The Flow of Money in a Nonprofit Organization

One of the biggest misconceptions that people have about nonprofit organizations is that they are very easy to run and are a safe bet since they don’t have to pay federal taxes. People feel that since there is no pressure to make a profit for shareholders, it’s a lot easier working with a nonprofit as opposed to a for-profit business. However, when a person sits down and talks individuals who have had the responsibility of working with nonprofits, it becomes clear that just the opposite is true.

What is a nonprofit? In its most basic terms and from the standpoint of the United States government a nonprofit is a business that does not need to pay federal income taxes because they meet the criteria laid out in section 501 (C) of the IRS code. Usually, a nonprofit is going to a provide religious services, will be a charitable entity, or will be an educational facility. While the designations change from country to country, every country has a similar exemption for these types of organizations.

Here’s the kicker. Even a nonprofit organization needs to sell things for a profit. If they don’t make a profit off of the things they sell or the services they provide, they would not have the money needed to pay their employees, do research, purchase equipment, rent an office, or pay for employee travel. The only exception to this would be a nonprofit that only generates revenue via donations. And even at that the apparatus the nonprofit has for soliciting donations requires individuals be paid with real money.

Free nonprofit accounting software may help some nonprofits manage the complicated finances associated with running their organization. A peculiar thing about nonprofits is that they have to answer to watchdogs that look at charities and examine how much of their proceeds actually go to the cause they claim to support. All of this requires excellent documentation of the money that comes in as well as the money that goes out. Nonprofit organizations are a lot harder to run, manage, and keep financially solvent than most people realize.