Does your nonprofit organization currently use commercial accounting products? While off-the-shelf accounting software may have worked in the early days of your nonprofit organization, it lacks the tracking and reporting capabilities necessary for nonprofits who have multiple funding sources. Overtime, off-the-shelf accounting software can become impractical and create costly errors.
Ask yourself the following questions to determine if your organization should consider making the investment in nonprofit fund accounting:
1. Do you have certain funds that you must spend in accordance with special restrictions – in particular ways or for certain purposes?
Nonprofits must carefully track and report on separate restrictions on money as used to support their programs. Major donations and grants are commonly given with a set of specific and unique requirements, restrictions, and responsibilities. The associated funds are either “restricted” or “unrestricted.” Failure to demonstrate that “restricted” funds have been used correctly can have some serious organizational consequences, including termination of executives, loss of funding, and worst case, the loss of tax-exempt status. Solutions that deliver a financial solution which is built specifically for fund accounting are specially designed to help nonprofits meet those tracking responsibilities and handle the special requirements that may come with each new source of funding.
2. Do you need to measure the performance of a specific program, activity, or performance by location?
Nonprofit organizations typically have the need to track more than financial information. They need to report on program results and report on outcome measures. Most commercial accounting software is not designed to track or report on programs. For those that do, it is usually managed with a Job Cost system, primarily used by the construction industry, which tracks financial information. Nonprofits should ensure their accounting toolset is robust enough to track and report performance or outcome measures on financial statements, as well as budgeting outcome measures for accurate forecasting. This is where nonprofit specific fund accounting systems excel.
3. Do you have forms that need to be recorded as encumbered?
Nonprofits may require an accounting system where expenditures are encumbered prior to receipt of goods and services. In encumbrance accounting, nonprofits can track and report on spending commitments to significantly reduce the risk of fund over-commitment. The ability to report on encumbered funds provides nonprofits tighter controls on spending while fully utilizing a grant budget. Commercial accounting systems are not designed to properly address these reporting and tracking requirements. Fund accounting systems, on the other hand, are specifically designed to address this unique need.
4. Do you have multiple audiences that require you to provide various report types showing how money is being spent?
As with any organization, reports and financial statements must be readily available for internal and external audiences. Because of the nature of funds, nonprofit and government organizations have distinctly different reporting requirements from commercial companies. Their accounting methods must reflect those differences. Reporting is a critical issue and function for nonprofits as continued funding can depend on reporting accuracy. An organization that is able to provide detailed levels of reporting has a much better chance of seeing its funding and the scope of its mission increase. Each of the audiences and the reports that are specific to the organization will have unique requirements. They need access to sophisticated, audit-level reports for good accounting, as well as simple, high level reports that can be understood by less accounting-savvy audiences. The flexibility of detail and presentation in reporting is crucial, and graphing and charting capabilities to improve presentation of complex financials are must-haves in any fund accounting system. Being able to easily generate necessary reports without custom report writing is vital with the ever-changing reports required by funding sources.
5. Can you easily adhere to nonprofit-specific accounting rules?
Nonprofits need to comply with stringent reporting standards. Audited financial statements must present information in accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 116 and 117 or Governmental Accounting Standards Board (GASB) guidelines. Fund accounting software typically includes reports that make compliance easy, whereas commercial accounting software does not usually provide these reports without costly customization.
6. Do you have the need for a self-balancing chart of accounts?
Because of the nature of funds, a separate chart of accounts must be maintained for each fund. In commercial accounting systems, separate revenue and expense accounts are maintained, but are intertwined on balance sheet accounts. For fund accounting, funds must be treated as separate entities with their own general ledger and individual revenue, expense, income, and balance sheet reports. And the need to produce multiple balance sheets within the same organization is common. True fund accounting software will automatically hand the offset postings to cash or payable accounts by fund, as well as the encumbrance processing, grant tracking, and budget controls.
7. Do you need to integrate with other mission-critical or back-office software?
Providing auditors, stakeholders, and key decision-makers a clear look at the lifecycle of every dollar from receipt to expenditure will continue to be the focus for the future. This is where integration to mission-critical software such as program management software and back-office software—including fundraising and human resources—is essential. Commercial accounting systems also offer integration to other systems, just not those that are aligned specifically to the nonprofit sector. Because fund accounting software is created with a nonprofit’s needs in mind, it has integration capabilities to allow nonfinancial, yet mission critical data to be recorded, tracked, and reported on within the fund accounting financial software.
If you answered “yes” to any of these questions, you should use accounting software designed to handle the specialized accounting requirements specific to the nonprofit sector. Customizing or overlaying features onto commercial software to achieve nonprofit accounting functionality has the potential to be inefficient, incomplete, and expensive to buy and maintain. Good fund accounting meets the complex fund tracking and flexible reporting requirements that are vital to a nonprofit’s continued ability to serve its community.