Although the most popular accounting software products, from QuickBooks to SAP, handle the needs of businesses in many industries, nonprofits have a business model and therefore accounting standards that are different from those of manufacturers, retailers, healthcare and other commercial sectors.
What makes nonprofits so special that their accounting tools must be different? How can you find out which accounting software will be suitable for your nonprofit organization?
For starters, the essence of being a nonprofit is that, unlike nearly every other business, your organization is driven by goals that do not relate to financial profit. You are pursuing a mission. Your success is not measured by a profit and loss statement, but rather by nonfinancial metrics for activities such as feeding the , improving the environment, conquering disease or whatever your mission may be.
Churches fall under the category of nonprofits. Unlike for-profit businesses, churches are not owned but rather are run by pastors, a church board, other governing bodies and staff who are often a combination of paid and volunteers.
Instead of owners having equity in the balance sheet, net assets are tracked for a nonprofit. The assets may have donor or they could be unrestricted funds.
In many cases, nonprofits are not funded entirely by their operations but wholly or in part from donations or grants. If your nonprofit or nongovernmental organization receives grants or awards, you are likely to need financial software that can help you comply with the requirements stipulated by the grantors. In the United States alone there are over 1.5 million nonprofit organizations. ( https://www.fool.com/the-blueprint/fund-accounting/)
Winning grants can be difficult, especially for competitive programs, so managing the grants that your organization receives is critical to making those grants successful and to pave the way for additional grants in the future.
What is Fund Accounting?
Nonprofits use an approach called fund accounting which focuses on the use of resources more than profitability, with transparency and accountability at its core. It provides the framework for organizations to tell their stories and remain accountable to their stakeholders.
A fund is a separate accounting entity that is defined by an organization. An organization may have many funds supporting the mission. Each fund maintains a set of self-balancing accounts that must be used for the specific purpose defined by donors, grantors, governing boards, or by law.
For instance, your nonprofit might have a fund for scholarships. The money for the scholarships could be raised through a charity walk or a gala evening, and any combination of activities. You would want to ensure that money raised for scholarships was spent on scholarships and report back to the donors on how the money ended up helping 100 students. Similarly, a grant could be used to fund one or more programs, and it might have conditions such as the types of activities to be funded and allowances for overhead expenses. The grant conditions would call for the money to be spent in a specified time, and reports would let you ensure your activities match the grant conditions.
The word “fund” has a different meaning at every nonprofit organization. At a university, a fund may be an endowment. At churches, it may be to a mission, congregation or parish. If a church raises money for its building fund, for instance, that money may not be spent on other church activities.
For public service organizations or nongovernmental organizations (NGOs), a fund may be tied to an award or grant. The organization has an obligation to use resources specific to the designated purpose of each fund and must be able to clearly report and tell the story of how those resources are being used.
An organization may have many funds supporting its mission. Each fund must be used for specific purpose defined by donors, grantors, governing boards, or by law. Fund accounting supports your ability to know with confidence every dollar received is going for the purpose it was intended.
Nonprofit and services organizations have the responsibility and duty of care to steward its resources for the delivery of its mission. How an organization responds to this call of duty matters. A strong commitment to transparency and accountability will result in the organization’s ability to attract and retain future donors and support.
Do You Need Fund Accounting and Award Management?
Fund accounting is not required by generally accepted accounting principles (GAAP), but nonprofit organizations still need purpose-built fund accounting software. Fund accounting requires specific industry expertise, knowledge and experience to bridge the gap between tracking the use of funds and generating GAAP financial statements that focus on the changes in net assets.
General business solutions lack the ability to maintain balances between funds, recognize the release of restriction and track commitments and encumbrances while supporting the user’s ability to generate transparent, reliable reports at the fund level. Intercompany entries and entity management can’t track fund release and net assets in a manner that is appropriate and tells the complete story.
These tracking requirements can become complicated when your programs are funded by different awards, each with its own timetable and expense eligibility criteria. For international organizations, you may face additional complexity such as handling multiple currencies and multiple languages.
Fund accounting software for grant recipients is often called award management software, or grant management software. You may need to search multiple categories and keywords to learn about all your options.
How to Choose the Right Software
To find the right product for your needs, the best place to begin is with requirements to help you evaluate alternatives. Here are some common requirements that may apply to your organization.
High Level Requirements
A written list of requirements is the starting point for evaluating accounting software options. Requirements allow vendors to prepare better informed and more accurate proposals in response to your request.
Most organizations seek business benefits from their award management system such as these:
Improve decision making with access to real-time information, expenses, subawards, and obligations, presented in easy- displays.
Increase efficiency. Productivity goes up since information silos are eliminated; everyone has access to the same information.
Streamline processes. Gives you a comprehensive start to finish of your entire process and helps eliminate redundant and potentially conflicting data issues.
Automate, simplify grant compliance. Access one set of data in the format you need as often as you need.
Provide user-defined multi-currency viewing. View and report grant data in different currencies, depending on your multinational operational needs.
Support multiple languages. Specific the languages which you need for all your users.
After you spell out the broad goals for the software, it’s time to delve into the details. You should provide samples of your documentation as appropriate to accompany these requirements. You may want to use a spreadsheet to track how various products stack up in your evaluation.
