’re trying to help.
But for many if not most nonprofits, avoiding outsourcing shorts those underserved people in the long run. Outsourcing accounting is less expensive than hiring or training staff, and it delivers financial operations that stand alongside those in private industry. It builds your nonprofit while taking nothing away.
Ultimately outsourcing doesn’t mean giving away accounting responsibility. In fact, it means the opposite: investing in making the accounting function as professional and world-class as possible. Which is what your nonprofit and its mission deserve.
At Denise Henning CPA, we’re here to help your nonprofit with its resource challenges. We’ll get you the financial clarity and health you need so that you can get back to doing the job you love. And we can start helping in one conversation. Reach out to us today, or call us at (412) 719-8900. We look forward to hearing from you!