Maintaining a healthy reserve ratio can both support and propel nonprofits ahead. In an earlier article, we discussed the different types of reserve funds and their importance in preserving financial sustainability. Now it’s time to consider the role management and nonprofit boards play in managing reserve funds.
NPO executives are ultimately responsible for ensuring:
- Nonprofit operating reserve and restricted funds are spent appropriately
- Reserve fund activities are properly tracked
- Documentation and transactions involving restricted funds are organized and accounted for in the event of an audit by the fund provider
To help you meet these responsibilities, here are our 5 best practices for managing your nonprofit’s reserve and restricted funds.
5 Best Practices for Managing Your Restricted Funds
1. Use class tracking functionality in your accounting software
If your nonprofit organization has multiple operating reserve funds or restricted funds, you should be using the fund accounting method for reporting purposes.
By leveraging the class tracking functionality in QuickBooks Online, for example, you can:
- Capture revenues and expenses relating to specific funds
- Make sure funds are used in accordance with any restrictions
- Eliminate the messy bookkeeping that can result when the right processes and controls aren’t in place
Let’s look at an example.
Imagine your organization runs a hot lunch program for elementary school kids in East Vancouver, funded by a local business. The funding covers the cost of the meals, but not the delivery fee.
You hire a local restaurant to cater the meals and deliver them to the appropriate schools. Then, following the first lunch session, the restaurant sends you an invoice for $450: $430 for the meals + $20 for delivery.
When you enter your payment into QuickBooks Online, you would:
- Categorize both the meal and delivery costs as program expenses
- Flag the meal portion of the transaction under the “Hot Lunch Program” class
That way, when you filter your reporting by class, you’ll see only the $430 meal amount attributed to your Hot Lunch Program fund.
Class tracking functionality streamlines reporting obligations and helps you stay accountable. By generating Profit & Loss statements by class for funders and board members, they can easily review the revenues and expenses for specific funds.
2. Set up separate bank & investment accounts
Establishing separate accounts for your nonprofit’s regular banking, versus any reserve investments, will make it easier to track interest income and expenses relating to specific funds.
Using separate accounts not only lets you capture transactions in their appropriate classes more effectively, but it also improves reporting accuracy, reduces ambiguity, and makes your monthly reconciliation process more straightforward.
3. Use one central document to summarize all your funds
Creating and sharing a single fund summary document will help keep the restrictions and reporting requirements for separate funds clear to management and staff at all times.
Rather than relying on documentation alone to guide appropriate spending, however, you may also want to clarify fund restrictions with everyone in advance at a granular, transactional level.
4. Review fund transactions monthly
Part of managing reserve funds includes making sure balances are sufficient to achieve a fund’s purpose.
By reviewing transactions on a monthly basis, you can:
- Confirm funds are being used in accordance with their restrictions
- Check that staff aren’t coding transactions to the wrong classes or categories
- Keep your books accurate and up-to-date over the long term
If allocation errors are being made, catching them early on will allow you to work with staff to correct and prevent them.
5. Make sure your team is on the same page
Never underestimate the importance of keeping everyone in the loop. Every team member needs a clear understanding of how various funds can be used, and how they must be tracked.
Fixing ongoing mistakes after the fact can be painful and costly. If, for instance, your bookkeeper doesn’t understand how the income or expenses for various funds need to be tracked, unraveling what’s been done later can be very complicated.
- Train your staff on how to code reserve fund-related expenses before they start using the funds
- Compile the restrictions and reporting requirements for all funds in one central document, so your team can refer to it as needed
- Review fund transactions monthly to catch accounting and reporting errors before it’s too late
Finally, if your management team or board of directors needs help managing reserve funds, we can help! At Enkel, we have experience working with a variety of nonprofits to provide accurate, reliable fund accounting. Contact us to learn how we can help you manage your organization's books.