At first glance, traditional accounting systems for profit-based businesses and nonprofit accounting software (also known as fund accounting software) seem one and the same. So much so that many nonprofit organizations forego nonprofit-specific software in favorable of more familiar accounting or financial management solutions. While these traditional accounting systems certainly work for profit-based businesses, they lack the ability to track funds and create the reports nonprofits need to appease their donors, grant funders, and the government.
Nonprofit organizations are required to follow more stringent rules and regulations when it comes to financial reporting and accounting. Not only must they carefully track and report on funds as they move through the organization, but they must also adhere to the specific requirements, responsibilities and restrictions set forth by their grantors and donors. Funds are classified as either “restricted” or “unrestricted” and failure to demonstrate the proper use of “restricted” funds can lead to loss of funding or tax-exempt status (depending upon the situation, of course).
As you can see, accounting for nonprofits is certainly different than accounting for businesses. That’s why growing nonprofit organizations need nonprofit accounting software. Designed to help nonprofits meet their financial tracking and reporting responsibilities, specialized nonprofit accounting solutions can help your organization continue to grow and make a difference in the community in which you serve.
How Do Nonprofits Use Nonprofit-Specific Accounting Software?
In addition to tracking the overall organizational outlook reports, nonprofit accounting software is configured to track and report on specific projects related to one donor. Donors and grantors want to know that their donated funds are being spent as requested and want a chance to review the overall use and results from those funds. Nonprofit organizations cannot pool their money into general operations the way for-profit businesses do, and – more often than not – it is critical to track each different fund source to each relevant activity so donors and granting agencies can see exactly where their money went. A nonprofit’s ability to track funds and be transparent about how those funds are allocated will encourage donors and grantors to continue their support in following years.
As you can see, financial reporting is a critical issue and function for nonprofit organizations as their continued funding depends upon reporting accuracy. Nonprofits that provide their donors and funders with detailed reports have a much better chance at securing funds for the future and seeing their mission accomplished. The features included in nonprofit-specific accounting software largely reflect the importance of flexible but accurate reporting for nonprofits. For example, nonprofit accounting software (unlike traditional accounting software) is time flexible. While your grants and donations may be applied for and granted annually, many funding agencies and organizations may function on a unique timetable that does not correspond with those of other grantor’s. So, while commercial accounting software often assumes a fiscal year that ends in the same month each year, nonprofits often have to report to several different audiences, with different information requirements and reporting timelines. One foundation may want yearly reports that span the period from January 1 to December 31, while another requests them to reflect from July 1 to June 30. With nonprofit accounting software, you’re able to do just that.
Nonprofit Accounting Software Improves Financial Reporting
Nonprofits require flexibility when it comes to financial reporting. In addition to complying with the reporting standards set forth by the Financial and Government Accounting Standards Board (FASB & GASB), nonprofit organizations are also required to comply with the reporting requirements expected from private and public grantors. This means they need a flexible solution designed to meet nonprofit standards and create a variety of reports for multiple donors.
Many nonprofit organizations start out using commercial accounting software and switch to nonprofit accounting software when their funding sources start to branch out. Overwhelmed by the financial reporting requirements, many nonprofits turn to nonprofit accounting solutions after realizing that traditional accounting software cannot meet donor expectations. At best, the process in traditional accounting software can grow impractical and difficult to maintain. At worst, it can open the door to costly errors and complex audits.
Growing nonprofit organizations need nonprofit-specific accounting software now more than ever before. If your organization is in the market for a new solution, contact us today. We offer a variety of fund accounting software solutions to meet the unique financial reporting needs of your nonprofit organization.
If you’re unfamiliar with how nonprofit accounting works, we recommend you find a CPA to help you navigate the specifics of nonprofit accounting. Their guidance can prove valuable as you decide how you are going to set up your organization’s accounting practices and the software you are going to use.