Financial Management for Nonprofit Organizations

 

Content sponsored by Araize

You might wonder why knowing accounting can lead to nonprofit sustainability. Without a clear understanding of basic accounting, your nonprofit may struggle to achieve its financial goals and fulfill its mission.

Knowing Accounting Strengthens Nonprofit Sustainability

Accounting is the cornerstone of running nonprofits and for-profits alike and its importance goes back to medievel times.

It is imperative that the management of your nonprofit, whether it is the Board or Executive have at the very least, an understanding of basic double-entry bookkeeping. A nonprofit well-versed in double-entry accounting will not immediately fulfill its mission, but it will allow them to understand the nuts and bolts of finance: balance sheets, income, expenses, matching revenue and expenses and long-term risk. It would also give them a clearer sense of what financial accountability really means. This knowledge accomplishes so much on different levels. Not only will it help you calculate your fund balances (net assets) by balancing debits and credits, it will make you more accountable by understanding the process of balancing the books in a moral sense.

Origins of Accounting

This concept goes back to Renaissance Italy, when merchants and property owners used accounting not only for their businesses but to make a moral reconciliation with God, their cities, their countries and their families. They even kept moral accounting records – tallying up their sins and good acts just like debits and credits. During this time, accounting was a key skill to learn, where a majority of citizens attended accounting schools.

Why Accounting Is The Key To Nonprofit Sustainability

Double-entry accounting spread to the Netherlands during the early 1500s, making this country the center of accounting education, world trade and early capitalism. Double-entry accounting was practiced by everyone from prostitutes to scholars. The best role model when it comes to being more accountable are the Dutch. It was the Dutch in 1602 who invented modern capitalism and the first publicly traded company – the Dutch East India Company, and the first official stock market in Amsterdam. It was the well-maintained culture of accountability that kept this company stable for a century.

History of Audits and Accountability

But the interesting thing that came out of this financial system was fraud. Investors complained that books were tampered with and demanded a “reeckeninge” or what we now know as a financial audit. The state did not allow the books to be audited in public, but they did conduct an internal audit which satisfied the company and state accountability. This set the stage for the common practice of auditing the books as we know it now.

However, in our society today, people have stopped learning double-entry bookkeeping, leaving it to specialists and accounting professionals. Most people don’t even know what it means. This leads us to why this is so important when it comes to nonprofits. Nonprofits need to ask themselves whether they want their nonprofit to be stable, sustainable and accountable. An excellent place to start would be to make double-entry accounting and basic finance part of the curriculum in high school, just like during medieval times.

Your Takeaway Tip

Knowing accounting gives you a clear picture of what financial accountability really means and how it relates to the audit process. It also gives you the insight to make your nonprofit more sustainable.

Joseph Scarano, CEO
Araize

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