INSIGHT

Outsourced accounting for nonprofits: What you need to know

March 20, 2025

Nonprofits play a vital role in our communities. They address critical social issues and provide essential services to people in need. But managing a nonprofit’s financials can be challenging, especially considering that many organizations have limited resources.

This is where outsourced accounting for nonprofits comes into play. The right partnership can transform how mission-driven organizations manage their finances and focus on their core objectives.

Partnering with an outsourced accounting team like BPM gives nonprofits access to expert knowledge and advanced tools without the overhead of maintaining a full-time, in-house accounting department. This allows them to ensure financial accuracy, compliance, and strategic financial management, so they can allocate more resources toward their mission-critical activities.

Learn to make financial management a breeze in our outsourcing your accounting free guide.

What makes nonprofit accounting unique?

Before getting into the specifics of outsourced accounting, we need to understand the distinct financial challenges that nonprofits face. Unlike for-profit businesses that focus on maximizing shareholder value, nonprofits must carefully manage their resources to further their mission while maintaining transparency and accountability to donors, grantors, and regulatory bodies if they want to stay tax-exempt and publicly supported through grants, contributions and other funding sources.

Nonprofit fund accounting

Fund accounting is central to nonprofit financial management. In fund accounting, organizations track resources based on restrictions placed by donors or grantors, ensuring that funds are used as intended and reported accurately.

Fund accounting involves:

Segregating resources into distinct funds based on donor time and/or purpose restrictions or board/management designations
Tracking revenue, expenses, restriction releases and net assets for each fund separately
Ensuring compliance with specific reporting requirements for each fund
Maintaining transparency in the use of restricted and unrestricted funds

For example, a nonprofit might have a general operating fund for day-to-day expenses, a restricted fund for a specific program funded by a grant, and an endowment fund for long-term sustainability. Each of these funds must be managed and reported on separately, adding complexity to the organization’s financial management, and fund accounting allows them to keep all those funds aligned with their purposes.

Expense reporting

Nonprofits must track expenses in multiple ways and for different reasons, such as:

By donor restriction and/or board/management designation
By grant or major funding sources that require reporting
By functional category (i.e. different programs, general and administrative, fundraising, etc.) for IRS Form 990 tax reporting and financial statement reporting
By natural category (i.e. personnel costs, rent, utilities, travel, etc.)
By department, location or other method that organizational budgeting is derived
For indirect overhead cost allocations
Along with statistical information to provide reportable measures of impact and key performance indicators (KPIs) to the public

The need for nonprofits to track the same dollar of expense six or more ways for different users and stakeholders requires thoughtful planning ahead when designing the structure of the accounting system.

Compliance and reporting challenges

Nonprofits face stringent reporting requirements from various stakeholders. Key stakeholders include:

The Internal Revenue Service (IRS) for maintaining tax-exempt status
State regulatory bodies for charitable solicitation compliance
Donors and grantors for fund usage and program impact reporting
Board of directors with fiduciary responsibilities for financial oversight and strategic planning
Charity watchdog groups, such as Charity Navigator, GuideStar, Charity Watch, BBB Wise Giving Alliance, and others

Each stakeholder imposes different requirements on a nonprofit organization, complicating the financial reporting process. To succeed, the team needs a deep understanding of nonprofit accounting principles, tax regulations, and industry-specific reporting standards.

For many nonprofits, especially smaller organizations, maintaining this level of expertise in-house can be challenging and resource-intensive, making outsourcing an attractive alternative.

The case for outsourced accounting for nonprofits

Given the unique financial landscape of nonprofits, outsourced accounting offers several compelling benefits that can significantly enhance their financial management. This can result in a clearer view of available resources, and a more secure financial foundation from which to pursue the organization’s mission.

Benefit 1: Access to specialized expertise

Outsourced accounting firms that focus on nonprofits—like BPM’s own nonprofit accounting team—bring a wealth of sector-specific knowledge and experience. This expertise is crucial for navigating the complexities of fund accounting, compliance, and strategic financial management.

Benefits of specialized expertise include:

Accurate implementation of nonprofit accounting standards (FASB ASU 2016-14)
Proper classification and tracking of restricted and unrestricted funds
Efficient preparation of IRS Form 990, state charity, and other regulatory filings
Strategic financial planning aligned with nonprofit best practices

For example, an experienced outsourced accounting team might help a nonprofit properly allocate indirect overhead costs across programs, ensuring accurate reporting of program expenses. This can make an enormous difference when it comes to maintaining donor trust and meeting grant requirements.

Benefit 2: Cost-effective financial management

For many nonprofits, particularly small to medium-sized organizations, hiring a full-time, in-house accounting team with comprehensive nonprofit expertise can be prohibitively expensive. Outsourced accounting can provide nonprofits with access to a team of experts at a fraction of the cost of maintaining an in-house department.

Potential cost benefits of outsourcing include:

Elimination of recruitment and training costs for accounting staff
Reduction in overhead expenses associated with full-time employees
Access to advanced accounting software without direct investment
Scalable services that can grow or contract with the organization’s needs

By outsourcing accounting functions, a nonprofit can redirect financial resources towards program delivery and mission fulfillment, potentially increasing its impact and effectiveness.

