Want to learn more on this topic? We've partnered with the author to present a free webinar on March 7 to help you simplify your year-end process. Register here.
With a mission-driven bottom line, many nonprofit organizations tend to focus most of their energy on achieving the organization’s mission and goals. As a result, administrative tasks like monthly bookkeeping end up falling low on the priority list. When the financial year-end comes around, many nonprofit organizations end up scrambling to put their books together, causing unnecessary stress all around.
For nonprofit organizations, accurate and up-to-date bookkeeping is incredibly important. A reliable and accurate set of financial statements are crucial for board members of the organization to make strategic decisions. The Canadian Revenue Agency also has stringent requirements regarding how the books for charities are maintained to ensure maximum transparency and traceability of donations.
At the end of the financial year, nonprofit organizations go through the complex process of piecing the whole year together and preparing a set of financial statements. Though tedious, the year-end financial reporting process is very important for nonprofit organizations.
Importance of the year-end reporting process
The year-end financial reporting process is important for nonprofits for a number of reasons:
- Donors will be expecting tax receipts
- The organization has six months from their fiscal year-end to submit their tax return even if it is nil
- Users will want to see meaningful financial statements
- The board/management should be looking at year-end results in order to forecast/budget for the next year
There are typically three options for the year-end preparation of nonprofit organizations financial statements:
- Audit. The highest level of assurance over financial statements. An audit provides assurance that financial statements are free from material misstatement.
- Review. Provides limited assurance over financial statements. It is more of a sanity check, “do these statements make sense?”
- Notice to Reader. Provides no assurance over financial statements. Statements are prepared in order to complete the tax return.
The needs and/or board requirements of the organization will determine what level of assurance the organization requires for its financial statements.
Common challenges faced by nonprofits during the year-end reporting process
1. Recording transactions and maintaining support. As per the Canada Revenue Agency (CRA) requirements, documents must be retained for a period of six years from the end of the last tax year they relate to. Without having a formalized policy over the retention of transaction support (e.g. receipts, invoices, etc.), there is an increased risk that documents can be misplaced if they are kept in hard copy.
Another challenge that accompanies maintaining transaction support is how to actually record the transactions. No matter how the organization’s financial statements are prepared, the bank accounts must be reconciled. This is the starting point for ensuring that all transactions have been recorded. This can be very overwhelming but thankfully, there are technology tools that can help simplify bank reconciliations, reduce the need for manual data entry and help eliminate duplicate entries and typos.
2. Financial statement presentation. Preparing financial statements can be a complicated task. The purpose of the financial statements is to tell the story of what the organization accomplished in the year and to help the users make informed decisions. At a minimum, it is recommended that nonprofit organizations use the Accrual Method of accounting. This means that transactions will be recorded whether or not the cash has been collected. This is a more accurate method of reporting compared to cash accounting. Cash Accounting is recording transactions solely based on bank statements.
After deciding on what method of accounting to use, the board/management should then look at how to recognize revenue/contributions. Revenue recognition will be determined by funding requirements and accounting principles. Both will need to be reviewed in order to prepare meaningful financial statements. By reviewing the support for contribution transactions, the bookkeeper and external accountants will be able to determine how to best present revenue.
3. Lack of resources required (to provide auditors with what they need). Part of the year-end process consists of gathering a comprehensive list of information for the external accountants. The list will vary based on the level of assurance being provided over the organization’s financial statements. However, the common items that are requested include the trial balance and general ledger, bank and credit card statements, and accounts payable and receivable listings. The higher the level of assurance, the more support the external accountant will require.
Nonprofit organizations often lack the financial resources to hire a treasurer or a bookkeeper with sufficient knowledge for preparing these documents. The board as a whole is ultimately responsible for the financial reporting of the organization. In certain instances, the board members reviewing the documents are not well equipped to provide the required financial oversight to the financial statements of the organization. Without a knowledgeable treasurer and a team of financially-literate board of directors, the organization will not be able to provide the supporting documents required for an audit.
The Year-End Reporting Process can be complex and tedious for nonprofit organizations. If you find your nonprofit organization facing similar challenges that we’ve outlined above, do not fret. There are technology tools in the market that can help users to simplify the year-end process! You can learn more about these technology tools and more tips on how you can simplify the year-end process by tuning in to our free webinar with CharityVillage on Thursday, March 7 2019!
As the Enkel Controller, I will be discussing financial best practices for nonprofits with an emphasis on streamlining the year-end reporting process.
You will leave the webinar knowing:
- What you need to provide to your year-end accountant
- How you can simplify the year-end process with technology
- The additional benefits of these technology tools
If you cannot make the live webinar session, we would encourage you to still register! By registering, you will receive a recording of the live webinar session a day after the session. If you are struggling to figure out what you need to wrap up your nonprofit’s year-end reporting process, this webinar is perfect for you.
Click here to register for a spot!
Andrea Mitchell is an accounting manager at Enkel Backoffice Solutions, a bookkeeping firm that provides customized solutions to Alberta-based businesses in Edmonton and Calgary. Enkel strives to provide fellow entrepreneurs with a better system for managing their bookkeeping, cash flow, and financial data, so they can focus on growing their businesses.