Importance of the Right Nonprofit Accounting Software
This article addresses why organizations require access to accounting software, specifically suited to the nonprofit sector.
What does your nonprofit organization need to know about QuickBooks?
To dispel one impression, QuickBooks is not a pejorative for us. In fact, we endorse it and other entry-level software as satisfactory tools for small- to mid-sized nonprofits. We use the QuickBooks Enterprise edition hosted by our private cloud service for many of our outsourced accounting clients.
QuickBooks has become the default software for small businesses and nonprofits as it’s user-friendly and has some feature-sets that other, more advanced, accounting software may not have (e.g., integrated credit card processing).
It can serve as a permanent tool for organizations with slow or no growth, along with those that operate more like private businesses with revenues mainly derived from selling goods or services. We have seen nonprofit accountants, who know how to use QuickBooks, perform some magical things, pushing it beyond its intended limits. There’s a natural human resistance to change and, unfortunately, their good intentions sometimes become a disservice to the organization. For those in this position, we suggest reading Stepping Up to New Accounting Software – How It Really Works.
Why is nonprofit software called fund accounting?
Abila, the software vendor for MIP Fund Accounting™, published a white paper, “Ten Reasons Nonprofits Need Fund Accounting.” The 10 reasons can be boiled down to three or four main ones. The term, “fund accounting,” causes some confusion. The traditional definition stems from the government where funds are self-balancing accounting entities within a government organization that is statutorily prescribed. Think general fund, utility fund, etc.
However, the term is less precise when it is applied to nonprofit organizations. Nonprofits can have self-balancing, “operating,” entities that generate both revenue and expenditure reports. Additionally, these have a balance sheet that is established by the Board of Directors (e.g., capital campaign fund, federal or state grant fund, etc.).
More typically, the term is used in reference to accounting for revenue sources that are restricted for certain purposes or have a time expiration. Usually, these are grants, large donor contributions, and endowments. The balance of assets over the life of the funding is shown in the Net Asset section of the Statement of Financial Position but is not a self-balancing accounting entity. Some accountants refer to this as net asset accounting rather than fund accounting. For more on fund accounting, click here.
Why do nonprofits outgrow entry-level accounting software?
Nonprofit organizations outgrow their accounting software for three main reasons:
- Too many accounting objects to track
- More robust and flexible budgeting and forecasting
- More comprehensive and flexible reporting and data analysis
Nonprofit accounting objects
The minimal requirement for nonprofit accounting software is to keep accounts by their traditional balance sheet and income statement categories, the purpose of how money is spent and whether funds provided are restricted or unrestricted. If the organization receives grants that require reporting back to the funder expenditure, an additional object is required. QuickBooks, or almost any basic accounting system, can handle this situation.
For example, the QB chart of accounts handles the basic accounting requirement to produce a balance sheet and income statement. Its class code is a subaccount and is best used to designate the function or program associated with expenditures. This includes child care, education, fundraising, and administration. The job code, a separate coding scheme in QuickBooks, can be used for grants and projects.
However, when nonprofit organizations grow in size and complexity, the three coding elements become inadequate to generate the financial information required by all of the stakeholders. These stakeholders include management, Board, donors, funders, taxing authorities, etc. The coding structure can grow to something like this:
- General Ledger (normal account)
- Program or function
- Funding source (grants and other sources that require tracking and reporting
- Department or responsibility/cost center
- Projects (events, campaigns, etc.)
- Net asset classifications (restrictions and designations)
What to know about nonprofit budgeting and forecasting
Most nonprofits take budgeting seriously since it is the measurement counterpart, at least in terms of financial performance, to profit in the private sector and is normally required in the by-laws and governance policies of the Board of Directors.
Forecasting goes beyond budgeting and projects financial performance into the future based on historical trends and best estimates of future activity. It is not unusual for a mid-size nonprofit organization to simultaneously manage multiple budgets and forecasts, which could include:
- Current-year operating budget
- Current-year capital budget
- Revised-versions of the above in mid-year
- Current-year cash budget
- Budgets in the process for the following year
- Long-term (5-year) financial forecasts
- Separate grant budgets that cross fiscal years
Entry-level software and many commercial accounting software products do not have the capability much beyond creating a current-year budget and allowing revisions to it. Specialized nonprofit accounting software allows multiple budgets for various uses, multi-year forecasting, cross-fiscal year budgeting of grants and other fund sources. Specialized nonprofit accounting software also allows audit trail of budget creation and changes as well as budget control tools, such as alerts and encumbrances.
What to know about reporting and data analysis
Most entry-level accounting systems can generate predefined standard financial reports with options for summarization, filtering, time-period selection, and comparisons to prior periods and budgets. Smaller organizations get by with these fixed reporting capabilities and can further extend them by using the Excel export feature and add-ons.
A significant deficiency is the inability of entry-level software to organically generate GAAP-compliant reports required for nonprofits. This includes a Statement of Financial Position with the net asset section showing restricted and unrestricted funds.
An additional report is a Statement of Activity showing a reconciliation of the beginning and ending net assets or fund balance. Specialized nonprofit accounting software offers much stronger reporting and data analysis capabilities. The underlying account structure is stronger and more detailed, and the reporting tools are more sophisticated and flexible. Even more, NFP Partners has provided more on reporting in the article, A Guide to Monthly Financial Reporting.
A few other reasons for stepping up
There are other reasons for leaving entry-level accounting software. Though none of these weaknesses may be the main reason for upgrading, they can serve as a ‘hot button’ or catalyst.
- Indirect cost allocation to programs and grants
- Auditability, especially as applied single-purpose audits where federal funds are involved
- Access security and internal controls features
- Integration with other applications
Who are the main vendors of nonprofit accounting software?
Nonprofits constitute a big sector in the economy. Correspondingly, there are many players and more coming on. The ones we encounter most frequently and utilize in our outsourced accounting service, are mature and feature-rich products that have incorporated new technology. Some of this technology includes cloud computing and standard tools for integration with other applications (e.g., API).
Additionally, these vendors provide strong support and a network of value-added resellers and consultant. Here are the ones we can recommend or employ in our outsourced accounting practice with links to their websites:
NFP Partners was a value-added reseller (VAR) of MIP for 12 years and remains a certified consultant. The application employs a dimensional chart of accounts. It can also be deployed in a traditional client-server arrangement or in a cloud-based, multi-tenant environment. Additionally, it’s a great solution for small- to mid-sized nonprofits with demanding accounting requirements at an affordable cost.
Sage Intacct developed from scratch as an Internet-only application, entirely cloud-based and available on the SaaS (Software as a Service) model like SalesForce. Its functionality is built around a dimensional chart of accounts, as is MIP. It exceeds MIP in the richness of features, especially the use of customizable dashboards and connectivity of other cloud-based applications.
Accordingly, the software is positioned and priced for larger organizations. NFP is presently examining becoming certified on the software and making it available to larger outsource clients.
Also, NFP Partners has a partnership with JMT Consulting, a major national Value Added Reseller of nonprofit accounting software including Sage Intacct and Abila MIP Fund Accounting™.
QuickBooks (Enterprise and On-line versions)
QuickBooks remains the low-end software of choice for smaller nonprofits. Its company, Intuit, presently promotes the online version that is still evolving and lacks some features found in the Enterprise edition. NFP utilizes the Enterprise Accountants’ Edition for most of its smaller outsourced clients.
Even more, the software holds a QuickBooks ProAdvisor certification. Additionally, it has developed techniques for complying with Generally Accepted Accounting Principles for nonprofits.
Contact NFP Partners today if you’d like more information on nonprofit accounting software.