Mistakes to Avoid with the Bank Account for a Non-profit
Banking rules are different for non-profit organizations. This means it's imperative that these organizations look for the right bank that suits their specific needs. A non-profit has a myriad of things to consider that a for profit company does not. It can be an overwhelming task to consider it all. Don’t worry, though, you’re at the right place! In the blog, we will cover banking mistakes you should always avoid as a non-profit organization.
1. Mixing Personal and Business Expenses
Mixing personal and business expenses can cost you a hefty amount no matter what type of organization you are in. However, as a non-profit, you need to be extra careful with your expenses. Mixing personal and business purchases puts your tax deductions in danger, creates a tax liability, and even puts your legal assets at risk of being seized. In order to get your tax deductions in order, you need to prove that the expenses being made are business expenses. When you mix personal and business expenses, you can get into some serious legal trouble.
2. Neglecting Record Keeping
Bookkeeping matters a lot when you’re a non-profit organization. There are many instances during which a bank has to check-ups on an organization. For example, most banks have to be notified if transactions above $10,000 are being made. This applies to non-profits as well because fundraisers can usually raise a huge amount from a single entity.
You need to have your records in order in case your bank wants to ensure that you are working under proper regulations and compliance. Of course, great bookkeeping also avoids any financial disputes and also promotes accountability within the organization.
3. Failing to review account fees
Banks charge a fee to make money. This rule applies to almost all organizations; however, some banks may consider waiving the fee if you’re a non-profit organization or may offer a discounted price.
It is important for you to consider the banking fees and how they are in line with your organization. It is best that you review all account fees at regular intervals to make sure that they are reasonable. Alternatively, you should always be on the lookout for better options since that will also help you in avoiding unnecessary expenses.
4. Not Following Proper Accounting Practices
As a non-profit organization, you need to have proper accounting procedures in place for whoever is involved in the business. Whether it be employees or volunteers, you should have internal procedures and policies to avoid conflicts and any fraudulent activities. Before you make policies, take some fraud indicators into consideration.
There are several signs that may indicate a potential problem with an accounting system. These include unusual processes or procedures being used, such as allowing certain individuals to bypass established procedures. Additionally, the use of altered or photocopied documents rather than originals can be a red flag. Another concerning issue is unexplained or poorly explained accounting adjustments. Any of these signs may indicate a potential issue with the accuracy and integrity of the financial records.
Alternatively, you can take steps to avoid fraud, one of the best ways being the segregation of roles and duties. You need to be crystal clear about what role is played by what department and even individuals. When you divide duties, you make sure that nothing leaves the concerned department. This helps in avoiding fraud and other illegal activities.
Of course, proper accounting practices are also necessary because they ensure that tasks such as properly classifying income and expenses and reconciling the account on a regular basis which is important for the financial management of a nonprofit organization are done adequately. Failing to follow these practices can lead to errors and problems with compliance and get your organization in legal trouble and may even risk you being shut down.
Non-profits are in possession of some very sensitive details. No matter what type of non-profit organization you are in, you need to have excellent security in place. Having great and updated security systems in place not only ensures that your information is locked and secured but also protects your bank accounts from fraud. You can ensure more security by using strong passwords and regularly reviewing account activity. Failing to do this can result in unauthorized transactions and financial losses.
6. Bank Communication
Now, whatever bank you choose, make sure the line of communication between the organization and the bank is always open. Banking experience matters a lot when you are a non-profit because you may have special needs or requirements.
This is exactly why you should choose a bank that has past experience in dealing with non-profit organizations. Ideally, go for a bank that has current non-profit clients. If they have experience, they will provide you with better service than most. Moreover, non-profits can apply for things like tax-exempt loans, bonds, and financing. A bank with no experience might not be eligible enough to help you navigate through the process and you might be left in the dark.
This is why your bank needs to have an open line of communication and also know what they are talking about and the service they are providing you. With a good bank, you can avoid problems with account management and access to services.
7. Recording Transactions in the Incorrect Time Period
As you are already aware, non-profits have a lot of donor restrictions and have different accounting methods. This can impact the timing of transactions being recorded. When using the cash basis method of accounting, income and expenses are recorded when they are received or paid, respectively. On the other hand, when using the accrual method, income is recorded when it is earned and expenses are recorded when they are incurred. It is recommended for nonprofit organizations using the accrual method to also use software to manage donor contributions and any restrictions associated with them.
