Don’t Get Lost in Translation: What Finance Needs from the Development System
Nonprofit financial reporting is the responsibility of the finance team. But in a fundraising organization, Finance is heavily dependent on Development systems to furnish accurate, unambiguous fundraising data to the general ledger, so that correct annual and monthly financial reporting can be produced. In this piece, we’ll take a look at the key components of what Finance requires to generate proper financial statements so that your Development system can provide Finance with the information they need.
As a user of Raiser’s Edge and now Blackbaud Raiser’s Edge NXT for more than 20 years, that system’s vernacular makes a lot of sense to me when discussing what information Finance needs and how they need it. But it’s important to note that these concepts are valid regardless of what CRM or donor management system you use. Similarly, I’ve used Blackbaud Financial Edge NXT for almost as long as I’ve used Raiser’s Edge, and I’m a big fan of the innate integration between the two. That said, no matter what financial management system you use, these constructs apply agnostically and across the board.
Recording and Reporting Requirements
At its simplest, accounting and financial management for nonprofits are focused on recording and reporting: accurately recording transactional data in accordance with generally accepted accounting principles (GAAP) to support accurate and timely report generation for organizational leadership, governmental requirements, and donor stewardship purposes.
In the US, the Financial Accounting Standards Board (FASB) asks nonprofit entities to adhere to a couple of key recording and reporting standards related to fundraising (among many others):
- Donor-imposed restrictions on assets (i.e., funds or property donated)
- How fundraising revenue is recognized and recorded
In addition, nonprofit finance teams are generally responsible for ensuring that both their mission-focused programming and their fundraising activities are conducted cost-effectively. This is imperative for donor stewardship purposes but also because—in the world of fund accounting—the finance team is required to match restricted or unrestricted fund-specific expenses against restricted or unrestricted fund-specific revenue. The finance team is also typically responsible for ensuring that development leaders are cognizant of the efficiency and cost-effectiveness of campaigns and other fundraising initiatives.
All the required data points discussed above are information that is—by best practice—first recorded in the development system of record when gifts, grants, or commitments are first received. Transactional data are then electronically or manually transmitted to the finance system for recording in the general ledger so that financial statements and other reports can be generated.
The finance team depends on the development team to record financial data not only accurately but in accordance with GAAP. When this doesn’t happen effectively, the finance team is forced to unravel all of the fundraising detail they receive before they can log it so that transactions can be recorded appropriately to support accurate financial reporting.
It’s All in the Details
High-level information about each of these key areas is presented below. It’s important to state that this information should not be misconstrued: questions about managing any particular financial recording or reporting concern at your organization should be addressed with your own professional financial advisors.
The finance team needs to know whether funds or property donated or granted (or committed to be donated or granted) are donor-restricted or unrestricted. So, for each gift transaction added into the development system:
- The transaction needs to be flagged as donor-restricted or unrestricted
- If restricted, the nature of the restriction needs to be recorded – i.e., specific donor-intent
- The restriction details (or that the gift is unrestricted) need to be providable to the finance team
Blackbaud Raiser’s Edge NXT makes that easy with the ability to mark gifts as restricted, track gifts by the funds they support, and categorize funds by intent. Fund Records are also used to indicate broad or specific donor intent. Lastly, when transmitting gift data to Finance, it’s imperative either to include restriction and fund information on gift records, or to segregate data by restriction and fund, so the finance team can post the transactions or their totals to the proper accounts. In Blackbaud CRM, this same information can be recorded by leveraging Designations. Other donor management systems have similar ways to tag transactions to ensure that restrictions are appropriately recorded and transmissible to Finance.
The finance team is responsible for properly recording revenue into various asset and revenue accounts that get classified in different ways on financial statements. Cash gifts and other cash received (e.g., pledge payments) may get deposited into different bank accounts that may be listed separately on financial reports. Gifts of securities may be added directly to investment holdings, and gifts in kind may be recorded as both revenue and expense.
Standard accounting principles for nonprofits hold that pledges should be recorded as revenue at the time the pledge commitment is made (i.e., not when the payments are made), and payments on those pledges only reduce the amount owed but do not count as new revenue.
The bottom line here is that gift type is an imperative data point in all reporting or data transfers that go from Development to finance. Whether transactions are pre-classified by gift type or gift type is simply included in an output file so the finance team can classify the transactions on their own, it’s a crucial data element.
Since Development systems don’t manage or track organizational expenses, it’s typically the responsibility of the finance team to not only record programmatic, management, and fundraising-related costs but also match them accordingly to:
- Restricted funds to ensure that donor restrictions are being enforced and for subsequent stewardship reporting to donors, grantmakers, and other funders
- Fundraising campaigns, appeals, and events to accurately measure the cost-effectiveness of fundraising activities and deliver cost-benefit analyses to Development
Revenue and expense transactions need to use a common coding structure to properly match expenses to restricted or unrestricted revenue and the fundraising initiatives that generated the revenue.
We’ve already discussed the need to ensure proper tracking of donor intent and restrictions. Knowing the fund associated with donations will allow the finance team to match expenses to that fund that satisfy donor intent (e.g., books for the library or basketballs for the athletics program). It will also allow the finance team to help create straightforward stewardship reporting to support the development cycle.
With gift details like the associated campaign, appeal, or event, the finance team can effectively match expenses to those initiatives using common coding and produce financial reports demonstrating the cost-effectiveness of individual fundraising activities and the fundraising program overall.
Key Phrases in the Other Language
Development and Finance often don’t speak the same language. Still, like so many who find themselves in new surroundings, all you need to know is a few key phrases in the other language to demonstrate friendship and collaboration and to learn where the bathroom is. For development professionals who want to ensure that Finance gets the data they need, those phrases include donor restrictions, revenue recognition, and expense matching.
Suppose you can ensure that your donor management system can properly record and transmit the main transaction characteristics that allow the finance team to properly record donor restrictions, properly recognize revenue, and properly match expenses. In that case, you’ll be on your way to ensuring that nothing gets lost in translation.