Complies with industry standards for security
Integrated with authentication provider for single sign-on
Available on leading cloud provider
Integrates with document management, email, and office productivity apps such as word processing and spreadsheets
Offers application programming interface (API) or software development kit (SDK) to allow further integrations
Based on current standards such as web services and XML
Create proposal estimates (budgets) using the sponsoring Funder’s specified line items that map to your organization’s G/L account numbers. Enter estimate amounts annually, quarterly, monthly, weekly, or daily; and use unit of measure codes to track quantities of specific items.
Track revisions of budget estimates as you move through the negotiation process.
Use the milestones feature to track due dates and completion dates of important activities during the proposal phase, such as submission of certifications, budget narrative, key personnel bio’s, etc.
Attach important documents such as emails, spreadsheets, PDFs, etc.
Specify an award-specific currency that allows the organization to toggle the display of estimate amounts between the currency the organization operates in (LCY) and the currency of the sponsor (ACY).
Incrementally obligate funds and track obligation amounts by sponsor-driven restrictions for better monitoring of available funds.
Record modifications received from the sponsor to revise estimate amounts.
Include a list of the terms and conditions of the award agreement.
Use the milestones feature to track project activity deliverables, reporting deadlines, etc.
Define the sponsor-imposed restrictions using dimension values to control expenses.
Further control spending by restricting the start and end date for the obligation.
Track actual expenses against the sponsor-approved budget line items.
Track cost matching requirements and record transactions counted against any requirement.
Track gifts-in-kind (e.g., towards a cost matching requirement).
Calculate and record indirect costs based on an organization-wide rate or award-specific rates.
Calculate and record revenue recognition.
Calculate and generate sales invoices in the Receivable system based on cost reimbursement, unit price, installment, or time and material methods.
Track funds by to include modification of estimates, incremental obligation of and tracking terms and conditions, milestones, certifications, clearance status, and monitoring level.
Track total expenses under a subaward, including monies disbursed directly to the and monies disbursed for example equipment and supplies on behalf of the .
Specify subaward-specific currencies to record and view subaward amounts in the currency of the (SCY)
With the purchase of an additional feature pack, implement the Intercompany feature to record entries across companies, where regional and local offices in other countries are represented by different companies in a single database or multiple databases. This allows the organization to enter data that automatically flows to the appropriate company and is then replicated out to the country offices and back in to headquarters without any redundant data entry or complicated import/export processing. All companies do not need to be on the same database. Data entry can originate in the country offices and then flow to HQ and then back to the country office.
Record modifications to revise estimates or obligations in different currencies using the currency code feature and automatically flow estimate and obligation amounts to regional and local offices in other countries using the inter-company feature. This can also originate in country offices.
Starting with requirements like these, you may end up with dozens more which are unique to your organization. For instance, do you need to comply with any government standards or integrate with additional backend systems?
Regardless of where you are in your organization’s business cycle, the annual audit is never far from being top of mind. If you are reading this and a December 31 calendar year end, how did your audit go? If you are preparing for a June 30 fiscal year end, will you be ready? The position paper will provide an evaluation of the drivers for having successful audits. Does your organization have the tools it needs to be successful?
Achieving Compliance with Accounting Standards
The financial manager of a nonprofit must acknowledge the regulatory and compliance environments in which their organization operates. Nonprofit organizations must deliver clear statements to their key stakeholders including donors, board members, auditors, and watchdog groups. This creates several issues for the organization such as the timing of the audit, financial presentation, and the response to due diligence questions typically required by board members or the auditors.
The Financial Accounting Standards Board (FASB) has issued the Accounting Standards Update (ASU) no. 2020-07 The purpose of this change is to improve generally accepted accounting principles (GAAP) by increasing the transparency of contributed nonfinancial assets for nonprofit organizations. Read the full ASU report, no. 2020-07. ( link: Accounting Standards Update 2020-07—Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets (fasb.org)
The FASB guidance requires additional information and could result in increased costs to obtain the new data as well as an increase in audit fees resulting from changes in the presentation and quality of the data required.
The financial manager, in conjunction with the organization’s audit committee, should be continually reviewing the impacts of external pressures. In many cases, the new compliance measures may require the collection of data over and the allocation of resources. It is important to have the tools in place to satisfy the increasing compliance requirements and respond to the evolving reporting landscape.
CFO’s and financial managers are using data to find patterns in behavior, identify trends to help plot the best course for their operation and to take advantage of opportunities good data can bring. Analytics can keep your organization running smoothly amid the inevitable operational changes and adjustments. Further, Analytics can provide a complete view of the organization, with the appropriate level of detail easily available. Auditors are also using data analytics to support their processes. Analytics can provide higher quality audit evidence, reduce repetitive tasks, and better correlate audit tasks to risks and assertions.
A financial manager must be prepared to respond to the increased demands for more data from donors, the Board, auditors and constituents of the organization and institution the organization supports. Typical periodic reports are no longer sufficient.
Financial Tool Kit
The financial manager of a nonprofit organization must continually evaluate the tools available to their teams to support the audit and operations. The financial team needs tools to respond to compliance changes and support the demands of audits. These tools should include:
- An Enterprise approach to business operations that provides a centralized database and system of record
- The ability to drill down to underlying data in reports
- Oversight changes made to setup, users, and permissions
- Integrated allocation and budgeting processes
- Embedded workflow process that restricts access across the data as well as requires appropriate review
- Flexible nomenclature that can evolve with the organization
- Dimensional reporting
- The collection of financial and non-financial data to support the new reporting and 990 filing requirements.
Our next post will explore the modules and features nonprofits need in their accounting software, such as general ledger, payroll, receivables, payables, reporting, integrations and more.