INSIGHT

Nonprofit accounting: Best practices for financial management 

Shannon Winter, Daniel Figueredo • May 29, 2025

Industries: Nonprofit

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Running a nonprofit organization comes with unique financial challenges. Unlike for-profit businesses focused on generating profits for shareholders, nonprofits must demonstrate accountability to donors, stakeholders, and government regulators while advancing their mission. Effective accounting practices aren’t just about compliance—they’re essential to your organization’s sustainability and impact. 

8 nonprofit accounting best practices 

We understand that you likely chose the nonprofit sector to make a difference, not to spend hours navigating financial complexities. Yet proper accounting serves as the foundation that enables your mission to thrive. Let’s explore eight best practices that can strengthen your nonprofit’s financial management. 

1. Implement a structured chart of accounts 

Your chart of accounts (COA) serves as the backbone of your accounting system. This organized directory categorizes all financial transactions and provides a clear framework for reporting. 

A well-designed nonprofit COA typically includes these five key categories: 

• Assets: Everything your organization owns (cash, property, accounts receivable) 
• Liabilities: Everything your organization owes (debt, deferred revenue, accounts payable) 
• Net Assets: Your nonprofit’s worth (total assets minus total liabilities) 
• Revenue: All incoming funding (donations, grants, earned income) 
• Expenses: All outgoing funding (program costs, administrative expenses, fundraising) 

While the Unified Chart of Accounts (UCOA) offers a standardized template, many small to mid-sized nonprofits benefit from a customized COA that aligns with their specific needs and reporting requirements. 

2. Maintain clear financial statements 

Regular, accurate financial statements provide critical insights into your organization’s financial health and help inform strategic decisions. The four essential statements for nonprofits include: 

• Statement of Activities: Similar to a for-profit income statement, this document tracks revenue, expenses, and changes in net assets over a specific period. 
• Statement of Financial Position: Often called a balance sheet, this snapshot shows your assets, liabilities, and net assets at a specific point in time. 
• Statement of Cash Flows: This reports how cash moves in and out of your organization through operating, investing, and financing activities. 
• Statement of Functional Expenses: Unique to nonprofits, this statement categorizes expenses as program, administrative, or fundraising costs to demonstrate how your spending advances your mission. 

Reviewing these documents regularly helps identify trends, anticipate challenges, and make informed budgeting decisions. 

3. Diversify and track revenue sources 

Financial stability requires more than just raising funds—it demands strategic diversification. Categorizing your revenue sources provides visibility into your funding model and helps identify areas for growth or potential risks. 

Consider organizing your revenue into these categories: 

• Individual donations (one-time gifts, recurring donations, event revenue) 
• Corporate support (sponsorships, matching gifts, employee campaigns) 
• Earned income (membership dues, merchandise, service fees) 
• Investment returns (endowments, stocks, bonds) 
• Grants (government, private foundations, family foundations) 

By tracking these categories separately, you can easily assess your funding mix and make strategic adjustments to increase your organization’s resilience. 

4. Understand and manage overhead expenses 

The term “overhead” has historically carried negative connotations in the nonprofit world. However, these administrative and fundraising expenses are essential investments in your organization’s capacity and effectiveness. 

While conventional wisdom suggested limiting overhead to 35% of total expenses, today’s more nuanced approach recognizes that optimal ratios vary by organization size, mission, and stage of development. Instead of fixating on arbitrary percentages, focus on: 

• Ensuring overhead expenses directly support your mission 
• Communicating transparently with donors about how administrative costs strengthen your impact 
• Finding efficiencies where possible without compromising effectiveness 
• Directing as much funding as possible toward programs while maintaining necessary infrastructure 

Remember, responsible overhead spending builds capacity that ultimately expands your organization’s reach and impact. 

5. Properly manage restricted funds 

When donors place restrictions on their contributions, honoring those intentions becomes both an ethical and legal obligation. Your accounting system must clearly track these different funding categories: 

• Unrestricted funds can be used for any legitimate organizational purpose. 
• Temporarily restricted funds are designated for specific programs or time periods. 
• Permanently restricted funds, such as endowments, provide ongoing support through investment returns rather than the principal. 

Establish clear processes for tracking these restrictions, reporting on their use, and releasing them when conditions are met. This attention to detail builds donor trust and supports compliance with accounting standards. 

6. Invest in nonprofit-specific accounting software 

As your organization grows, spreadsheets quickly become inadequate for managing complex financial data. Nonprofit-specific accounting software offers specialized features that improve accuracy, save time, and enhance reporting capabilities. 

Look for platforms that offer: 

• Fund accounting capabilities for tracking restricted contributions 
• Grant management features 
• Integration with your CRM or donor management system 
• Customizable reporting that aligns with nonprofit standards 
• Multiple user access with appropriate permission levels 

While platforms like QuickBooks can be configured for nonprofit use, solutions specifically designed for the sector may offer additional advantages for complex organizations. 

7. Stay current on tax compliance requirements 

Although nonprofits enjoy tax-exempt status, they still face significant filing requirements. Maintaining compliance protects your organization’s status and reputation. 

Key tax considerations include: 

• Timely filing of the appropriate Form 990 (990-N, 990-EZ, 990, or 990-PF) 
• State-specific filing requirements, which vary by jurisdiction 
• Employer tax obligations (W-2s for employees, 1099s for contractors) 
• Proper handling of unrelated business income tax (UBIT) 
• Documentation of donor acknowledgments for substantial contributions 

Missing filing deadlines or requirements can result in penalties or, in extreme cases, loss of tax-exempt status. Working with an accounting partner experienced in nonprofit compliance can provide valuable protection. 

8. Engage professional accounting partners 

As passionate as you may be about your mission, financial management requires specialized experience. Whether through hiring, outsourcing, or a combination approach, professional accounting support offers significant advantages: 

• In-house accountant: Provides dedicated attention but requires substantial investment in recruitment, salary, and benefits. 
• Outsourced accounting services: Delivers guidance from professionals who specialize in nonprofit accounting, often at lower cost than full-time staff. 
• Fractional CFO services: Offers strategic financial leadership on a part-time basis, ideal for organizations that need high-level guidance without the expense of a full-time executive. 

The right approach depends on your organization’s size, complexity, and budget. Many nonprofits find that outsourcing provides the best balance of insights and affordability, especially when working with a firm that understands the nonprofit sector’s unique challenges. 

Strengthen your financial foundation with BPM 

Effective accounting practices do more than satisfy compliance requirements—they provide the financial clarity that empowers your mission. At BPM, we’ve helped countless nonprofit organizations strengthen their financial systems and make more strategic decisions about their resources. 

Our nonprofit specialists understand both the technical requirements and the mission-driven perspective that make nonprofit accounting unique. Whether you’re establishing basic systems or looking to enhance sophisticated financial operations, we’re here to help. 

Ready to take your nonprofit’s financial management to the next level? Contact BPM today for a consultation with our nonprofit accounting team. Together, we can build the financial foundation that will sustain your mission for years to come. 

Download the e-book, “Realizing the potential of outsourced accounting” to help your business maximize efficiency and transform your financial operations.