This is a guest post by Joseph Scarano
Does your nonprofit’s current accounting software allow you to create separate financial statements by fund? How about generate budgets by grant, fund or program?
The needs of a nonprofit are different from that of a commercial business, and that goes for accounting needs, too! This article will help you understand the needs of your organization and help you select the most effective software for your nonprofit.
Evaluate Your Organization’s Needs
First, list and prioritize your organization’s requirements to establish the most important elements required in a new system. The factors to consider are:
- Funding Sources and Budget for your Organization – The more complex your funding stream, the more complex your reporting requirements will be both internally and externally. You need a system that can report on revenue and expenses by multiple layers such as funds, functional area, programs and funding sources.
- Reporting Requirements – Financial reports for nonprofit organizations are significantly different than for profit accounting reports with requirements for reporting by net asset classes (funds) and functional areas. If you are generating reports outside of your accounting system, then you need to look at systems that can generate the reports you need for grants and preparing financial statements that are compliant with FASB regulations for nonprofits.
- Additional Information Needed – What additional information is needed, such as client specific data, key program measurement metrics, grant restrictions.
- Future Growth – You want to plan for future growth so you don’t outgrow your system within a few years.
- Integrated Systems – What other applications will need to integrate with the system, such as donor, member management, point of sale, payroll, human resources, volunteer management, student tracking.
- Software Delivery – Does staff and volunteers need access to the system from remote locations? What is your current IT infrastructure? Do you have both Windows and Mac computers. Does your staff rely on mobile devices for work?
- IT Support – Do you have an internal IT staff, or have access to IT resources.
- Budget – Finally, what is your budget for a new system.
The Difference Between Nonprofit Accounting Software and Commercial Accounting Software
If you are a nonprofit, then you probably will need a fund accounting software solution. Nonprofit and government organizations have unique reporting requirements that typically cannot be handled with commercial accounting software. Nonprofits must report on all of their financial activity by funds, or net asset classes. This requires separate year end closing entries by funds that a commercial accounting system cannot handle.
Unique Features of a Nonprofit Fund Accounting Software System not Found in Commercial Accounting Systems:
- Multi-segmented chart of accounts for funds, functional areas, programs, grants, departments.
- Separate year end closing entries by fund
- Ability to create budgets by fund, functional area, programs, grants, departments.
- Financial Statements compliant with FASB regulations for nonprofits
- Ability to separate program and grant revenue from donations and fund raising event revenue
- Ability to record in-kind contributions
- Ability to track donor restricted funds
- Integration with donor, member management systems
- Allocation of costs for indirect cost accounting
What Do You Look for in a Nonprofit Accounting System
The size of your organization does not really determine the type of system you need. You may have an operating budget of less than $500,000, but your have diverse funding sources that requires a more complex system that cannot be handled by an entry level system. So, the size of your organization (budget) should not be the determining factor as to whether you are looking at a entry level, mid-level or an enterprise system.
When evaluating a new system, make sure the new system handles the majority of your requirements and does impose the same limitations as your existing system.
Low Cost Nonprofit Accounting Solutions
This is typically inexpensive commercial accounting products that are not designed for nonprofit accounting. While these solutions will save you money up front, they will typically cost you more in the long run with extra time preparing for year end reporting and preparation for audits and 990s.
This is typically industry specific accounting products that have a segmented chart of accounts that can handle the reporting requirements of a multi-funded nonprofit.
The advantage of working with a system that is industry specific is you also get support from a company that understands your day to day challenges as a nonprofit. Most vendors of these industry specific solutions also have other applications to handle fund raising management, memberships and other unique applications for nonprofits.
High End Solutions
These are typically referred to as ‘enterprise systems.’ These can be both industry specific or commercial applications. If you are looking at a commercial system make sure it will allow you to customize the chart of accounts and generate nonprofit specific financial statements. Also, a commercial system will not have the ancillary applications needed for donor management.
While enterprise solutions are customizable you need to make sure your investment in customization reaps enough benefits to justify the cost.
Accounting Technology Options
Software vendors are now offering more options for software delivery:
- Installed – software installed on your computers
- Hosted – Software installed on third party servers that are accessed remotely
- Cloud (Saas) – Software is web-based and is accessible from any computer with an Internet connection.
Your decision is whether you want to maintain your own servers and software on-premises or to choose an off-premise solution. Here are the things to consider for each option:
Installed Nonprofit Accounting Software
On-premises installations usually requires a large capital expenditure for software and hardware, plus related IT costs for installation and maintenance. You are responsible for backing up your data and installing any updates and upgrades.
Usually, upgrades and support are additional fees that are incurred every year. When looking at this solution, you must factor all of these costs into your total budget, typically over a five year period.
Hosted Nonprofit Accounting Software
Hosted solutions is the same software as the installed versions, but are installed on third party computers and are maintained by the vendor. The cost is usually a subscription model similar to a Cloud (SaaS) solution.
Typically hosted solutions require some type of software to be installed on your computer to access the data. A hosted solution takes the IT burden off of your organization, since the programs and data are maintained by the vendor. But, since hosted solutions are usually the same as the installed version, they typically do not have the same mobile ready features available in a cloud solution.
Cloud Software-as-a-Service (SaaS)
This is software that is written to be accessed through web-browsers. These solutions are referred to as multi-tenant applications since there is only one instance of the software running on a server for all data sets. Software-as-a-Service (or SaaS) are subscription based and the cost includes all updates and upgrades, and sometimes also includes support. There is no software to install on your computers and all backups are maintained by the vendor.
After Purchase Considerations
After you have made your decision, the hard work starts. Make sure you plan the implementation to include time for data transfer and training on the new system. For accounting systems the ideal time to make a switch is at the beginning of a fiscal year since you will then have the entire fiscal year on the new system instead of having to refer to two systems at year end for reporting.
The services provided by vendors include:
Typically accounting data is difficult to convert since most system are incompatible in the account structure and file structure. But, you want to consider converting your database of names – vendors, clients, employees and donors. Converting fund raising systems is usually easier since the database is more linear and doesn’t rely on accounting structure.
Post Sales Consulting
The most critical part of converting from one accounting system to another is the initial set up of the new system. Most vendors will offer their expertise in helping you get up and running with the proper account set up that mirrors your organizational structure and will allow you to generate the appropriate reports and data needed from the system.
Make sure you budget for training with your new accounting system. This will help you get started with the knowledge to understand the basic system set up and day to day processes. It is also important to schedule a training session a few months into your implementation for more advanced features and functions.
Make sure your vendor provides ongoing software support to answer questions and help you get up and running. Support is provided by telephone, email and online chat.
Here are some companies that specialize in providing accounting software solutions to nonprofit organizations.
Looking for more help with effective accounting for your nonprofit? Check out Joseph’s full CharityHowTo webinar training, “How to Set Up Your Nonprofit Accounting System!”