July 29, 2022 | 6 min read
Happy Friday and welcome back to the Friday Five! Today is part one of a series where we will be building out our Glossary of Terms for everything related to non-profit accounting.
With the endless use of lingo and jargon, we think it’s important to focus on the vocabulary that we use in everyday conversations to showcase the importance of truly understanding these terms. So today we’ll be starting with definitions for fundraising with a focus on the 5 core types of money that can come into your organization.
According to Merriam-Webster, donations are any gift, particularly those given to the public or a charitable cause. While the most common form of a donation is cash, it is not the only one. Other common donations are given as either goods or services – like a sponsorship where you provide food or tables for an event – and these can be just as impactful as their cash equivalent.
When recording donations it is important that you are tagging and separating your donors based on the frequency of their donations. While it is important to keep great relationships with both major donors (large gifts) and regular donors (high frequency), the communication will most likely take different forms. Using a CRM that has automated workflows such as DonorNinja can help improve efficiency by recording donations, sorting donors, and giving a platform to communicate with all in one.
Donations are also more flexible than other types of fundraising dollars. This is because they do not normally have any types of restrictions. Restrictions can influence time, purpose, or both – and are regularly seen in non-profit accounting.
Grants can come from both the public and private sectors. While they commonly come from governmental organizations, ranging from federal to municipal levels, individuals and organizations can also establish grants. Merriam-Webster defines grants as “to bestow or transfer formally”, such as a scholarship.
While grants are normally spread over several years, they are recorded in full at the time of the promise. This is accrual based accounting, and is recommended since it provides a more accurate representation of the organization’s financial health. We will not bore you with all the details now, but you can learn more here.
Grants can also have restrictions. An example would be the 21st century grant which supports academic development for after school hours, primarily in underserved communities. This grant carries a purpose based restriction.
Similar to grants, pledges are a promise to give money in the future. Since nonprofits work in the industry of feelings, vocab is important here as well. Just like any other legal promise there needs to be a contract for records. While signing a contract does not include the warm fuzzy feeling of helping others, this is called a promissory note and it carries the connotation that others are relying on the donor’s actions.
Pledges, like donations and grants, commonly have restrictions on how they can be used which are based on time, purpose, or both.
An example of this would be that John Doe donates $10,000 to the local high school’s basketball team. If Mr. Doe said that it has to be spent over the course of 10 years then this would be time restricted. But, if the restriction was that it had to be used on equipment then it would be purpose based and the school could only use the money for expenses directly related to equipment like shoes, balls, a hoop, etc.
Tributes can take two forms: honorary and memorial.
Honorary tributes are made on the behalf of someone else who is still currently alive. An example would be if one of your relatives started a scholarship to your alma mater in your name.
The other type of tribute is memorial. These contributions are given after someone has passed away. An example would be starting a fund for local youth and naming it after an influential member of the community who had a large involvement in helping youth.
Another form of raising money is by providing a service. Similar to a business where the client is charged back after the fact, a non profit can use fees for service to supplement costs. Examples of this would be dependent on the mission, but can take the form of child care, job training, or even material or equipment. These are less common than other forms, but every penny counts.
That’s our first 5! Did you know the distinctions between all of these? We’ll be adding to this glossary in future installments of the Friday 5 – so tell us in the comments – what non-profit accounting words have always confused you too?
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