Nonprofit accounting tracks what you raise and what you can spend it on. It even tracks what you owe your donors. Accurate financial records and reports help set realistic goals, record gifts properly, and honor donor restrictions, which is why accounting lays the foundation for the operations of your organization.
In particular, fundraising and financial management go hand in hand. Tracking revenue helps your nonprofit generate and use funds efficiently, meet fundraising regulations, and maintain donor transparency. You don’t need to be an accountant to lead a nonprofit effectively, but understanding basic financial principles helps you build stronger fundraising plans and instills donor confidence.
Here are three ways nonprofit accounting principles influence fundraising and strengthen your strategy. Let’s dive in!
1. Making data-driven fundraising decisions
You likely already use donor data to guide fundraising decisions. For example, an animal shelter might evaluate previous event turnout and post-event survey scores to decide whether to run an auction for a second time, and strong numbers for both would make a repeat look like an easy call.
But the main goal of any good fundraising campaign is revenue, and that’s where accounting data becomes helpful–even essential–to success. To decide whether this year’s campaign activities are worth it, start with last year’s total. Then look at the financial details around that number, including:
- Your nonprofit’s current funding needs. Let’s say last year’s auction raised $25,000, which covered veterinary bills for all of the pets you had in your care at the time. This year, you took in several animals with complex medical conditions, and a grant you were counting on fell through. To cover this year’s vet costs, you may need to raise at least $40,000 through this event, which could require switching to a more lucrative format.
- The upfront costs of the fundraiser. In-person events aren’t cheap, since venue rentals, decorations, equipment, refreshments, and event marketing all add up. Pull reports of last year’s actual spending, check whether you can cover those costs again, and work out whether your auction is likely to earn that money back with plenty left for your mission.
- Opportunities to raise more or spend less. Last year’s financial data may show gaps you can close. To boost revenue, you could sell t-shirts or add a text-to-give page for participants. If you’re looking to reduce costs, you might ask for equipment and catering donations or pivot to a virtual auction to cut the added costs of in-person events.
A quick way to compare events is by calculating cost per dollar raised. Divide what the event cost by what it brought in. If the auction in our example cost $10,000 to run and raised $25,000, you spent $0.40 for every dollar raised. Review that figure alongside your other campaigns to see which ones return the most for your mission.
Budgeting ties these pieces together. Work with your nonprofit’s accountant to finalize revenue goals, set a budget for each event and campaign, and confirm that those budgets align with your overall operating budget for the year. When your fundraising and financial plans align, you can uncover new opportunities to boost success and to spot shortfalls before it’s too late to fix them.
2. Properly recognizing revenue
Once a fundraiser brings in money, your bookkeeper follows specific rules to record it and reconcile the data.
Nearly all of the funding your organization receives falls into one of two categories: contribution transactions or exchange transactions.
Contribution transactions occur when a supporter is promised nothing in return for their money. Your finance team generally records these gifts when you receive the funding or confirm an unconditional pledge to give. This category covers:
- Most individual monetary gifts of all sizes
- Most in-kind donations of goods, services, and non-cash assets like stock or real estate
- Some corporate giving, such as matching gifts and volunteer grants
- Government and foundation grants (which may come with additional conditions that affect revenue recognition)
Exchange transactions occur when a supporter expects something of value in return for their money. Your finance team records that revenue as you deliver the promised benefit. Examples include:
- Corporate sponsorships provided in exchange for publicity or other benefits
- Membership dues in return for services
- Merchandise sales and product fundraisers
- Event ticket and auction item purchases
- Fees for services, such as museum admission or low-cost tutoring
- Crowdfunding and peer-to-peer campaigns that offer incentives or perks
Timing is critical across all exchange transactions. If your supporter pays before receiving a benefit—such as purchasing event tickets in advance or ordering merchandise before it ships—your finance team records the cash as deferred revenue. This stays on your books until you deliver the promised benefit, which means your bank balance can look healthy even while officially reported revenue lags behind.
3. Honoring funding restrictions
When donors, grantmakers, or corporations make large contributions, they usually want some say in how the money is used and often tie their gift to a program or specific aspect of your mission that they care about. Your nonprofit needs to honor those restrictions to maintain strong relationships with your most impactful supporters.
According to Jitasa’s guide to restricted funds, there are three primary categories of nonprofit funding:
- Unrestricted funds: This funding can go toward any of your organization’s expenses, whether they relate directly to your mission or fall under overhead. Donations received on your website, from sponsorships, events, and general crowdsourced campaigns are usually unrestricted.
- Permanently restricted funds: These funds usually relate to endowments, which are large sums of money contributed by one or more donors. Your organization usually can’t spend the principal contribution directly. Instead, you’ll invest these funds and collect the interest, dividends, or investment returns. An annual percentage is generally agreed upon to fund a donor-designated program or initiative. For example, a university might use endowment earnings to fund specific, ongoing student scholarships or faculty positions.
- Temporarily restricted funds: These funds include most major and planned gifts, grants, and corporate sponsorships. These funds are tied to a specific purpose or time period, and once you fulfill the purpose or the time period runs out, you may:
- Release the funds from restrictions to cover your nonprofit’s highest-priority needs
- Redirect remaining balances to another initiative aligned with the donor’s interests
- Return any unspent funds to the donor if they asked you to do so in their donation agreement
Track restrictions carefully by recording them in both your donor database and your accounting system so your fundraising and finance teams see the same picture. Then, when you pull reports, you can review your organization’s assets “with restrictions” and “without restrictions.” This specification is especially helpful when budgeting for campaigns and initiatives for the following year.
In the meantime, you can use these reports to determine the impact of gifts, particularly major gifts, on your mission. Providing impact reports for grantors and donors that show how you used their money toward your mission helps build trust and may even encourage them to give again in the future. Acknowledgment letters are a great place to start, but taking appreciation a step further with these impact reports and personalized phone calls will also help retain these important supporters.
Understanding these concepts helps, but communication helps fundraising and financial management work together. If you want more resources for your nonprofit, CallHub’s blog has plenty to explore. Additionally, make a habit of talking through your fundraising priorities with your accountant, bookkeeper, and other finance professionals, then reviewing actual results against your operating budget so both teams can act in your nonprofit’s best interest and protect long-term sustainability.
