How Fund Accounting Helps Associations Promote Transparency

Your association likely brings in funding from a wide range of sources, from membership dues and sponsorships to merchandise sales and online course fees. To make the most of your resources for your operations and member engagement strategy, you need to properly track all of your revenue streams  (opens in a new tab) via organized accounting procedures.

This is where fund accounting comes in. Jitasa’s guide to fund accounting  (opens in a new tab) defines the term as “a method of financial management that tracks the amount of money allocated to various operations at a tax-exempt organization.” While most organizations that use this system are traditional nonprofits, professional and trade associations like yours also benefit from it because your accounting should focus on promoting accountability rather than generating a profit.

In this guide, we’ll walk through a few applications of fund accounting that your association can incorporate into its operations. But first, let’s dive deeper into what we mean by “fund” accounting.

Types of Funds in Fund Accounting

All of your association’s revenue falls into one of three categories based on whether the contributor has designated it for a specific purpose. Here is a quick breakdown of these categories:

• Unrestricted funds have no designations attached, so your association can put them toward any area of its budget. Most of your member-oriented revenue streams (dues, events, courses, merchandise, etc.) are likely unrestricted.
• Permanently restricted funds usually take the form of endowments, which some associations use to support ongoing initiatives like scholarships, fellowships, or awards  (opens in a new tab). Your organization doesn’t spend endowment contributions directly. Instead, you’ll invest them and put the interest toward these programs.
• Temporarily restricted funds are bound by specific activities or time periods. Once the activity is finished or the time elapses, any remaining funding can be released from restriction. Grants  (opens in a new tab) and sponsorships are the most common temporarily restricted revenue sources for associations, as well as any major donations you might receive.

To make sure your association uses restricted funds as intended  (opens in a new tab) (and thereby maintains a positive relationship with the funder), you have to record, allocate, and report on each category separately.

Applications of Fund Accounting for Associations

Decision-Making

Once you implement fund accounting at your association, it’ll impact many of your internal processes, especially budgeting  (opens in a new tab). Fund accounting allows you to see exactly how much money you have available for your association’s activities during the year. When creating your operating budget, allocate restricted funds first to ensure they go toward the right initiatives, then fill in the gaps with unrestricted funding.

Additionally, strategic planning  (opens in a new tab) and financial planning should go hand in hand. Use your association’s overarching, long-term goals to determine which commonly restricted funding sources would be most beneficial to pursue. Fund accounting helps keep all of your association’s employees and board members on the same page and ensures your organization stays accountable to itself as your team makes major decisions about its future.

Reporting

In addition to internal accountability, fund accounting promotes external transparency, especially with reporting. Your association’s annual financial statements  (opens in a new tab) will be more accurate if you acknowledge your use of fund accounting in them as follows:

• Statement of activities: Separate restricted and unrestricted revenue and net assets.
• Statement of financial position: Separate restricted and unrestricted net assets.
• Statement of cash flows: Note cash inflows with restrictions.
• Statement of functional expenses: Not directly applicable, but restricted funding indirectly affects how you report expense allocation.

Among other purposes, these statements will help you fill out your association’s annual tax return and answer the questions it includes on restricted funding accurately, since the government wants to ensure that you’re using these funds properly.

Relationship Building
Securing grants, sponsorships, and large donations for your association hinges on relationship building. Financial transparency—especially regarding how you use these restricted contributions—is a key contributor to those relationships. A few practical ways to promote this transparency include:

• Adding information about restricted funds to the financial section of your association’s annual report.
• Linking to your financial statements and tax returns on your organization’s website so they’re easily accessible to individuals who want to dig deeper into your finances.
• Putting potential grantors, sponsors, and large-dollar donors in touch with your treasurer, who can serve as your association’s financial liaison when needed.

When fund accounting influences your association’s relationship-building efforts, you’re more likely to come off as trustworthy to important stakeholders and secure significant, lasting support.

Leveraging fund accounting is critical for any association looking to be more financially transparent and tap into lucrative revenue streams. If you have additional questions or need help setting up your system, you can always reach out to an accountant who specializes in working with tax-exempt organizations and can tap into that experience to develop the best financial management approach for your association.