Nonprofit Accounting Basics: What Fundraisers Should Know

As a nonprofit fundraising professional, you likely spend most of your time planning campaigns and finding new ways to engage donors in your organization’s mission. Although the overarching goal of your work is to generate revenue, you probably don’t think much about the behind-the-scenes accounting tasks that ensure revenue gets allocated in the best possible way for your nonprofit to make a difference in its community.

However, a solid financial framework is integral to every area of your nonprofit, including fundraising. Even if you don’t manage your organization’s records or file its tax forms, learning some basic accounting principles will help you collaborate more effectively with your finance team and set realistic, mission-aligned goals.

In this guide, you’ll get a clearer picture of the financial landscape that shapes your fundraising work as we walk through three of the aspects of nonprofit accounting that are most likely to intersect with your responsibilities. Let’s begin!

The Difference Between For-Profit & Nonprofit Accounting

When people hear the term “nonprofit,” their first thought is often that your organization has to bring in exactly as much money as it spends each year. While it’s true that nonprofits can’t turn a profit by definition, this conclusion doesn’t align with the actual accounting-based meaning of profit.

The real distinction between “for-profit” and “nonprofit” is that for-profit organizations aim to return value to shareholders or investors (i.e., turning a profit in an accounting sense), while nonprofits have to reinvest all of their funds into their own work. This distinction determines each type of organization’s accounting goals: for-profit organizations try to maximize the value they can return as they manage their finances, while nonprofits focus on staying accountable to supporters and other key stakeholders (governments, grantmakers, etc.).

Under this definition of profitability, your nonprofit’s finances don’t need to break even—in fact, if you can bring in more funding than you spend, it puts your organization in a better position to recover from any unexpected circumstances that may arise. Plus, Infinite Giving’s nonprofit cash management guide recommends adding surplus revenue to a dedicated reserve fund and making low-risk investments to help these savings grow over time and promote long-term financial health.

Budgeting

The accounting task you’ll most likely be involved in as a fundraiser is creating your nonprofit’s annual operating budget. This document is your organization’s master financial plan for the year, outlining all of the expenses you expect to incur and the revenue you intend to generate.

Let’s examine each side of a nonprofit operating budget so you can go into discussions with your organization’s finance team fully aware of what this resource entails.

Revenue

You probably know that offering many different ways to contribute encourages more community members (both individuals and organizations) to get involved with your nonprofit. Additionally, along with building reserve funds, diversifying your organization’s revenue streams is one of the best ways to promote long-term financial stability.

Most nonprofit operating budgets organize revenue projections according to the following five categories:

• Individual donations. This category encompasses all monetary gifts from individual donors (small, mid-sized, major, and planned), as well as event revenue and in-kind donations of goods and services.
• Corporate philanthropy. This term refers to all of the ways for-profit organizations contribute to your nonprofit, such as employer matching gifts, volunteer grants, payroll donation programs, and sponsorships.
• Earned income. Even though your organization can’t turn a profit, it can generate some of its own income through memberships, merchandise sales, and fees for mission-related services (e.g., animal shelter adoption fees or museum ticket sales).
• Investments. The two main revenue streams in this category are endowments and the returns from the investment vehicles you should use for growing your reserves, such as treasury bills, certificates of deposit (CDs), and mutual funds.
• Grants. Whether they come from the government or foundations, grants can provide critical funding for your nonprofit’s most important projects and programs—as long as you submit well-written proposals that clearly explain why you deserve the funding.

Categorizing operating budgets in this way helps them align with most nonprofit financial reports, and your recordkeeping system is probably organized similarly for consistency. When your finance team consults with you to determine if their revenue projections align with your fundraising goals, it’s helpful to understand where they’re coming from with this system.

Expenses

On the expense side of their operating budgets, nonprofits usually organize costs based on how that spending furthers their mission. This functional expense categorization method also aligns with reporting requirements and provides better insights for maintaining accountability.

Here is a quick breakdown of the three categories of functional expenses:

• Program costs are directly mission-related and vary widely between organizations, such as an animal shelter’s veterinary care costs or a museum’s spending on exhibition development and maintenance.
• Administrative costs allow your nonprofit to operate and include expenses like staff compensation, utility bills, insurance, and office equipment.
• Fundraising costs encompass the upfront expenses of revenue-generating campaigns, including spending on event planning, marketing, fundraising software, and other needs.

Your nonprofit’s administrative and fundraising costs combined make up its overhead. Contrary to popular misconceptions, overhead isn’t inherently bad—in fact, some is necessary for your organization to thrive. However, if your finance team needs to cut costs, they’ll probably take funding away from overhead first to maximize the available funding for mission-related work, which they may also discuss with you to ensure they strike the right balance with fundraising costs.

Restricted Funds

You’ll likely also encounter restricted funds in your fundraising work. Donors and funders who contribute significant amounts to nonprofits often want some level of control over how these funds further the organization’s mission, so they’ll designate their gifts for specific initiatives that align with their values.

According to Jitasa’s guide to restricted funds, all nonprofit contributions fall into one of these three categories:

• Unrestricted funds: Typically small to mid-sized contributions that come with no designations, so your organization can put them toward any program or overhead expenses.
• Permanently restricted funds: Usually endowments, which you can’t spend directly but instead invest and use the interest to fund a donor-specified initiative indefinitely.
• Temporarily restricted funds: Legacy and major gifts, sponsorship revenue, and grant funding that are bound by a specific purpose or time period but can be released from restriction when the purpose is fulfilled or the time expires.

Donor-imposed funding restrictions are legally binding, and your nonprofit can face lawsuits or penalties from the IRS if you misallocate those funds. As you solicit contributions that are likely to be restricted, keep your organization’s overarching goals in mind so you can direct supporters to designate their contributions for initiatives you really need to fund. 

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By understanding these nonprofit accounting basics, you’ll gain a clearer view of how your fundraising duties fit into your organization’s bigger financial picture. Then, you can use this knowledge to collaborate confidently with your nonprofit’s finance team and ensure everyone is working toward the same goals—although they’ll likely be happy to answer any further questions you may have about accounting, too!