In today’s nonprofit landscape, trust is integral to your organization’s fundraising success. According to recent studies more than two-thirds of nonprofit donors find it essential to trust the organizations they support. However, the same survey found that only about one in five donors have a high level of trust in nonprofits, meaning your organization has a gap to bridge as you work to build it building strong relationships that lead to long-term support.
Demonstrating good financial management is one of the best ways to build trust with donors. While your nonprofit may be considering implementing a fund accounting system (or improving your existing system) primarily for compliance purposes, this organized method of tracking finances can also strengthen donors’ trust in your nonprofit if you use it effectively.
In this guide, we’ll look at what fund accounting is and how your nonprofit can use it as a relationship-building tool Future-proof your fundraising efforts. Let’s get started!
Overview of fund accounting
CFO Leverage’s Guide to Fund Accounting defines this term as “a method of managing finances designed for tax-exempt organizations. Generally, it keeps track of which funds are appropriated for various programs and operations and how much money is allocated to each activity.” Fund accounting focuses on the responsibility side of accounting (instead of prioritizing profitability like traditional accounting), making it perfect for all types of nonprofits.
In a fund accounting system, all of your nonprofit’s revenue falls into one of three categories, depending on what donor or funder-imposed designations (if any) are attached to it. Your financing can be:
- Unlimited, This means you can use it to cover your organization’s costs.
- Permanently restricted, This means it’s part of an endowment fund that you invest in and use to earn interest to support a long-term initiative, rather than spending directly.Temporarily limited, This means that the contributor indicated that you should use the funds for a specific project, but if you complete the project or a deadline passes, the remaining funding may become unlimited.
In general, the larger a contribution is, the more likely it is to be limited, because the donor or funder wants some control over how your organization uses its money. Major and planned giftscorporate sponsorships and grants are typically the temporarily limited category, while small and medium donations (both individual and corporate) and earned revenue (e.g., membership dues and service fees) are typically unrestricted.
How to use fund accounting to cultivate donor trust
1. Publish financial data
Obviously this is the easiest way to be transparent with donors about your financial management practices is to publish your collected data. And if you use fund accounting, you can make your nonprofit’s trustworthiness especially clear in public reports, by showing how you’ve kept your promises to donors regarding funding designations.
You can publish your organization’s financial data using these resources:
- Tax returns. After you file your nonprofit’s annual Form 990 with the IRS, the form must be publicly available for at least three years. The IRS publishes all returns automatically, but you can also post a link to your organization’s recent Form 990s on your website so donors can more easily access them.
- Financial statements. Some nonprofits also post their most recent financial statements on their websites and refer to them during tax filing, grant reporting and other activities. To incorporate fund accounting principles, be sure to separate restricted and unrestricted net assets in your statements of operations and financial position and to note income restrictions on your statement of cash flows.
- Annual report. Dedicate a portion of your annual report to charts and graphs that present the year’s financial highlights in an understandable format, including how much of the revenue you brought in was restricted versus unrestricted. Then add your financial statements as attachments in case some readers want to know more.
Additionally, it is helpful to share the direct impact of restricted funds with their contributors to reassure them that you are delivering on your promises. This is why many grant makers require periodic reports that detail how you are using the grant funding and what progress you are making on the initiative supported by the grant.
You can also communicate the consequences of limited funding less formally with individual and corporate donors. For example, if you have recently completed a capital campaign to fund a construction project, you can update key donors who contributed to the campaign on construction progress throughout the project and explain what the new building will help your organization achieve to reassure them that their gifts are having the intended impact.
2. Budget with funding constraints in mind
Implementing fund accounting impacts your nonprofit’s financial planning and reporting. When developing your organization’s annual operating budget, always first allocate limited resources to the initiatives for which they are intended. That way, you’ll know how much unrestricted funding you have available to fill the gaps in your programs and cover overhead costs (which fewer supporters spend their contributions on than direct mission-related expenses).
Budgeting In this way, your nonprofit also helps avoid the consequences of misallocating limited resources, which are often more serious than simply violating the contributor’s trust. Donor-mandated marks on nonprofit donations are legally binding, meaning your organization could face lawsuits or fines if you misappropriate these funds, even accidentally. So, prioritizing limited funding in your financial management processes from start to finish will protect your nonprofit’s reputation and resources in more ways than one.
3. Pursue strategically limited contributions
Organized record-keeping, transparent reporting, and careful budgeting are all strong financial practices to ensure that your nonprofit adheres to the restrictions set forth in the fund accounting system, thereby securing donor trust. Another key factor in achieving this goal is pursuing only the generally limited contributions that will support its overarching strategy.
Here are some tips for strategically pursuing different types of limited contributions:
- Main gifts: Use the information you gain about a potential major donor through prospect research and communication during the cultivation process to suggest gift designations that align with their values And your greatest financing needs.
- Grants: Decide which one of yours current and upcoming programs most require funding, then look for grant opportunities that specifically fund these types of programs.
- Sponsorship: Double down on Donation’s corporate sponsorship guide recommends considering different types of sponsorship options that go beyond the classic financial agreement (e.g. in-kind and media) to meet the needs of your organization And meet your business partner’s needs more effectively.
All of your nonprofit’s planning processes (strategic, fundraising, and financial) should support each other to strengthen relationships with supporters and ultimately advance your mission.
Financial transparency cultivates donor trust, and fund accounting allows your nonprofit to be fully financially accountable to its constituents. Use the tips above to get started, and don’t hesitate to reach out to nonprofit finance professionals if you need help setting up your system or have questions about how you can use fund accounting to be more transparent with your supporters.
Related
#fund #accounting #matters #cultivating #donor #trust