NFP Partners has been working with nonprofit organizations for over seven years, providing accounting software tools and added-value services. Our initial focus was on nonprofits that had outgrown their entry-level accounting software, such as QuickBooks or Sage 50 (formerly Peachtree), or were using commercial software that was not suited to handle nonprofit accounting differences. Coming from the private sector, adapting to the nonprofit world was a steeper slope than we had first imagined. Similar to private businesses, a nonprofit software purchase is usually a “have to” and seldom a “want to” decision. However, for nonprofits, the process is much slower. Often, budgeting and funding for back office software is not a high priority and plans are subject to derailment as higher perceived needs arise. So, there’s a tendency to get by as long as possible with the existing software until it’s simply an unsustainable situation. It’s not unusual that organizational change accompanies these types of decisions.
This article addresses why nonprofits eventually migrate to a more robust accounting system. On April 24th, I will present our revised webinar on this topic that will include a suggested strategy and practical steps in implementing new accounting software. It’s not too late to register and it will be schedule for future dates. The webinar will be informative, truthful and helpful for nonprofit financial managers who want to help their organization succeed.
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-size 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 since it is 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 stagnant growth, along with those that operate more like private businesses with revenues derived from selling goods or services. We have seen nonprofit accountants and bookkeepers, who know how to use QuickBooks, perform some pretty 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.
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 government where funds are self-balancing accounting entities within a government organization that are 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 accounting entities that generate both revenue and expenditure reports and a balance sheet that are established by the Board of Directors (e.g., capital campaign fund, federal or state grant fund, etc.), but more typically it’s 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.
Nonprofit organizations outgrow their accounting software for 3 main reasons:
- Too many accounting objects to track
- More robust and flexible budgeting and forecasting
- More comprehensive and flexible reporting and data analysis
The minimal requirement for nonprofit accounting 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 grantor on the use of the funds, a third object is required. QuickBooks or almost any basic accounting system can handle this situation. For example, the QB chart of accounts handles the normal accounting requirement to produce a balance sheet and income statement. The class code is a subaccount and is best used to designate the function or program associated with expenditures (e.g., child care, education, fund raising, and administration). It can also be used creatively to track temporarily and permanently restricted funds. The job code, a separate overlaying 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 provide the financial information required by all the stakeholders (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.)
- FASB117 (restrictions and designations of net assets)
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 privates 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
- Current-year cash budget
- Revised-versions of the above in mid-year
- Budgets in 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, audit trail of budget creation and changes, and budget control tools, such as alerts and encumbrances.
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 (e.g., the QuickBooks Statement Writer). A significant deficiency is the inability of entry-level software to organically generate GAAP-compliant reports required for nonprofits, including a Statement of Financial Position with the net asset section showing restricted and unrestricted funds, and a Statement of Activity showing a reconciliation of 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. In Abila MIP Fund Accounting the reporting capability is built-in as a proprietary part of the software. It can be supplemented using third-party products such as Crystal and Access that can query an SQL database. Other solutions rely more on a third-party reports writer for all reports.
A Few Other Reasons for Stepping Up
There are other reasons for leaving entry-level accounting software. None of these weaknesses may be the main reason for upgrading but can be a ‘hot button’ or catalyst.
- Indirect cost allocation to programs and grants
- Auditability, especially in regards to single-purpose audits where federal funds are involved
- Access security and internal controls features
- Integration with other applications
Attend our webinar set to premier on April 24 where we will further explore this topic, do some show and tell, and discuss how to go about making the transition.