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Writer's pictureTrent Foster

8 Pitfalls to Avoid


mistakes, accounting, avoid, financial, cash flow, income,
Be careful! Don't be one of the many that are making huge financial mistakes!

Watch your step. Miss that hole. Jump over that rock. Organizing your financial books for closing is a treacherous journey.


You want to avoid the pitfalls and dangerous slip-ups that can get in your way. This article discusses eight common financial mistakes that can pop-out and deter your organization’s progress towards its goals and mission. The following are some mistakes you don’t want to make:




1. Setting Up Chart of Accounts


This set of documents is a list of each account your organization uses, plus any sub-accounts. For example, you may have an account for Fundraisers. A sub-account could be spring auction, summer carnival, adopt a pet, or bake sales. This account would be listed with its various sub-accounts.

You could have a numbering system where each account ends in 00, such as 5600, 8900, 3500. Your sub-accounts could be:

  • Fundraising 5400

  • 5410 Spring auction

  • 5420 Summer carnival

  • 5430 Adopt a pet

  • 5440 Bake sale

Be sure to create enough sub-accounts to make this tracking easy. Sub-accounts allow you to distinguish each department and its components. This makes it easy to manage profit and loss by department.




2. Planning for Inventory


Every organization should have an up-to-date inventory at the end of each month. This allows operations to be ready on the first of the next month.


No matter what your cause, you have some inventory. If your cause is saving abused animals, you would have an inventory or count of the animals available for adoption each month, quantities of dog and cat food available, number of blankets and bed available, etc. If your organization builds playgrounds for children, your inventory may include wood for building forts, plastic pieces for creating a playhouse, bags of sand for ground cover, etc. Use the ending inventory formula below to make sure you have a sufficient amount of products/supplies to make it through the next month:


Beginning inventory count

+

purchases

-

use of materials

=

ending inventory




3. Forecasting Cash Flow


To keep your organization functioning, you need sufficient cash flow each month to keep the organization healthy. Because of this, it is important for you to estimate your cash flow for the month. Knowing how much cash your organization needs to stay alive each month is paramount to your success.


You need to consider several factor to determine how much cash your organization needs each month to operate:

  • Accounts receivable: This is the dollar value of credit sales or monies owed to your organization. These are the credit sales you did not collect in cash. With these amounts, be sure to factor in the time it takes to collect this cash.

  • Debt payments: These are interest payments and any repayments of principal due.

  • Inventory: Dollar value of inventory to fill needs and conduct business over the next few months.


These factors help you identify the total amount of case your organization needs to operate. If you do not have enough cash flow, the organization may need to acquire a line of credit or raise capital through other means.




4. Operating vs. Non-Operating Income


Good financial management includes both operating and non-operating income.

Operating income is the profit you generate for day-to-day activities of your organization.


If your organization sold a vacant lot next to its primary place of business, this transaction would be non-operating income. Because your organization does not usually sell property, this is an unusual source of income. Non-operating income is something that is out of the ordinary and income on which you cannot rely.


Your organization must acknowledge both types of income and record them separately.




5. Understanding Profit Margin


Each product or service your organization provides probably brings-in a different amount of profit. For example, a dog shelter may obtain some profit from an adoption fee for a dog. That amount can vary depending on whether it includes veterinary services, innoculations, food, leashes and collars, transport crates, etc. You can up your organization’s profit if you mix these fees and increase some of the amounts. If you are having a fundraiser dinner and auction, you may charge $25 for dinner tickets and also ask a minimum bid fee of $20. You can mix these amounts by changing either fee, or by adding other cash incentives -- raffle tickets, white elephants.




6. Completing Bank Reconciliations


To keep your bank accounts on track, it is best to reconcile them within a few days of the end of each month. Reconciling quickly after each transaction helps you catch errors and potential fraudulent transactions.




7. Organizing Accounts Receivable


It is important to the success of your organization to monitor your accounts receivable. You should have in place a formal collection procedure -- and adhere to it. You must do this to keep enough cash on hand to run operations.


Follow an aging schedule for accounts receivable. This method groups your receivables according to when your organization issued each invoice. Keep an eye on this report and put in place a collections procedure to gather the amount due by implementing an email or phone initiative to request payment.




8. Cash Accounting


Cash accounting is a tricky way of doing business. It really does not paint an honest picture of your organization’s financial situation. This method does not conform to generally accepted accounting principles (GAAP). This method accounting posts revenue when it receives cash and posts expenses when they are paid.


The better way to manage financials is by using the accrual method. Your organization posts revenue when it is earned, and records expenses when they are incurred. Running this system matches revenue earned with expenses incurred to create the revenue. This is a more accurate view of your organization’s financial health.




When you have questions about managing your financial statements and keeping month-end records and year-end reports, contact TBFoster Accounting to get your answers. We have ideas to share and solutions to management and organizational questions. Keep in touch with our blog. If you have questions about organizing and closing your books each month or year, let us help. Contact our not-for-profit team leader at trent@tbfosteraccounting.com.

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