Nonprofit Fund Accounting: A Silo Solution

Don’t Forget Your Compass

In business, most everything can be traced to one, quantitative goal: profit. The canonical bottom line exists as a sort of North Star for any profit-seeking business. In the not-for-profit world, things aren’t so cut and dry. For a nonprofit, there are two “bottom-lines”: the mission and keeping the lights on. It’s this blend of qualitative and quantitative forces – in concert with a series of donation restrictions – that makes finding North quite the challenge. If you’re feeling like a lost explorer, don’t fret. Let the compass that is nonprofit fund accounting be your guide for resource allocation and use.

What is Nonprofit Fund Accounting?

Nonprofit fund accounting helps answer the question, “What should I set aside for <insert cause here>?”. It can’t tell you how much money to set aside, but it can tell you which money. If you’re confused and thought you could be money agnostic, please read up on donor restrictions here.

Setting up a fund is like setting up another company inside within your nonprofit. Each fund gets its own set of books, expenses, liabilities, revenues, and other accounting mechanisms that let you monitor and report fiscal health. This partition allows you to cleanly isolate the expenses and revenues associated with a given fund. For example, you may decide to set up a fund dedicated to just the housing component of your nonprofit’s disaster relief effort. Instead of losing the expenses, revenues, and other useful bits of data to the noise that is fund-less (and fun-less) accounting, you can neatly organize your resource allocation and return with a fun little fund.

Empathize with Your Nonprofit: What if It Were You?

Between the mortgage, the groceries, and the umpteen subscriptions to redundant streaming services, existing is expensive and complicated. What if your only tool to combat the fiscal madness was an accountant writing your net change in assets on a sticky note once a month. It’s better than nothing but impossible to make meaningful and educated financial changes.

The first piece of advice every Warren Buffet type will give you about personal finance is “learn to budget”. Though boring, it really does make a world of difference. Learning what aspects of your life generate and deplete your resources allow you to make changes to your lifestyle. Categorization and budgeting is one of the greatest tools in your personal finance tool belt. Why wouldn’t you do the same for your organization with nonprofit fund accounting?

More Than a Fund, a Friend

Although you may implement nonprofit fund accounting to ensure your don’t violate rules found in FIN46 and FASB117, your motivations don’t need to end there! Nonprofit fund accounting helps prevent misuse of funds. It should come as no surprise that siloing various accounting efforts reduces the oversight found in the spaghetti approach. More than the internal gain, nonprofit fund accounting can be a marketing tool! Think of the confidence you could give your donors by showing them exactly for what their donation will be used. Even further, offering a selection of funds for your donors helps clarify your mission and signal to prospective donors your accounting competence.

Get a Friend for Your Fund

Although your first impulse might be to set up a bank account for every item on your to do list, don’t do it! A poorly planned approach to organization is NOT better than nothing at all. When implemented poorly, nonprofit fund accounting can cause stratification and confusion. That’s why we suggest bringing on experts to help you develop out a code to implement these silos rather than building actual money silos from the ground up. Look for the accounting solution that produces gain, not grain.

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