Nonprofits are businesses too
Nonprofit businesses are sometimes called not-for-profit entities, especially by accountants. Unlike a conventional business, a nonprofit business’s main aim isn't to make lots of money.
Instead these entities are often charities or small clubs. They handle money, such as donations and membership fees, but in a different way to a for-profit business.
In other respects a nonprofit business works just like a regular business. Money comes in, money goes out, employees are paid and day-to-day operations are carried out.
All of this has to be accounted for, by law. There are legal processes that nonprofit entities have to go through – when they are formed and on a regular basis from then on. Nonprofit accounting is a big part of this work.
In this guide we'll look at what you need to do to set up your nonprofit company and keep it running smoothly – and legally.
Is your business really nonprofit?
Not all types of business are suitable to be run as nonprofit organizations. Here are some questions to ask yourself:
- What's your motive? What is the purpose of your business? If it's to provide charitable services, or to handle the accounts of a social or sports club, there's a good chance it qualifies as a nonprofit.
- Where will revenue come from? Nonprofits tend to get most of their income from donations, membership fees, fundraising events, grants from the public or private sector and perhaps investment income.
- Are there other nonprofits like yours? Whether or not your business will be granted nonprofit status depends on a number of factors. It will help if there are other nonprofit businesses with a similar structure.
The regulations vary depending on where you set up your business, so check local laws for guidance.
Six steps to get started as a nonprofit
There are some hoops to jump through before you can start running your nonprofit business:
1. Incorporate your business
File the necessary paperwork with the appropriate government agency. It's easy to forget to do this, but you may be liable for extra taxes if you don't do it on time.
2. Apply for tax exemptions
A big advantage of nonprofit entities is tax exemption. Again, do this early on to get the most benefit from it. Note that although your business is tax-exempt, your employees will still have to pay taxes.
3. Create a business plan
Good quality nonprofit accounting software can help you here, allowing you to run through different forecasts and scenarios. Play with the numbers and see which plan works best for you.
4. Plan your fundraising
You'll probably have no products or services to sell, at least at the beginning. So how will you raise money? A well-thought-out fundraising plan will help keep cash flowing in.
5. Look into financing
Nonprofits can apply for various grants and other forms of finance, from the public and private sectors. An online search can be helpful here. Check your government's business website for details.
6. Structure your outgoings
How much can you afford to spend? Your business was set up to provide a useful service, but you'll need to budget carefully to make sure expenditure doesn't exceed income. Again, accounting software can help here.
Record all revenues
Nonprofit businesses can have many different sources of revenue. Each of these must be accounted for:
- Pledges: A pledge is a promise to give money. Some pledges might be conditional on a future event (such as the same amount being matched by another donor), so record these carefully.
- Donations: These might come as a result of street collections, postal campaigns, cold-calling, web advertising or email marketing. All donations must be recorded, whether cash, check, money transfer or internet payment.
- Volunteer time: Time is money, and must be accounted for as such. That's especially true if it adds value to your organization, or if the person concerned has a special skill such as bookkeeping.
- Membership dues: These are collected by social clubs and societies in return for access to facilities or services.
- Special events: If you collect entrance fees for a fundraiser or other event, this is revenue to be recorded.
- Investments: Larger nonprofit organizations might buy investments such as stocks or land. There are rules about this, so check your tax office for details.
- Grants and other lump sums: There may be grants available for nonprofit businesses, from central and local government and also from the private sector. All the money you receive in this way must be recorded in your accounts.
Think like a regular business
Just because you're running a nonprofit business doesn't mean you can't strive to make your business successful. The more efficiently you run your organization, the better the service you'll be able to provide to the people who need it. Here are some ideas:
Hire the right employees
A nonprofit organization doesn't technically have an owner. But it does still have people in positions of responsibility, such as the secretary or treasurer. It's important that these people fulfill their roles to the best of their abilities. So make sure you hire well.
Strive to earn more than you spend
You're not technically trying to make a profit. But if you collect more in revenues than you spend, that extra money can be either reinvested or spent on extra services or facilities.
Look for business opportunities
Network with business owners, talk to advisors and your peers. Learn about opportunities to raise money for your nonprofit business or improve the services you offer.
Talk to your "customers"
The people receiving your business’s services can be considered as customers. Whether it's the members of the club you run or the recipients of your charitable services, talk to them. Find out what they really need from you, then tailor your organization to match.
Choose good accounting software to keep an eye on the numbers
Just like any other business, a nonprofit business is best run with one eye on the accounts. If you have the right accounting package you'll be able to do this easily. Look for these accounting features:
Ability to handle nonprofit organizations
That might seem obvious, but some accounting software was written only with conventional businesses in mind. Try to find a package that was designed with at least some input and feedback from nonprofit entities. It's likely to work better for you.
You might want to track things like accounts receivable ratios, liquidity graphs, monthly timelines of income and expenditure and other useful statistics. High quality accounting software will let you do this, with a 'dashboard' of useful numbers that you can access quickly and easily.
Collaborate from anywhere, at any time
Many nonprofit organizations are tight on money with no fixed office space, so they need to have employees working remotely. Cloud-based software make perfect sense here, allowing your accountant or bookkeeper to update the accounts wherever they happen to be.
Tools for growth
Your business might stay small, or it might grow as you reinvest revenue to help people. Choose nonprofit accounting software that can be scaled up for extra users, and extended with add-on apps to handle new features that you might need.
Automate those manual time-consuming tasks
If you're running a nonprofit business in your spare time, you'll want software that can handle all the important tasks for you – in one place. That way you'll get more done in less time.
Make the most of your nonprofit status
There are advantages to running a nonprofit organization. Obviously the big one is not having to pay tax on net income (subject to local laws).
The paperwork tends to be lighter, too, as governments try to keep nonprofit red tape to a minimum. For example, you may be exempt from providing regular balance sheets and statements of income.
All of this will hopefully leave your business with more money in its accounts. Use it wisely. Your organization was set up either to serve its members or improve the welfare of a group of vulnerable people – or society in general.
By following best practices and carefully monitoring all the money received and spent, you'll be able to serve those people well – and make a real difference to their lives.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.