Addressing the Disconnect Between
Program and Finance Teams
in
Nonprofit Organizations
The program completed activities but not reflected in financial reports. A key issue is reliance on cash-based accounting rather than the accrual.
- By Rezaul Islam
- Nov 21, 2024
When I began my career in the nonprofit sector, I quickly noticed a disconnect between the finance and program teams. The finance team focused heavily on policies, compliance, and financial justifications. Meanwhile, the program team grappled with field realities, stakeholder engagement, and performance outcomes.
This divide often led to inefficiencies and misaligned priorities, especially in financial reporting. Through my diverse career, working in both program and finance roles, I observed a key issue: many organizations recognize project expenses using a cash-based accounting approach instead of the accrual method. This practice disregards the matching principle, where expenses should align with the revenue they generate. As a result, completed activities often go unreflected in financial reports, causing discrepancies that undermine program performance and decision-making.
By understanding this systemic issue, I hope to highlight the need for a unified approach that fosters collaboration between finance and program teams to achieve better outcomes for organizations and the communities they serve.
Disconnect Between Program and Finance Teams in Nonprofit Organizations
In many nonprofit organizations, there’s a growing concern around the proper implementation of accrual-based accounting, often leading to a disconnect between program operations and finance teams. A common issue arises when program teams report completed activities, but these activities are not reflected in financial performance reports. This gap in financial visibility can lead to frustration and confusion, especially when program teams expect financial reports to align closely with their on-the-ground efforts as it affects program burn rates, program funding, activity implementation, and questions about program work efficiency.
The Role of Accrual-Based Accounting, How Does it Work?
Accrual-based accounting is essential for nonprofits to present an accurate and complete financial picture. Unlike cash-basis accounting, which only records transactions when cash is exchanged, accrual accounting records revenue and expenses when they are earned or incurred. This ensures that financial reports match the true economic activity of the organization during a specific period, helping stakeholders understand the full scope of the nonprofit’s operations.
One of the core principles behind accrual accounting is the matching principle, which states that expenses should be recorded in the same period as the revenues they help generate. This allows nonprofits to match costs to the corresponding program activities, ensuring that financial performance reports truly reflect the organization’s ongoing work, even if cash has not yet been received or paid.
Why Many Nonprofits Struggle with Accrual Accounting
Despite the importance of accrual accounting, many nonprofits struggle with properly implementing these principles. A key reason is the lack of understanding about how to apply accrual accounting and the matching principle effectively. In many cases, nonprofit organizations are more accustomed to cash-basis accounting or may not have received adequate training in accrual-based accounting.
In addition to the knowledge gap, the complexity of nonprofit operations makes it more difficult to track and allocate expenses. Many nonprofits manage multiple projects, grants, and restricted funds, each with its own set of financial requirements. If accrual accounting is not implemented correctly, expenses may not be recorded in the correct periods, leading to discrepancies between program completion and financial reporting. This is particularly problematic when program teams, who are focused on completing activities, expect to see those activities reflected immediately in the financial reports.
Another contributing factor is the lack of alignment and communication between program teams and finance teams. Program teams are generally focused on activity completion, while finance teams are concerned with accurately tracking and reporting expenses. Without proper coordination, the two teams can find themselves at odds, leading to missed deadlines, inaccurate reports, and ultimately, a failure to capture the full impact of the nonprofit’s work.
Solutions to Bridge the Gap
To address these issues, nonprofits can take several steps to improve the implementation of accrual accounting and enhance the collaboration between program and finance teams:
Invest in Training and Education: A critical first step is providing finance teams with comprehensive training in accrual-based accounting and the matching principle. This training should include examples specific to nonprofit scenarios, such as grant management, deferred revenue, and multi-year project tracking. This will help ensure that accountants understand how to record transactions in a way that reflects the true financial position of the organization.
Foster Communication and Collaboration: Regular communication between finance and program teams is essential to ensure that everyone is on the same page regarding financial reporting. Regular check-ins can help finance teams understand the timing of program activities, while program teams can gain a clearer understanding of how expenses are recorded and reported. This collaboration can prevent delays in financial reporting and ensure that completed activities are reflected accurately in the financial performance reports.
Enhance Accounting Systems: Many nonprofit organizations use outdated or inadequate accounting systems that make accrual accounting more difficult to implement. Investing in accounting software designed for nonprofits can help streamline financial tracking, automate accrual processes, and improve reporting accuracy. Many modern platforms offer features specifically tailored to nonprofit accounting needs, such as grant management, restricted fund tracking, and multi-year project oversight.
Implement Stronger Financial Controls: Strong internal controls and processes can ensure that expenses are tracked properly and matched with the correct revenue. For example, setting up clear guidelines for when and how expenses should be recorded, and having finance staff review reports regularly for discrepancies, can help catch errors early on.
The Benefits of Proper Accrual-Based Accounting
By implementing accrual accounting properly, nonprofits can gain several benefits:
Improved Financial Accuracy: Accrual accounting provides a more accurate picture of the nonprofit’s financial position, including revenue earned and expenses incurred, even if cash has not been received or paid yet. This ensures that financial reports reflect the true scope of activities.
Better Decision-Making: When financial data is accurate and up to date, nonprofits can make better, data-driven decisions. Whether it’s planning future projects, applying for grants, or managing cash flow, proper financial information helps leaders plan for the long-term sustainability of the organization.
Increased Transparency and Accountability: Nonprofits that follow accrual accounting are better equipped to demonstrate financial transparency to donors, board members, and other stakeholders. Accurate and timely financial reporting builds trust and credibility, which is essential for fundraising and maintaining public support.