How Accounting Can Impact Your Fundraising Strategies

6 min read

July 5th, 2024

Beyond compliance and annual reporting, fundraising and accounting might not seem inextricably linked.

However, nonprofit organization accounting can have a major impact on fundraising strategies, financial management, and organizational decision-making. A nonprofit's back office is an invaluable tool, a wealth of information, and a veritable control deck for leadership, fundraising, and financial health.

3 Ways Nonprofit Accounting Impacts Fundraising Strategies

1. Maximize the Use of Restricted and Unrestricted Funds

The most valuable type of donation a nonprofit can receive is a contribution of unrestricted funds because this money can be used for any purpose, whether it be spent directly on the mission or on overhead expenses (i.e. office supplies, utility bills, employee salaries, rent, etc.). Unfortunately, many funds received are not unrestricted but are earmarked for supporting a specific purpose or function. In other words, restricted funds must be spent in the manner mandated by the terms of a grant or the wishes of a donor. In addition to having use restrictions, restricted funds might also have a spending deadline, meaning if an organization does not spend the funds available from a grant by a specific date, they could be lost.

The balance contained in each "bucket" of revenue must be carefully documented and tracked, using a type of accounting called "fund accounting." Fund accounting ensures that each "bucket" is carefully accounted for. Additionally, it can help to ensure that funds from the right "buckets" are spent in a strategic manner designed to maximize the utilization of funds.

Fund accounting makes it easy for nonprofit leaders to see how much money and what kind of money they have available for funding their programs and covering the nonprofit's operating costs. So, fund accounting is essential to determining the type of money that is needed in a nonprofit and the fundraising efforts that are most immediately needed.

Read More: How Much Do Bookkeeping & Accounting Services for Nonprofits Cost?

2. Understand How Revenue Is Recorded

In the back office, your accountant must follow the generally accepted accounting principles (GAAP) in order to properly record revenue. Different types of revenue your nonprofit receives have different standards and rules regarding revenue recognition (i.e. how and when the revenue is recorded in your accounts receivable).

Grants, pledges, and traditional donations all have different revenue recognition rules.

• Grants - The rules for recording grant revenue differ based on the type of grant awarded to your organization. An unconditional grant's funds must be recorded at the time the grant is awarded, funds from a grant with contingencies must recorded at the time each installment is received, and funds from a reimbursable grant should be recorded when the funds are received.
• Pledges - In the back office, pledged donations are considered recognized revenue at the time when they are pledged - not at the time when the funds are received.
• Traditional Donations - The funds (or value) from traditional donations (such as online payments, cash contributions, and in-kind donations) are received immediately and also recorded immediately.

Each of these different methods for revenue recognition can sometimes result in confusion or a lack of clarity in determining an organization's actual cash on hand. So, this makes it necessary for nonprofit leaders to have cash flow statements readily available. This allows you to see the timing of when funds are actually coming into your nonprofit and how much operating cash is available at any given time.

The ability to compare accounts receivable to actual cash on hand can help nonprofit leaders determine whether their cash-based needs should be focused on receiving immediately available funds or working to gain additional pledges for donations to be received in the future.

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3. Track In-Kind Donations Accurately

In-kind donations include the donation of goods or services. For example, a nonprofit could be gifted a delivery truck or free legal advice from a lawyer. The accounting department must determine a reasonable estimate of the value of the goods or services to be recorded in the organization's records. This helps the nonprofit understand the value of in-kind donations and report them accurately.

How to Fuel Nonprofit Fundraising From the Back Office

Use Accounting Software and Organization-Wide Integrations

No nonprofit team has the time or resources to operate a fully functional back office with only manual processes. Automation is vital to gathering data, reducing errors, and producing reliable and timely financial reports. To create a back office that supports your mission and fundraising strategies, then you need to use accounting software (ideally, accounting software designed specifically for nonprofit organizations) and you need to use integrated applications that extend beyond the back office.

A high-functioning back office provides nonprofit leaders with the data they need to make informed leadership decisions to improve operational efficiency, fundraising success, and mission impact.

Use Program-Based Accounting

With a powerful back office, your nonprofit will be able to benefit from both fund accounting (discussed above) and program-based accounting (also known as project accounting). This type of accounting strategy uses a carefully automated system of expense and revenue categorization and overhead expense allocation to keep track of each of the nonprofit's programs, departments, fundraisers, events, marketing campaigns, etc.

Read More: 7 Management And Board Reports Nonprofits Should Be Looking At

With program-based accounting, you can evaluate the profitability and success of each program to stack rank them and identify the most successful (i.e. impactful or profitable). Once the programs are ranked, you can determine which programs should have funding priority and which you should consider cutting. This will help increase the impact and/or ROI of every dollar your nonprofit spends.

Focus on Collaboration in Budgeting and Fundraising Strategy

The information provided by your back office should help inform the organization's budget, planning, and fundraising strategies. Your back office team must provide the executive director and board of directors with regular, consistent financial reports that enable them to make data-driven decisions, collaborate with program leads, and develop a data-based budget and fundraising strategy to achieve more successful outcomes.

Define Your Donation Best Practices With Outsourced Accounting for Nonprofits

With a well-run back office, your organization will not only be compliant but can also be improved all around with data-driven decisions and strategies to supercharge your fundraising efforts. When you have data available to help you identify your nonprofit's needs and most successful fundraising approaches, you can focus your strategy on efforts that deliver the best outcomes.

Teamed up with an outsourced accounting partner with extensive experience working with nonprofits, your organization can access the tools, team, and technology necessary for automating processes, bolstering financial reports, and understanding how to leverage the organization's data for better leadership.