Nonprofit and for-profit organizations are similar, yet distinct in a few key ways. In terms of structure, stakeholder responsibilities, taxation concerns, and transparency, working in both types of organizations present unique challenges. Here is what you need to know if you are considering working in the nonprofit sector:
3 key considerations about financial work at nonprofit organizations
On a structural level, nonprofit organizations may present a unique challenge for financial stakeholders. Typically, a board of directors manages a nonprofit organization. The board sets policy, hires executives, and is responsible for the organization’s financial activities. Unlike a traditional business, members of a nonprofit board receive no compensation for their work.
They are typically volunteers with relevant experience. Here are three points to consider when considering a nonprofit firm:
The executives at a nonprofit are responsible for the organization’s public activities. These professionals meet with donors, delegate responsibilities to managers, and develop strategies. In contrast to the board, executives receive compensation for their work. On average, senior accountants at nonprofit organizations earn $76,690.
Under the guidance of the board and executive staff, managers and administrators carry out the organization’s daily operations. Though every organization has a unique structure, many have financial staff at each level. Depending on the size of the nonprofit, it may require financial analysts ($59,026) and directors ($127,809) as well as accountants (50,202) and auditors ($54,919).
According to Section 501 of the Internal Revenue Service tax code, charitable organizations are exempt from paying income, sales, and property tax. To qualify for these exemptions, an organization must be operated solely for charitable, scientific, religious, or public safety purposes.
Nonprofit organizations do pay taxes on compensation given to employees, such as Medicare and Social Security. Likewise, nonprofits are expected to pay income taxes on any activities not related to the organization’s primary directive. For example, if a charity gives away meals to people in need but sells reusable water bottles, it would have to pay income tax on profits earned from the water bottle sales.
3. Financial reporting
Financial planning stakeholders at nonprofit organizations are responsible for generating reports similar to those produced at other types of businesses, like balance sheets. Without these reports, it would be impossible to conduct strategic planning. However, the data contained within these reports can be quite different.
According to Paychex, a nonprofit organization must produce a statement of financial position, which is somewhat analogous to a balance sheet. However, where a balance sheet lists the owners’ equity in the company, a statement of financial position lists the sources of funds received by the organization and classifies them as unrestricted, temporarily restricted, or permanently restricted net assets—the difference between each classification being how much of each asset the organization is allowed to spend. The organization can spend unrestricted assets at its discretion. Restricted assets, however, earn interest, which can be spent.
Another key reporting difference is that nonprofits do not produce profit/loss statements. Instead, they produce a statement of activities. According to Paychex, this report lists the organization’s income and expenses, including the net sources of funds, such as donations and grants. Each item on the report is categorized as a surplus or deficit.
Importantly, financial stakeholders at nonprofits must diligently track donations to reduce compliance risks. Every dollar that comes into the organization must be documented carefully, and all funds must be tracked and logged.
Though nonprofits differ from for-profit companies in many ways, they also have similarities. Daily tasks such as recording financial transactions, documenting expenses, preparing statements, and using accounting software are all comparable responsibilities.
Considerations for working at a for-profit organization
Working at a for-profit organization is very similar to working at a nonprofit organization. However, there are likely to be more robust budgets and a larger and complex organizational structure the company is built around. For example, accountants at for-profit organizations can focus on their position’s responsibilities without many interactions from other departments.
Is working for a nonprofit the right choice for you?
If you’re thinking about working for a nonprofit, it’s important to understand that, as with for-profit businesses, your experience will vary depending on the unique organization. In general, however, it is easier to get a job with a nonprofit than a for-profit business. Entry-level positions at nonprofits are often unpaid. However, experienced professionals can find compensated work at nonprofits.
Nonprofit work attracts individuals who are willing to work hard for a cause they believe in. Though nonprofit work can be financially rewarding, the impact the organization has on society is more important. Working for a cause you believe in can be its own reward.
As noted by nonprofit professional and The Muse contributor Rebecca Andruszka, nonprofit work often involves getting outside of your professional comfort zone. Professionals who enjoy solving problems in the moment may be drawn to this kind of environment. Nonprofit organizations offer room for professional growth and allow individuals to discover what they are passionate about.
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