3 Signs Your Organization Needs a Nonprofit Accounting System

When your nonprofit is just getting started, your budget for an accounting system is likely very close to $0. Those low-cost tools can be a great way to launch 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 fund accounting system with subfund capabilities when you notice these three signs.

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.

1. 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. Systems like QuickBooks will allow you to use a field such as Class to segment your entries. But 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 your nonprofit accounting 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. Some of those funds come with detailed restrictions, further complicating your tracking.

If you’re like most organizations—even ones with smaller budgets—you need to manage your revenue and expenses by individual funds, 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—and probably more than one spreadsheet—that you wouldn’t be able to stay on top of daily data entry. And when you need to track those restrictions in a spreadsheet outside your system, you introduce information silos and increase risk.

2. You Aren’t Getting a Holistic View of Your Finances

When you update your accounting system, make sure you look for one that can manage your revenue and expenses across any characteristic, like grant, project, program, or department, while not requiring them to be created as segments in your nonprofit’s 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 segmented account 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.

With a segmented chart of accounts, you can drill deeper into your revenue sources and better understand what is working. You can make grant-specific or program-specific reports available as view-only so other areas of your organization have access to that important information. And this data rolls up into your organizational budget to give you a holistic view of your finances.

3. You Need Better Internal Controls

Your organization is built on trust. Your funders 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, secured your first donors, 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 programs and restricted 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
• Native expense management and AP automation
• 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.