When you are just getting started as a nonprofit, you are focused on getting an accounting system that fits your budget—which is likely very close to $0. Those low-cost tools can be a great way to get started and gain momentum, but there comes a point for every nonprofit when the time it takes to manage your fund accounting workarounds outweighs the cost of upgrading your system.
It may be time to look for a purpose-built fund accounting system when you begin managing a variety of different funds and restrictions, when you have trouble getting a financial picture of your entire organization, or when you need to expand your internal controls past the functionality of your current system.
Is your accounting software not working for your organization? Check out our webinar, Got That Too-Small Feeling on QuickBooks? Think Bigger! for tips on how to say goodbye to financial reporting workarounds.
Your Chart of Accounts/Class List Becomes Unwieldy
Nonprofit accounting, and fund accounting in general, is all about tracking, managing, segmenting, and reporting on individual funds. While systems like QuickBooks will allow you to use a field such as Class to segment your entries, what they often don’t do is allow you to manage your revenue and expenses into those various segments at the end of a period. Understanding your revenue and expenses by your fund segment, at its core, is what distinguishes nonprofit accounting systems from their for-profit counterparts.
If all you had to worry about were a single program or revenue stream, it would be relatively easy to manage in a for-profit system. But very few nonprofit organizations only need to subdivide revenue and expenses into a single project, fund, or program. You have multiple income streams—donations, grants, service fees—as well as all the ways you use the money.
If you’re like most organizations—even ones with smaller budgets—you need to manage your revenue and expenses by individual grants, projects, programs, departments, and cost centers. Imagine tracking the revenue and expenses of hundreds of programs funded by scores of grants within a dozen or so cost centers in a system like QuickBooks. It would require so much time and effort that you wouldn’t actually be able to stay on top of daily data entry. Not to mention by using an outside system, most likely a spreadsheet, to track those various restrictions, you introduce information silos and the possibility for data inconsistency.
You Aren’t Getting a Holistic View of Your Finances
When you update your nonprofit accounting system, make sure you look for one that can manage your revenue and expenses across any of these characteristics while not requiring them to be created as segments in the chart of accounts. The reason is simple. If you need up-to-the-minute balances for your organization’s projects, every time you add one you will add significant volume to the chart of accounts. If you have 20 projects, you will need at least 20 expense accounts—and likely more—to track the balance of those projects.
Think of tracking revenue like baking pizzas. If the system allows for table-based tracking, then you’re simply baking one revenue pizza and slicing it into each of the 20 different projects. That’s always going to be faster and easier than baking 20 pizzas.
You Need Better Internal Controls
Your organization is built on trust. Your donors trust you to spend their gifts the way you said you would. When you have one or two people managing the accounting functions, the audit trail is simple. But as your organization grows, you need security and redundancy built into your system.
Having internal controls inherent in your fund accounting software can also save you money. You don’t have to use a fund accounting system to meet IRS requirements, but someone will have to calculate the correct fund balances and make the manual journal entries. And that someone is usually the auditor or your CPA, and therefore it usually costs you more money to do it. Once you move past needing to track only the ASU 2016-14 net asset classes, then a true fund accounting system is almost a necessity.
When You Know You’re Ready to Switch
Free and low-cost options helped you get started. And they likely served you well as you launched your first programs and won your first grant opportunity. If you are starting to feel the pinch of too-small accounting software, here are a few things to keep in mind as you look for your next solution:
- Compliance with industry accounting and reporting standards
- Ability to manage multiple budgets, including a general budget and budgets for specific projects and restricted grant funds
- Timely, accurate reporting within the system
- Accurate reporting of encumbered funds and purchase order functionality
- Flexible chart of accounts
- Effective management of all grants and contracts
- Increased accountability with internal controls
- Integrations with other nonprofit management solutions
- Secure access to mission-critical data anytime, anywhere
- Designed for nonprofits
Learn more about the advantages of a fund accounting system purpose-built for your tracking and segmenting needs with our whitepaper, Why Nonprofits Need Fund Accounting Software.
This blog post was originally posted April 2013 and updated November 2022.