Nonprofit organizations and charities are missional by nature, typically built by people with the passion and drive to make a difference. But even the most well-meaning, mission-oriented organizations can inadvertently limit their impact through simple financial missteps behind the scenes. Unfortunately, these kinds of mistakes don’t just affect the bottom line or hurt the cause. They can also jeopardize funding, invite audits, and erode the trust of donors, boards, and supporters.
At H&S Companies, we share your passion for creating impact, but our mission is about helping you. We help nonprofits across Michigan and beyond stay compliant, transparent, and financially sound. With our holistic, audit-ready approach to nonprofit accounting, we’ve seen firsthand how a few common mistakes can quietly grow into major challenges–and we have developed the tools to help you avoid them. We focus on serving as your trusted partner, so you can confidently focus on your mission.
This post is designed to identify the three most common financial mistakes nonprofits make, and how you can avoid them.
Mistake #1: Poor Financial Documentation
What It Looks Like: Life moves fast, and when you don’t have the proper systems in place, it’s easy to lose your grasp on record-keeping, at home and in business. Missing receipts, an outdated or unstructured chart of accounts, or late banking and credit card reconciliations quickly pile up leaving crucial gaps in documentation that become difficult to back-fill.
Why It Matters: Incomplete or disorganized financial records make it nearly impossible to properly demonstrate transparency and compliance. They can also trigger nonprofit audit findings, hinder grant eligibility, and raise red flags with donors who reasonably expect clean, consistent reporting. In some cases, poor documentation can even result in having to return grant funds!
How to Avoid It:
Strong, orderly documentation starts with consistency and the right tools:
- Implement standardized bookkeeping practices across the organization
- Use nonprofit-software specifically designed for fund accounting
- Schedule quarterly check-ins with a trusted CPA or financial advisor like H&S
We help clients get their paperwork and systems in order regularly – clients like Jessica.
When Jessica was asked to be the treasurer of her son’s baseball team, she quickly realized that the filings were inaccurate and outdated. She reached out to H&S to see if we could help. We met with Jessica and helped her set up online bookkeeping where she could easily track the revenues and expenses of the organization. We also went over all the deadlines to help her become current. Now, whenever Jessica transitions out of her role as treasurer, she’ll be able to confidently train someone else to assume the responsibilities and simply pass along the established systems.
Mistake #2: Inadequate Internal Controls
What It Looks Like: Many nonprofits have lean teams where everyone wears several hats. The problem is that people can quickly become siloed and stretched too thin. Soon, one person is handling all financial responsibilities with no support, and approval processes for expenses and payments quickly fall through the cracks.
Why It Matters: Weak internal controls increase the risk of fraud, errors, and compliance breaches. Even when everyone involved is trustworthy, the absence of checks and balances creates unnecessary exposure. Auditors and regulators pay especially close attention to internal controls, so even small deficiencies can quickly lead to serious findings.
How to Avoid It:
It doesn’t take a large staff to build solid internal controls – just some intentional structure:
- Establish dual sign-off requirements for payments and financial decisions
- Create written financial policies and procedures to guide daily operations
- Conduct regular internal reviews or third-party audits
- Partner with a team like H&S who offers assurance services to do the heavy-lifting for you
Mistake #3: Misclassifying Revenue
What It Looks Like: Revenue misclassification is one of the most technical–and costly– nonprofit account errors. This can happen when:
- Restricted grants are recorded as unrestricted income
- Contributions are mislabeled as exchange transactions
- Donor-resistricted funds are improperly tracked
Why It Matters: Incorrect revenue classification can draw unwanted scrutiny from the IRS, lead to inaccurate financial statements, and hurt donor trust. It can also cause poor decision-making if board leadership isn’t seeing the true picture of the organization’s available resources.
How to Avoid It: Knowledge and good systems can improve accuracy. Take steps to:
- Understand IRS rules for nonprofit revenue recognition
- Work with CPAs who specialize in nonprofit accounting
- Use accounting tools that fully support fun accounting and restrictions
Why This Matters More Than Ever
Financial compliance for nonprofits is no longer optional. It’s essential. Nonprofits today face increased scrutiny from regulators, auditors, grantors, and donors, and clean, well-documented financials are often the difference between winning funding or missing out. The bottom line is: transparent financial practices build trust and allow mission-driven work to flourish. They support long-term sustainability, and allow leaders to focus on what matters most to their mission.
How H&S Companies Can Help
H&S has extensive experience working with nonprofits and government entities, providing the clarity and confidence leaders need to move forward. Our integrated services include nonprofit bookkeeping, audits, tax strategy, and financial consulting–all designed to work together seamlessly. We don’t just help you fix problems once they surface, we help you create systems and processes to prevent them.
Let’s make your mission financially sound—schedule a nonprofit consultation with our team today.
