Rules heighten the need for specialized software.
Like what you see? Click here to sign up for Accounting Today's daily newsletter to get the latest news and behind the scenes commentary you won't find anywhere else.
by Wayne Schulz
As the stream of funds available to nonprofit organizations starts to slow, the importance of accounting for expenditures has never been greater, and restrictions on expenditures and stricter accountability for surpluses or deficits are more important than ever before.
In the past, many nonprofits could squeeze by with a smaller, off-the-shelf accounting package. By tweaking the account number structures, often a flexible, pseudo-fund accounting structure could be produced. When times are good and the funding flows freely, there are fewer demands for accountability and reporting of where the grants are being spent.
With the new era of fiscal accountability required of nearly every company, there has never been a better reason to investigate a nonprofit-specific accounting package.
There is one major difference between a for-profit and a not-for-profit accounting system, and that is the way that a surplus (either retained earnings or fund balance, depending on whether the organization is a for-profit or nonprofit entity) is tracked. A for-profit organization usually has one surplus account, while a nonprofit can have several depending on the extent of its funding sources and donor restrictions.
Companies that are structured as for-profit (corporations, partnerships, and sole proprietors) typically have to track one surplus account—usually a retained earnings or owner’s equity balance. In some instances, the companies might make adjustments to different owners’ capital accounts, but these adjustments are more often for internal tracking than a requirement of any bank or funding source.
Nonprofit entities often have restrictions placed upon what they can and cannot do with surplus funds. Revenues are often donated and those donors have the ability to specify exactly how the funds are to be spent. Also, in return for essentially giving away money, the donor expects some accountability for how those funds were expended.
The initial temptation for all nonprofit organizations is to hustle down to the office supply store to purchase QuickBooks or Peachtree for $300. They often consider that to be an extremely effective and inexpensive solution to their recordkeeping.
You might realize in hindsight that the use of an off-the shelf (versus nonprofit-specific) system could be harmful to the health of a growing nonprofit in the long term.
As the organization grows and expands, several things are likely to happen:
● New funding opportunities will arise;
● Donations will increase;
● New and bigger fundraising campaigns will be undertaken; and,
● Accountability for expenditures will become more difficult to track as more transactions are added to the system.
When any of these events happen, there is going to be an additional burden placed on the accounting software to produce the more-detailed information being requested. Starting off the right way—with an accounting system designed for nonprofit organizations—increases the odds that you’ll be obtaining accurate and detailed information as your organization grows.
What separates nonprofit software from the off-the-shelf systems? Generally, the elements available should include fund accounting, reporting, projects and grants, fundraising, and tight fiscal accountability. The roles of these are broadly as follows:
Fund accounting. Nonprofit accounting systems operate on the double-entry standard of accounting. Specialized features in this software include the ability to specially handle fund accounting. This means operating different funds as self-balancing charts of accounts. If you make accounting entries from a restricted fund to a fund that is dedicated to property, plant, and equipment, the software will automatically make any due-to and due-from entries. The separate funds are always kept in balance by the software, with self-balancing journal entries created as appropriate.
Reporting. Funding sources for nonprofit organizations can be varied. Often, these sources operate on different fiscal years than the nonprofit. Because of this, reporting must always be flexible enough so that reports can be produced with varying reporting periods. If the organization’s fiscal year is December 31, it is probable that some of the grants will have a different reporting period; therefore, the software must be able to create these reports that often cross over the organization’s normal year.
Projects and grants. The ability to create ad-hoc reports on different grants without hard coding an entirely new series of general ledger account codes is important. Because new grants can be issued yearly, it typically isn’t practical to create an entirely new chart of accounts to track their activity. Doing this would create an unwieldy structure. To handle this task, most accounting software has the ability to use special project and grant codes. Often, these are entered along with a general ledger account. The use of the project and grant codes allows for more detailed financial reporting without having to make use of a larger and ever-expanding chart of accounts.
Fundraising. Even if a nonprofit has no current needs or plans for fundraising at some point, the use of external donors may be considered. Top nonprofit accounting systems have either a native fundraising module or allow for links to an external system. Having a fundraising package that is supported and sold by the same company is highly desirable, since it will ease integration and future support. Fundraising packages typically will track donors and donation campaigns, and completely automate many of the direct mailings so that your nonprofit will maximize the ability to solicit funds. The tracking of this donor information is significantly easier with software designed for the task. It is far easier to correctly manage your donors when the numbers are small than to suddenly find you have a significant number of donors and their history trapped in some database or spreadsheet program with no way to easily extract them for better recordkeeping.
Tight fiscal accountability. The nonprofit world is always concerned with budgets and expenditures. All the nonprofit-specific systems have a laser-like focus on the bottom line. The budgeting is often broken down to the extent that you will be able to use encumbrance and future forecasting to streamline the responsibility centers. Virtually all allow for multiple future years of budgets, so the next year’s budget can be created before the current year is completed.
AccuFund describes itself as a gap product: software designed for those organizations too big for entry-level accounting, such as QuickBooks or Peachtree, yet too small to reach up to a more costly nonprofit system.
Each module is written specifically for Windows and has smartly laid-out data entry screens that speed the learning process. An optional loan-processing module, which is rather unique at this price range, allows for several user-definable loan types and will compute both fixed-term and payment loans. Additional fees can be added for any number of reasons, such as late or prepayment. The availability of this module in a low-cost price range is a big plus for any nonprofit considering AccuFund.
The AccuFund Forms/Report designer module enables you to create customized reports that draw from the data within the accounting system. Checks, purchase orders, and receipt forms are all designed within the Forms/Report designer and can therefore be customized by the end user to match any desired layout. There are a number of standard reports that are included with the system, and these can all be modified by the user and saved with different filters and parameters depending upon individual needs.
If you’ve been thinking you need a nonprofit-specific accounting system but just couldn’t afford it, you should take a look at the AccuFund line. It is an affordable, feature-packed system that will start you off on the right foot.
Fund Accounting Software Series
The FASS system by Executive Data Systems has been used by hundreds of nonprofit organizations since being introduced in 1983. With modules for the core accounting as well as for donor and grant management, it is a very full-featured yet affordable system.
| Fund Accounting Software Series|
Executive Data Systems
If you often have to enter extensive journal allocations, you’ll appreciate the distribution codes built into the General Ledger. Here you can save up to 36 different accounts for later use. When you call up the allocation code, it will immediately import the account codes, saving you the additional data entry keystrokes.