8. Not having proper Documentation
Opening a bank account whether it be a profit or a non-profit organization is not typically an overly complex process. However, it is necessary to have all the right documents in place before you go to open a bank account. If you are trying to open a non-profit bank account, make sure to have the following documents in order:
- Nonprofit’s incorporation paperwork
- Tax ID number
- The letter of exemption from the Internal Revenue Service (IRS)
In addition to this, you should also name your treasurer and select the individuals who can sign on the organization’s behalf. The bank will need proper identification for these people and may even request extra certification. To make sure that you have all the right documents, call ahead of time and talk to a bank agent.
Moreover, you should also apply for tax-exempt status. Remember that there are several types of tax exemptions available for non-profits but only one will apply to yours. You can still open a bank account as a non-profit before you get your tax exempt status; however, you won’t be entitled to any of the benefits your bank has for non-profits.
9. Not Checking Minimum Balance Requirements
Another common mistake that is made by non-profits is not checking their bank’s minimum balance requirements before opening an account. Every bank has one and it varies. You need to maintain this minimum balance as a failure in doing so will result in your account being inactive.
If the minimum balance requirement is not met, you will be charged a fee that can add up to a hefty amount if you’re not careful. So, make sure to pick a bank that has a minimum balance requirement your organization can keep up with.
10. Not Making Sure that your Non-profit Status is Applicable in all Operational Places
Every state has different regulations and rules as to how a non-profit should operate. This applies especially when it comes to donations being made to your organization. While people from all states can make donations to your organization, you need to make sure that your organization is well within the legal rights to be accepting donations from said location.
To elaborate, if you are hosting fundraisers, or accepting donations large or small, make sure that you are meeting all the legal requirements in the state to do so. You may need to apply for tax-exempt status in every state you are accepting donations from. So, it’s best to stay up to date with all rules and regulations regarding the same.
What are the consequences of mismanaging a banking account for non-profits?
If you don’t take the aforementioned points into consideration, you will be in dire consequences. Now, no one likes to face consequences for genuine mistakes. However, you need to have certain things in order to avoid financial, legal, and management trouble. As a non-profit organization, failing to keep up with regulations may result in:
1. Financial Losses
If your non-profit bank account is mismanaged or is not looked after properly, you will face some serious financial losses. Not to mention, this increases your risk of fraudulent activities. It can also lead to hefty overdraft fees and you may also miss unauthorized transactions. Any sort of financial mismanagement as a non-profit can have severe consequences.
**2. Legal Problems **
Any organization should keep up with any regulation changes and make sure that they are compliant with all rules that apply to them. If your organization misses this, it can land in a lot of legal trouble. For any sort of negligence, you can be fined or be given some hard penalties. You may also risk being shut down if you prolong updating your operations to work with the regulations.
**3. Damage to Reputation **
This one is almost impossible to go back from. As a non-profit, you rely on your donors to keep your organization afloat. This means that you need to maintain a great reputation and provide them with proof that you are doing the work that you promised to do. But, if your non-profit lands in any trouble whether it be legal, financial, or even an internal conflict, it can damage your reputation. This will lead to a significant loss in current donors and you may even have trouble finding new ones.
**4. Difficulty in Obtaining Funding **
As stated above, as a non-profit, your organization stays afloat through the donations you get. If you mismanage your banking activities, funding will be hard to acquire. Funding sources do not want to provide funding to organizations that have a history of mismanagement.
**5. Loss of Tax-exempt Status **
Many non-profits have a misconception that their tax exemption is a right. The IRS offers one only to organizations they see fit. This means that it is a privilege that can be revoked at any time. Nonprofits that fail to follow relevant laws and regulations may risk losing their tax-exempt status. Additionally, if non-profits use their bank to make transactions not related to charitable purposes and do not follow the guidelines strictly, it can have dire consequences for anyone involved in the organization.
**6. Internal Conflicts **
If there is a mismanagement of your bank account such as unkept funds, unauthorized transactions, transitions that are not for the organization, and more, it can lead to internal conflicts. The general manager control includes board members and the senior management who are in charge of financial operations in the company. Mismanagement can lead to there being conflicts between the staff and upper management.
This is why non-profits should consider getting an independent audit, that is, getting audited by someone who is not a part of the organization to make sure that no information is manipulated. In addition, the organization should have clear financial policies to avoid these internal conflicts.
All in all, opening a non-profit bank account is a smooth process as long as you have your documents in order. You will not face any problems as long as you work under proper regulations and make sure that there are clear policies in place to avoid any sort of trouble.
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