If it weren’t for development staff, many nonprofit organizations would be out of business tomorrow! Fundraisers serve a vital function in securing contributions from donors and maintaining relationships with those donors that will lead to more (and bigger!) gifts in the future. Too often, however, nonprofit organizations focus only on getting gifts “in the door”, and don’t pay enough attention to how those gifts are actually put to use in the community. So, once a contribution is made, what aspects of accounting for that contribution deserve your organization’s attention?
1. Tag every gift with the donor’s designation: When we get a gift that is designated for a specific purpose, we are required to spend the gift for the stated purpose. That part is pretty obvious, right? The key is that we must be able to prove we’re following the donor’s wishes! If we receive a $100 cash contribution and enter it into our development office’s software, it needs to be tagged with the donor’s designation, such as “Building Fund” or “Meals for Homeless Children”. Then, that gift will trigger a $100 credit entry to revenue in our accounting system (along with an offsetting $100 debit entry to cash, of course), and that revenue entry must be tagged with the same designation. Whether that means a separate revenue account for each designation or a separate characteristic as an addendum to one revenue account will depend on the software that our finance office is using. Regardless, if our development office says “We’ve received a $100 gift earmarked for Meals for Homeless Children”, our finance office must be able to answer “Understood, and we reflect that same information in our books as well”.
2. Spend the money correctly: Now that we’ve received that $100 cash gift and properly noted the designation, we can’t let it sit in our bank account forever; we need to continue to follow the donor’s wishes, and actually spend that money to provide meals for homeless children. So, we’ll purchase $100 worth of food, and the finance office will reflect that in our books as a $100 debit entry to an expense account, and an offsetting $100 credit entry to cash (to keep it simple, we’re skipping the accrual step in this example). When we create this expense entry, we have to tag the entry as related to “Meals for Homeless Children”, just as we tagged the revenue entry initially. Now, anyone who reviews our books can see that we received $100 designated for meals for homeless children, and we’ve spent $100 on meals for homeless children. We’ve followed our donor’s wishes and made the world a little better in the process; everything is fine!
3. A new fiscal year does not mean a new designation: What if things get a little more complicated? Let’s say that we received that same $100 cash gift designated for meals for homeless children, but it’s near the end of the fiscal year, and we’re able to spend only $80 for that purpose before our fiscal year ends. Once a new fiscal year starts, all of our revenue and expense accounts clear out and start over at $0. So what happens to that $20 that we didn’t spend yet? Do we now get to spend it on whatever we want? Absolutely not! Even though we’re in a new fiscal year, our books still have to reflect that that remaining $20 is still designated for, and must be spent on, meals for homeless children. So, it’s important that our accounting software allow us some way to retain equity by these donor designations; that is, from one fiscal year to another, the software must “remember” how much money remains to be spent for every designation or purpose, in the net asset account(s), since simply subtracting expenses from revenues to determine a remainder doesn’t work when we cross fiscal years.
If our nonprofit organization receives designated giving, the considerations listed here are not optional, they’re mandatory. It’s not enough for our development staff to track the donor designations on the gifts; the finance office has to track the same information, plus ensure that those dollars are expended for those purposes, plus ensure that any remainders at the end of a fiscal year are still designated correctly in the succeeding years. If we can’t prove these things when asked, we’ll be in trouble with our auditors, if not the IRS. Remember, our Development Office keeps us in business, while our Finance Office keeps us out of jail!