Benefit 3: Enhanced financial transparency and donor trust

Donors and grantors increasingly demand transparency and accountability in how their contributions are used. Outsourced accounting can significantly enhance a nonprofit’s ability to provide clear, accurate, and timely financial reports, building trust with stakeholders.

Transparency benefits include:

Regular, professionally prepared financial statements
Clear tracking and reporting of restricted funds
Improved ability to demonstrate program efficiency and impact
Enhanced capacity to respond to donor inquiries and audit requests

For example, BPM’s outsourced accounting team might help your nonprofit create detailed reports showing how specific donations were used to further the organization’s mission, providing donors with concrete evidence of their impact.

Key services offered by outsourced accounting firms

Outsourced accounting firms typically offer a comprehensive suite of services. These can generally be tailored to the unique needs of the nonprofit in question. For example, one organization might need fractional leadership in addition to day-to-day bookkeeping, while another might need audit support and additional hands to help with reporting.

Understanding which services are potentially available can help organizations determine which aspects of their financial management could benefit from external expertise.

Financial record maintenance

Outsourced accounting firms can manage day-to-day financial transactions, ensuring that all income and expenses are properly recorded and categorized. This could include:

Recording and categorizing all financial transactions
Reconciling bank and credit card statements
Managing accounts payable and receivable
Maintaining the general ledger and subsidiary ledgers

For instance, an outsourced bookkeeping team can ensure that all grant expenditures are properly coded to the correct restricted fund, facilitating accurate reporting to grantors and simplifying the audit process. This can help the nonprofit remain grant-eligible, ensuring that future projects can be funded.

Financial reporting and analysis

Regular financial reporting is crucial for informed decision-making and stakeholder communication. Outsourced accounting firms can prepare a variety of financial reports tailored to the needs of different audiences within the nonprofit.

Common financial reports include:

Monthly financial statements (Statement of Financial Position, Statement of Activities, Statement of Functional Expenses)
Budget-to-actual comparisons
Cash flow projections
Program-specific financial reports
Reporting of outcomes, KPIs, dashboards, and benchmarking

Beyond just preparing these reports, outsourced accountants can provide valuable analysis and insights. For example, they might identify trends in donor giving patterns or highlight areas where expenses are outpacing budget projections, allowing the nonprofit to make timely adjustments to its financial strategies.

Treasury and investment management

Development of Cash Management Policy
Creation of Investment Policy Statement (IPS)
Investment Research & Due Diligence
Asset Allocation Guidance
Investment Management
Performance Reporting
Quarterly Meetings with Investment Committee

Audit preparation and support

Many nonprofits are required to undergo annual financial audits, either due to regulatory requirements or as a condition of grant funding. Preparing for these audits can be time-consuming and stressful, especially for organizations with limited internal resources.

For nonprofits, outsourced accounting teams can provide crucial support in audit preparation, including:

Organizing and preparing all necessary financial documents
Reconciling accounts and resolving discrepancies
Drafting financial statements in accordance with GAAP
Serving as a liaison between the nonprofit and the auditors

By leaning on the expertise of outsourced accountants, nonprofits can streamline the audit process, potentially reducing audit costs and minimizing disruptions to regular operations.

Tax compliance and Form 990 preparation

Maintaining tax-exempt status requires careful adherence to IRS regulations and timely filing of Form 990. Outsourced accounting firms with nonprofit expertise can ensure that these critical compliance tasks are handled accurately and efficiently.

Tax-related services often include:

Preparation and filing of Form 990 and related schedules
State and local tax compliance, including sales tax and property tax exemptions
Monitoring and advising on unrelated business income tax (UBIT) issues
Providing guidance on maintaining tax-exempt status

For example, an outsourced accounting team can help a nonprofit properly allocate expenses between program services and management/general categories on Form 990, ensuring accurate representation of the organization’s efficiency to potential donors and regulators.

Choosing the right outsourced accounting partner

When selecting an outsourced accounting provider for your nonprofit, consider the following:

Nonprofit expertise: Look for firms with a proven track record in the nonprofit sector. For example, over the past 40 years BPM has worked with over 500 nonprofits across many different verticals, providing the team with deep industry knowledge.
Technology capabilities: Ensure they offer modern, cloud-based accounting solutions tailored to nonprofit needs. BPM, for instance, leverages platforms like QuickBooks, Sage Intacct, and NetSuite.
Customization: Your ideal partner should offer services that can be tailored to your organization’s specific requirements.
Communication style: Choose an accounting team whose communication aligns with your preferred style, frequency and method.
Compliance knowledge: Verify the team’s expertise in nonprofit-specific regulations and reporting standards, such as holding an AICPA Not-For-Profit Certification.

With careful consideration, nonprofits can partner with an external accounting team that not only manages their finances effectively but also supports their mission and growth.

Build a stronger financial foundation for your nonprofit mission

Outsourced accounting for nonprofits offers a powerful solution to the unique financial challenges faced by charitable organizations. By leveraging external expertise, nonprofits can enhance their financial management, improve compliance, and ultimately focus more on their core mission.

As you consider this strategic move, remember that the right outsourced accounting partner can be a game-changer for your nonprofit’s financial health and long-term success. And BPM can help. With a wealth of experience helping mission-driven organizations thrive—not to mention being a Certified B-Corp ourselves—the BPM team is well-positioned to help you navigate the complex nonprofit landscape.

Contact BPM today to transform your nonprofit’s accounting and financial management.