Five Minutes for Finance: Accounting Systems, Software, and Platforms
Our previous article covered Finance Roles and Responsibilities, describing the various positions involved in financial management. When it comes to the accounting systems, it would normally be the responsibility of the Finance Manager/Controller to “own” the system, ensuring the integrity and security of the financial data.
Understanding Accounting Systems for Nonprofit Organizations
Unlike for-profit businesses, nonprofits operate under a different financial framework, emphasizing transparency, accountability, and sustainability. An effective accounting system is crucial for managing finances, ensuring compliance, and supporting the mission of the organization.
Importance of Accounting Systems in Nonprofits
Transparency and Accountability: Nonprofits must demonstrate responsible use of funds to donors, grantors, and stakeholders. A robust accounting system helps track income and expenditures, ensuring that resources are used effectively and according to the organization's mission.
Budget Management: Nonprofits often rely on various funding sources, including donations, grants, and fundraising events. A solid accounting system aids in budget preparation and management, allowing organizations to allocate resources efficiently and plan for future projects.
Regulatory Compliance: Nonprofits are subject to specific regulations and reporting requirements, such as IRS Form 990 in the United States. An organized accounting system simplifies compliance and ensures that the organization adheres to legal standards.
Financial Reporting: Accurate financial statements, such as balance sheets and income statements, are essential for internal decision-making and external reporting. An effective accounting system facilitates the timely generation of these reports, enabling better oversight and strategic planning.
Key Components of Nonprofit Accounting Systems
Chart of Accounts: A well-structured chart of accounts is fundamental for any accounting system. It categorizes all financial transactions, allowing nonprofits to track assets (what it owns), liabilities (what it owes), net assets (known as equity in the for-profit sector), as well as income and expenses by program, funding source, or department. This helps organizations analyze financial performance and report accurately on their activities.
Fund Accounting: Nonprofits often receive funds with specific restrictions or purposes. Fund accounting is a method that tracks these funds separately, ensuring that resources are used as intended. This is critical for maintaining donor trust and meeting grant requirements.
Budgeting and Forecasting Tools: Integrating budgeting tools into the accounting system enables nonprofits to set financial goals and monitor progress. These tools facilitate the comparison of actual performance against budgeted figures, helping organizations adjust their strategies as necessary.
Financial Reporting: An accounting system should provide customizable financial reports that meet the unique needs of nonprofits. Reports should include the income statement (statement of activities), balance sheet (statement of financial position), and cash flow statements, all presented in a format suitable for stakeholders. Additional reports, such income and expenses for each program or department, are necessary to support decision-making at all levels.
Donation Tracking: Many nonprofits depend on donations, so an effective accounting system should include features for tracking donor information, contributions, and fundraising efforts. This allows organizations to recognize donors, manage donor relationships, and report on fundraising performance.
Compliance Features: A reliable accounting system should help nonprofits maintain compliance with relevant laws and regulations. This includes features for tracking grants, generating reports required by funding agencies, and managing tax-exempt status.
Choosing the Right Accounting Software
When selecting an accounting system, nonprofits should consider the following factors:
Scalability: As organizations grow, their accounting needs will evolve. Choose software that can scale with the organization. Alternatively, be prepared to move from a more basic and less costly accounting platform to a more robust, complex, and expensive system when needed.
User-Friendly Interface: Nonprofit staff may not have extensive accounting training. A user-friendly interface can facilitate training and ease of use. Software with a larger user base in the industry may facilitate hiring staff who are already skilled or familiar with it than newer or less-popular applications.
Cost: Many accounting solutions cater specifically to nonprofits and offer tiered pricing based on the size of the organization. Consider both initial costs and ongoing expenses.
Support and Training: Look for software that provides robust customer support and training resources, helping staff maximize the system’s capabilities.
Integration with Other Systems: Ensure that the accounting software can integrate with other tools used by the organization, such as donor management systems or grant tracking software.
A Note About Using QuickBooks
If your organization chooses to use QuickBooks (desktop or online versions), you should note that there are some issues to consider:
Terminology: QuickBooks (even the nonprofit version) does not use nonprofit accounting terminology. For example, Net Assets are called Equity in QuickBooks.
Restricted Net Assets: Because QuickBooks is not a true fund accounting system, it does not provide an easy way to segregate unrestricted from restricted assets. You will need to enable “Class Tracking” in the Settings and then create a Classes titled “Unrestricted” and “Restricted”. Then you will use special journal entries to record restricted revenue.
Activities and Funding Sources: In order to track activities (e.g. programs or departments) separately from funding sources, you will need to use Classes to track activities and Customer:Jobs to track funding sources. This will enable revenue and expense tracking by activity and/or by funding source, which is especially important if any of activities are supported by more than one funding source or if any of funding sources support more than one activity.
Activities include programs, administration, and fundraising as well as shared cost pools.
Activities should be set up as sub-classes of the Unrestricted Class.
Each unique funder (e.g. foundation, government agency, major donor) should be set up as a Customer.
Each unique funding source (e.g. grant, government contract, major gift) should be set up as a Job under the appropriate Customer.
Conclusion
An effective accounting system is essential for nonprofit organizations to operate successfully, maintain transparency, and fulfill their missions. By implementing a tailored accounting solution, nonprofits can improve financial management, ensure compliance, and ultimately enhance their impact on the communities they serve. As the landscape of nonprofit funding and operations continues to evolve, investing in a robust accounting system will enable organizations to adapt and thrive in a challenging environment.
About this Series
Subsequent articles in this series will cover the various aspects of internal controls as well as other topics related to nonprofit financial management. Here is a list of, with links to, previous articles:
About the Author
For over 30 years, Robert Pascual has been a leader in nonprofit financial management as a CFO, consultant, conference speaker and educator. He holds an MBA from the Haas School of Business at the University of California and is the founder and principal of Robert Pascual, MBA LLC. He has worked with small, mid-size, and large nonprofit organizations spanning the fields of education, workforce development, housing, health, philanthropy, social services, media, fiscal sponsorship, nature, and the environment. Each of these organizations has faced both unique and common challenges, some of which are probably similar to ones that you wrestle with.