Tuesday, May 27, 2008

Nonprofit Accounting for Music Groups

Hello. This week I wanted to write about accounting. I'm by no means an expert, but I've picked up a few things along the way running our nonprofit organization. Most important lesson I've learned, make sure you have more coming in than going out. Here is a run down of how we do it plus a list of things I've come to realize in the last decade.

In the beginning, we operated as a sole proprietorship. Essentially I had a separate bank account that I used to have money come in and out, but everything we did showed up on my tax return. This is certainly the easiest way to manage finances for a music group. Everyone is a subcontractor. Clients pay you, you pay the artists, and whatever is left (if anything) goes towards operating the business. Back then, we often didn't make enough money to pay everyone a decent wage, so I went without any pay for a while. That is when I began to understand that important lesson above, make sure more comes in than goes out.

After a couple years, we decided as an ensemble to become a more established entity so we reorganized as a nonprofit corporation. Words to the wise on this decision - it is not for everyone. I discuss the advantages and disadvantages of starting a nonprofit in my blog entry dated 12/19/06. Click here to see it. For us, it was the right decision. It allowed us to apply for grants and make donations to our organization tax-deductible. Also, given the amount of work we did in the schools back then, it made a lot of sense.

However, once we were a nonprofit corporation, our accounting become much more complicated. We had to start filing three tax returns a year, provide a detailed narrative of our activities each year, and start doing payroll, deductions, social security, medicare, etc. And that was just for the government. Needless to say, an activity that once was pretty straightforward become much more complex.

The load of managing our accounts falls mostly on one fabulous volunteer (aka Mom) who used to manage the accounts at a local bookstore. Imagine that, a bookkeeper at a bookstore?! For my part, I handle the payroll, pension, and budgets. We have learned through the years and now use the following system which is relatively easy to maintain.

1. We use accounting software. Right now we use MYOB. It is a great product with fabulous support. It updates our tax tables and allows us to operate under the fiscal calendar (July-June) very easily. With artists in four states, it is really helpful to have the computer calculate everyone's deductions for you. It is simple to print checks/reports and everything is customizable. It still takes a lot of time to enter everything - all sources of income and expenses need their own ecard. However, given everything we do, it makes life much easier.

2. We have an accounting firm handle the three tax returns. As a nonprofit, there is a lot of paperwork. All meetings have to have minutes. And every year we need to file returns to federal, state, and state charity registries. This doesn't come cheap, however it does offer us peace of mind.

3. We make sure to do the following monthly: a) pay bills [see expenses below]; b) deposit checks [see income below]; c) send thank you letters to donations made that month; d) file state and federal taxes with a quarterly reconciliation; e) pay pensions and associated union work dues; f) do payroll; and g) reconcile statements (credit card, bank, etc.).

4. We make sure to do the following yearly: a) send W-2s and 1099 forms (January); b) close out our payroll year (January); c) close out our fiscal year (July); d) send residuals/statements to artists and composers (July); e) send our tax return information to the accountant (October).

5. We have a savings account that we use for restricted funds. Anything we receive that is earmarked for a particular activity is placed there until we do that activity. For example, a grant designated for our education program, Toot your own Horn goes there until the funds are needed.

6. We review our profit/loss statement and our balance sheet every time we have a board or musician meeting. This insures that we are aware of our current situation and aren't met with any big surprises.

7. We have a chart of accounts. This is a list of all our assets, liabilities, and income & expense sources. Our bank accounts, petty cash, and property falls under our assets. Liabilities include our credit cards and payroll deductions & expenses. I've broken down our income and expense below.

Performance Income: Recitals, Outreach and Self-Produced Concerts
Donations: Government, Corporate, Private Donors, and Foundations
Other: Merchandise, CD Sales, Interest

Salary & Related: Wages, Payroll Taxes, Penions
Travel & Related: Lodging, Meals, and Travel
Office Related: Dues, Photocopying, Postage, Supplies, Telephone, Internet
Professional Services: Independent Contractors, Insurance, Legal & Accounting, Photography, Professional Development, Rent
Advertising & Promotion: Ads, Conferences, Literature Printing, Recording Projects

1. Make sure more money comes in than out. At the very least, break even.
2. Seek funding from a variety of sources (eg: ticket sales, CDs, grants, private donations)
3. Be realistic about your financial goals.
4. Always get multiple quotes for large purchases.
5. Always create an annual budget along with individual tour budgets. (See number 1)
6. Keep a detailed history.
7. Be economical without sacrificing your artistic product.
8. Spend money to get your name out there.
9. Set targets for your annual appeal with more people donating small gifts and less people donating big gifts.
10. Always have a back up plan for the inevitable. (eg cash reserve for low cash flow, secondary budgets based on less income, etc.)


Bob said...

Sorry to paleo-comment, but I've only just become aware of Quadre this month.

Very cogent summary! (Especially #1 in "10 Things I've Learned"). I hope many non-profits will see them and benefit.

Bob March
Lyric Theatre of San Jose

Anonymous said...

Your blog keeps getting better and better! Your older articles are not as good as newer ones you have a lot more creativity and originality now keep it up!

John said...

I am more concerned in keeping the books organized. There are many nonprofit organization volunteers who are concerned with this task. I am glad that you included in your post the importance of dealing with an accounting firm in handling the organization's funding including managing payments of taxes. Some accounting firms are now using nonprofit fundraising software or SAGE fundraising software in order to make sure that fund accounting, fund raising and payroll/HR needs are met per the nonprofit organization criteria. Thanks for reminding us of the items that should be paid monthly and yearly.

Anonymous said...

nice post!

Belle said...

Handling financial assets is a vital job. To protect the asset payroll Colorado invested on new softwares for accounting solution. What I love about these softwares is that they come handy even with small business. Payroll service smoothen the transactions and process of accounting that increases the work productivity.