When Nonprofit Bookkeeping Blunders go Nuclear: A Guide in What NOT to Do
In honor of financial literacy month, we are putting a spotlight on where nonprofits go wrong in financial management. In the realm of nonprofit organizations, meticulous bookkeeping is not just a good practice; it's essential for financial stability and accountability because about 30% of nonprofits fail to exist after 10 years, according to the National Center on Charitable Statistics. With this, even with the best (or worst) intentions, nonprofits can fall prey to various bookkeeping blunders that can jeopardize their operations and mission. In this blog, we'll explore some common nonprofit bookkeeping mistakes and provide extreme examples of nonprofits gone wild.
Neglecting to Separate Personal and Organizational Finances:
One of the most prevalent blunders among nonprofit founders and small teams is failing to keep personal and organizational finances separate. Mixing personal expenses with nonprofit funds not only complicates bookkeeping but also raises red flags during audits or financial reviews. To avoid this blunder, establish separate bank accounts and credit cards for your nonprofit, ensuring all transactions are properly categorized.
This article reports on a former CEO of a Hollywood anti-poverty organization, Youth Policy Institute (YPI), embezzled funds from the non-profit. CEO Dixon Slingerland admitted to using over $71,000 of the organization's funds for personal expenses, including property taxes, private tutoring, and a lavish dinner. He also misused funds for personal political donations and underreported his income. YPI, which offered assistance to low-income families, filed for bankruptcy in 2019, leaving nearly 1000 employees jobless. This is an extreme example of how lack of infrastructure can snowball.
Inconsistent Record-Keeping:
Consistency is key when it comes to bookkeeping. Yet, many nonprofits struggle with maintaining accurate and up-to-date financial records. This can lead to confusion, errors, potentially fraud, and ultimately, financial mismanagement. Implement a reliable system for recording income and expenses, whether it's through accounting software or manual spreadsheets. Schedule regular bookkeeping sessions to ensure all transactions are promptly recorded and categorized correctly.
This article discusses a case where a former employee of Chicago's Field Museum embezzled over $900,000 over seven years, as revealed in the institution's 2014 tax return. The theft was discovered during a restructuring and internal financial review in early 2014. The employee, who handled cash payments for memberships, pocketed cash without recording payments in the museum's system. The museum promptly fired the employee, conducted a forensic audit, and alerted law enforcement. The museum maintains that no public funds or donations were compromised. If the museum had better record keeping and receipting systems in place, this would have been caught much earlier.
Ignoring Grant Compliance Requirements:
Nonprofits often rely on grants to fund their projects and initiatives. However, failing to adhere to grant compliance requirements can result in serious consequences, including loss of funding and damaged relationships with donors. Make sure to thoroughly understand the terms and conditions of each grant, including reporting deadlines and expenditure restrictions. Keep detailed records of grant-related expenses and outcomes to demonstrate accountability and compliance.
The article depicts a scenario where the National Indian Women's Health Resource Center in Tahlequah failed to comply with grant requirements, resulting in mismanagement, allegations of fraud, and loss of funds. Despite receiving millions in federal grants intended for programs benefiting Native American women, the organization diverted its focus to youth programs within Cherokee County, neglecting its original mission. Lack of oversight and proper management led to years of financial mismanagement, including allegations of embezzlement. Despite warnings from employees and consultants about non-compliance, the organization's leadership failed to take appropriate action.
Ultimately, the mismanagement led to the resignation of board members, allegations of fraud against the former executive director, and the organization being left unsupervised. The article highlights the importance of adhering to grant compliance requirements and maintaining proper oversight in nonprofit organizations to ensure effective use of funds and mission alignment.
Overlooking Donation Tracking:
Donations are the lifeblood of many nonprofit organizations, yet tracking them accurately can be challenging, especially during busy periods or fundraising campaigns. Neglecting to record donations promptly and accurately can lead to discrepancies in financial reports and donor dissatisfaction. Invest in donor management software or implement a systematic approach to track donations, ensuring that each contribution is properly documented and acknowledged.
This article highlights a case where a nonprofit organization, Immunize Nevada, faced termination of grants due to oversight in donation tracking and financial management. Despite receiving reimbursements from the state for payments to vendors, the organization failed to pay over $400,000 to vendors, leading to funding suspension. Additionally, it was found that the organization didn't have proper systems in place to administer federal grants or track grant-related work time.
The article also mentions concerns of possible fraudulent activities. The termination of grants, totaling roughly $4 million, has had significant consequences, leaving the organization struggling financially and unable to fulfill its mission effectively. The situation underscores the critical importance of accurate donation tracking and compliance with grant requirements in nonprofit organizations to maintain trust and financial stability.
Failing to Budget Effectively:
A well-planned budget is essential for nonprofit organizations to allocate resources efficiently and achieve their goals. However, many nonprofits make the mistake of either not creating a budget or deviating from it without proper justification. Take the time to develop a realistic budget based on anticipated income and expenses, considering factors such as fundraising efforts, program costs, and administrative overhead. Regularly review and adjust the budget as needed to reflect changes in the organization's financial landscape.
One example of this is the Association for Volunteer Administration (AVA), which faced significant financial turmoil due to ineffective budgeting and mismanagement. Despite claims of being in "good financial health," an audit after the 2005 conference revealed that AVA was $300,000 in debt. The board was unaware of the true financial state until then, highlighting a lack of oversight and transparency.
Mismanagement included overspending on salaries and executive travel, unauthorized contracts, and misappropriation of funds. The organization ultimately closed its doors in March 2006 with $259,000 in debt. This failure underscores the critical importance of sound budgeting practices and proper financial oversight in nonprofit organizations to ensure sustainability and avoid catastrophic outcomes.
Effective bookkeeping is a cornerstone of financial stability and transparency for nonprofit organizations. By avoiding common bookkeeping blunders and implementing best practices, nonprofits can safeguard their finances, maintain donor trust, and focus on advancing their mission. Take proactive steps to establish sound bookkeeping procedures, invest in appropriate tools and resources, and seek professional guidance when needed. With diligent attention to financial management, nonprofits can thrive and make a lasting impact in their communities.