How Nonprofits Can Strengthen the Month-End Close Process

A strong month-end close does two things for a nonprofit. It gives leadership timely, reliable financial information for decisions about cash flow, program spending, and grants. It also means the nonprofit goes into audit season with everything already in order. While many of the basic steps of a month-end close are the same for any organization, nonprofits have additional accounting requirements, including those related to contributions, donor restrictions, and financial reporting. This can make the process more challenging, especially for lean finance teams. To help clients, prospects, and others, Dermody, Burke & Brown CPAs has summarized the key details below.

Create a Checklist for Month-End Close

A written checklist is the foundation of a nonprofit close. It helps make sure important tasks are completed, and it gives the finance team a process it can follow each month. The checklist should reflect the organization’s own funding sources, programs, and reporting requirements, but most nonprofits will need to address the following areas.

Record financial activity for the month — Every transaction from the month needs to be recorded in the correct period. Contributions and grants can require additional attention because the timing and classification of revenue may depend on donor restrictions, conditions, or the terms of an award.

Reconcile bank, credit card, and other balance sheet accounts — Bank and credit card activity should be compared against the general ledger, and the monthly statements, with any anomalies investigated and resolved. Other balance sheet accounts should also be reconciled so the amounts reported on the financial statements can be supported.

Review receivables, payables, and accrued expenses — Make sure all revenue and expenses for the month have been recorded. For nonprofits, this may include recording outstanding pledges and grant reimbursements, as well as expenses incurred during the month even if the invoice hasn’t arrived yet.

Review donor restrictions — This is where the nonprofit close starts to look much different from a for-profit close. The accounting team needs to confirm that restricted contributions are classified correctly and determine whether any restrictions were satisfied during the month. When a restriction has been satisfied, the appropriate amount should be released from restriction.

Reconcile grant activity — Grants require a separate review against the terms of each award. Make sure grant revenue and expenses have been recorded correctly, costs are charged to the right grant and are allowable, and remaining grant balances are accurate. This can also help the organization get reimbursement requests out on time.

Review payroll and functional expense allocations — Make sure payroll and related costs are allocated correctly among program services, management and general, and fundraising. Other shared costs may need to be allocated using a similar methodology as well.

Record adjusting entries — Review the books for depreciation, prepaid expenses, and other adjusting entries. This helps ensure revenue and expenses are reported in the correct period.

Review financial statements — The Financial Manager will want to review the financial statements for unusual fluctuations and budget variances. Finalized statements can then be provided to leadership to evaluate nonprofit performance, and they may also identify any other issues that require attention. More detailed reports are usually compiled for quarterly and annual review by both leadership and the board.

Organize documentation — Schedules supporting grant balances, donor restrictions, and fixed assets should be current. Reconciliations, invoices, receipts, grant agreements, and payroll reports should be easy to find. Keeping these records up-to-date throughout the year can reduce the amount of cleanup required for grant reporting and the annual audit.

Not all of this work has to wait until after the last day of the month. Reviewing accounts, attaching documentation as transactions happen, and resolving questions early can reduce the workload during the close window.

Assign Clear Deadlines and Ownership

Every item on the checklist needs an owner, a deadline, and a reviewer where appropriate. Some flexibility helps too, since one unfinished task shouldn’t hold up the rest of the close.

It’s important to note that the close depends on information from outside the finance team. Program managers may need to supply grant information, and fundraising staff may need to report new contributions. Others may need to submit expense reports and receipts. Setting firm deadlines for that information lets the accounting team start closing the month as soon as possible instead of spending the first few days waiting for paperwork.

Review and Improve the Process

There’s always room for improvement. As the organization becomes more comfortable with the close process, look at where bottlenecks are still occurring and what is causing them. It could be the same rework every month, or maybe the accounting department is always caught waiting for another department to submit information.

Once the root cause is established, the process can be updated. Work can be moved to earlier in the month or a handoff between departments can be simplified.

For some nonprofits, working with an outsourced accounting team can accelerate these improvements. A provider with nonprofit experience can help identify gaps in the close process and strengthen procedures. Many can also introduce technology that automates part of the process and reduces manual work.

Contact Us

A stronger month-end close begins with getting the fundamentals right. For nonprofits, that means accounting not only for routine transactions and reconciliations but also for many other nonprofit-specific requirements. Once a clear process is established, the close is more efficient and financial information is more readily available for leadership. If you have questions about the information outlined above or need assistance with an accounting issue, Dermody, Burke & Brown CPAs can help. For additional information call 315-471-9171 or click here to contact us. We look forward to speaking with you soon.