Top Accounting Mistakes Nonprofits Make and How to Prevent Them

Nonprofit organizations operate with a level of complexity that many people may not realize. Multiple programs, restricted grants, donor expectations, and compliance requirements all sit on top of lean teams that are focused first on mission.

When accounting systems are not designed with this reality in mind, even well-run nonprofits can struggle to clearly understand their financial position.

To explore these challenges, Ace Cloud Hosting spoke with Questian Telka, owner of ReQoncile Financials, and a long-time advocate for nonprofit financial leadership. Questian brings more than fifteen years of experience supporting nonprofits and small organizations through growth and change. She is a licensed Certified Public Bookkeeper, a QuickBooks Advanced Certified ProAdvisor, and an Enrolled Agent authorized to practice before the IRS.

Most recently, Questian has served as Director of Finance and Administration at a local nonprofit, giving her firsthand insight into the daily financial pressures nonprofit leaders face. She is also an active member of the National Association of Tax Professionals and the National Association of Enrolled Agents.

In this conversation, she shares where nonprofits most often struggle with accounting and compliance, and how technology, automation, and better systems can help organizations stay focused on their mission while maintaining financial clarity.

1. What are the most common accounting mistakes nonprofits make, especially when managing multiple programs, grants, or restricted funds?

The biggest mistake I see is not recognizing that nonprofit accounting is truly unique. To stay compliant and tell the full financial story, systems and processes need to be intentionally built for nonprofits.

That includes proper tracking of restricted grants and funds, releasing funds from restriction, functional expense reporting, and financial reporting that both meets compliance requirements and actually helps leadership and boards make informed decisions.

Too often, nonprofits overlook or undervalue the impact a nonprofit-specific bookkeeping or accounting team can have, and that gap shows up quickly as complexity grows.

2. Where do nonprofits most often fall short on compliance, such as grants, donor restrictions, or audit readiness, and why?

Let’s be honest, nonprofits are juggling a lot of compliance, and most teams are deeply mission-driven and often understaffed. I’m seeing that across the board right now. Compliance tends to suffer when it’s treated as an afterthought or when systems weren’t designed with growth in mind.

Many smaller nonprofits build processes that work for now but aren’t scalable or audit-ready when audits become required. I also see a lot of organizations tracking restricted grants and donor funds in spreadsheets outside their accounting systems, which is time-consuming, error-prone, and completely unnecessary with the right setup.

3. How does limited real-time financial visibility impact decisions made by leadership teams and boards?

Nonprofits aren’t unique here; real-time financial data is critical for good decision-making. When leadership teams and boards are working with outdated or unclear financials, decisions get delayed or are based on assumptions instead of facts.

That can lead to overspending in one program, underfunding another, missing early warning signs, or being overly conservative simply out of uncertainty. Clear, timely financial visibility gives leaders confidence to act instead of guessing.

4. How can automation and standardized workflows reduce errors and allow teams to focus more on mission-driven work?

Automation and standardized workflows reduce errors by removing variability and human guesswork from routine accounting tasks. When processes are clearly defined and consistently followed, transactions are coded the same way every time, approvals are documented, and exceptions are flagged early instead of weeks later.

They also dramatically reduce the time it takes to get the work done by eliminating manual data entry, duplicate effort, and unnecessary handoffs. Data flows between systems; reconciliations happen faster, and close cycles shorten. That efficiency compounds over time.

Most importantly, standardized workflows create reliability. Knowledge lives in the system instead of in someone’s head. That allows accounting teams to move out of constant maintenance mode and focus on higher-value work like analysis, planning, and supporting the organization’s mission.

5. Where does AI add the most practical value in nonprofit accounting today, such as forecasting, anomaly detection, reporting, or compliance?

AI adds the most practical value today by supporting accountants, not replacing them. Its biggest strength is handling repetitive, time-consuming tasks. It’s particularly effective at anomaly detection, identifying errors, and inconsistencies.

AI also accelerates reporting and forecasting. It can review financial statements and generate an initial analysis, giving accountants a strong starting point for monthly reviews and strategic conversations.

From a compliance and audit readiness perspective, AI can help organize and summarize large volumes of transactions, contracts, grant agreements, and donor restrictions, making it easier to tie activity back to source documentation and stay audit-ready year-round.

6. What signs indicate a nonprofit has outgrown its accounting software, and what should leaders prioritize when selecting a new system?

A nonprofit may appear to have outgrown its accounting software when reporting relies heavily on spreadsheets, grant or fund tracking happens outside the system, month-end close takes longer than it should, or leaders can’t easily get clear, timely financial reports. If audits feel reactive, data has to be reworked to meet compliance needs, or the team spends more time fixing errors than analyzing results, those are strong signals that something isn’t working.

That said, it’s not always that the software itself has been outgrown. In many cases, the system is capable, but it hasn’t been set up or maintained in a way that supports the organization’s current complexity. Chart of accounts structures, class or fund tracking, workflows, and integrations may simply need to be reworked to align with how the organization operates today.

When selecting a new system or deciding whether to optimize the existing one, leaders should prioritize clarity and scalability. The system should support nonprofit-specific tracking, automate routine processes, provide strong internal controls, and produce reports that make sense to decision makers, whether or not they have a strong financial background.

What This Means for Nonprofits

What stands out most from Questian’s perspective is that nonprofit accounting challenges are rarely about effort or intent. They are typically related to systems that were never designed to scale with the growth of programs, funding sources, and reporting needs. When financial visibility is delayed or fragmented, leaders and boards are forced to operate on assumptions rather than facts.

Automation and AI, when applied thoughtfully, offer a way forward. They reduce errors, shorten close cycles, and surface issues earlier, giving nonprofit teams the space to focus on planning, compliance, and mission impact. The goal is not to replace accountants, but to support them with tools that enhance reliability and sustainability.

At Ace Cloud Hosting, we help nonprofits simplify their technology stack and address modern challenges like secure remote access and data protection. Our cloud hosting solutions for accounting applications such as QuickBooks enable nonprofits to manage their accounting from a single, secure workspace, while we take care of IT management and security.

Are you a nonprofit? Share your experience or let us know what challenges you’re facing.

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