Nonprofits have many facets that make them different then for-profit businesses. Some of you may be wondering what makes a nonprofit unique or different. Here are just some main points that show their differences.
1. The reporting requirements in their financial statements are much different. While for-profits have a balance sheet and income statement, nonprofits have Statement of Financial Position and Statement of Activities.
2. While the Statement of Financial Position is comparable to the balance sheet, there is one key difference and that is equity portion. A business has retained earnings and contributed capital, while a nonprofit has Net Assets. And Net Assets is split into two categories: With Donor Restrictions and Without Donor Restrictions. This adds a layer of tracking that businesses do not need to worry about, where a nonprofit does not just record income, they need to determine if this donation has restrictions or not. And if it does have restrictions, that fund needs to be tracked separately as the nonprofit spends on that donation.
3. The Statement of Activities is comparable to the income statement. While a traditional income statement shows income less their expenses, the Statement of Activities splits out what is donated and spent, based on with donor restrictions and without donor restrictions. And this statement feeds into the net asset portion of the balance sheet.
4. Another key difference is what is reported to the IRS. A business will file a business tax return, depending on their entity type. A nonprofit submits a Form 990 that provides a lot more detail then just the donations, income, and expenses. It will include the board members and certain executives. It also has a portion called the Statement of Functional Expenses. This is splitting out the income statement into three portions [Programs, Management & General, and Fundraising].
a. The tracking of income and expenses in two different ways, the Statement of
Activities and the Statement of Functional Expenses, adds a layer of tracking that
requires attention to detail in every financial transaction and also the ability to
present the proper statement depending on the audience and requirements.
5. Nonprofits, no matter the size, operate based on their budgets. Businesses, especially family owned and ran businesses, do not always operate from a budget. In fact, many of times they do not even have a budget. But a nonprofit always has a budget and operate based on those budgeted amounts.
6. Just like there are many different businesses and provide different services, the causes of a nonprofits vary just as much. There can be some that help people with physical needs, while another will help with temporal needs. Another may be a transfer of donations that help other nonprofits raise donations, like the United Way.
As a nonprofit, you need to make sure that you can complete your audit and prepare your 990 in the most efficient and cost-effective way. Having the proper accounting set-up will go a long way in keeping your life stress-free and focused on the cause and mission of your nonprofit.