Ensuring Sound Financial Practices is Key to Your Success

Good financial management and transparency is the backbone of any successful nonprofit organization, whether you are a large international nongovernmental organization or a small community-focused organization. Understanding the finances of a nonprofit is crucial to building donor confidence, securing funding opportunities, maintaining tax-exempt status, and supporting strategic decision-making. Nonprofit finance involves managing revenues, expenses, and net assets to support your nonprofit’s mission while being accountable to donors and other stakeholders.

Nonprofit Bookkeeping

Nonprofit financial statements are formal records that provide a comprehensive overview of a nonprofit organization’s financial health and activities. Unlike for-profit businesses, nonprofits have unique reporting requirements to show how funds are used and managed. The foundation of any acceptable accounting system is the existence of appropriate internal controls, which are policies and procedures to help prevent fraud and ensure that users of the financial statements can have confidence in the numbers. Most nonprofits rely on Generally Accepted Accounting Principles (commonly known as GAAP), which mandate the following core financial statements.

1. Statement of Financial Position: The Statement of Financial Position demonstrates a nonprofit’s financial health at a specific point. It shows the assets, liabilities, and net assets (defined as the difference between assets and liabilities) and indicates whether the nonprofit has sufficient resources to cover its mission and sustain operations.
2. Statement of Activities: Similar to the income statement maintained by for-profit companies, the Statement of Activities summarizes a nonprofit’s revenues, expenses, and changes in net assets over a specific period, usually a fiscal year. It provides insight into how efficiently the organization generates revenue and manages expenses to achieve its mission.
3. Statement of Cash Flow: This statement tracks how cash moves in and out of a nonprofit over a specific period. The statement includes operational activities, investments, and financing activities related to repaying or receiving resources and indicates whether the organization has enough money on hand to fund its obligations and operations.
4. Statement of Functional Expenses: This specialized statement categorizes expenses by both functional areas – such as program services, management, and fundraising – and natural classifications such as personnel, occupancy, and supplies. It provides a clear, structured view of how resources are deployed across mission-critical activities, reinforcing transparency, stewardship, and accountability to donors, regulators, and stakeholders

Federal and State Law Compliance

Compliance with federal and state laws is an essential part of nonprofit financial management. To maintain tax-exempt status, nonprofits must file annual informational returns such as the Form 990 with the IRS, accurately disclosing revenues, expenses, executive compensation, and program activities. At the state level, organizations often need to register to conduct charitable solicitation, renew licenses annually, and follow rules governing fundraising and donor transparency. Federal laws also regulate employment practices, grant usage, and lobbying activities, requiring nonprofits to maintain proper documentation and internal controls. Failure to comply with these regulations can lead to penalties, loss of tax-exempt status, or reputational damage, making consistent oversight and professional guidance critical for long-term sustainability.

Nonprofit Reporting

Nonprofit reporting is the process of communicating an organization’s financial activities and impact to stakeholders, including board members, donors, grant makers, regulatory bodies, and the public. It goes beyond compliance by fostering transparency and trust, showing clearly how funds are raised, allocated, and used to advance the mission. Key elements of nonprofit reporting include preparing GAAP-compliant financial statements, filing IRS Form 990, and generating donor or grant-specific reports. Effective reporting often combines numbers with narratives, illustrating not just where the money went but also the outcomes it achieved. By providing timely, accurate, and accessible reports, nonprofits strengthen accountability, improve decision-making, and build confidence among those who support their work

Nonprofits function within a complex legal and regulatory framework that extends beyond financial reporting. These complexities increase if your nonprofit organization is operating in both the USA and in foreign countries. Fundraising activities are subject to charitable solicitation laws, which often require state-level registration and disclosure to ensure transparency in donor communications. In addition, employment and payroll regulations covering worker classification, wage and hour laws, nondiscrimination, and tax obligations apply to nonprofits just as they do to for-profit entities. Many nonprofits also voluntarily adopt governance practices under the Sarbanes–Oxley Act to strengthen accountability and protect against misconduct. For assistance in understanding your obligations related to nonprofit finance, contact Jeanny Lee at jlee@devsourcing.com.

Disclaimer: This material is provided for informational purposes and does not constitute legal advice. Access to or use of this information is not intended to create, and does not constitute, a lawyer-client relationship. No portion should be acted upon without first seeking legal counsel about your specific legal situation.