Nonprofits face many challenges when it comes to tracking and reporting to funding sources. This is the time to think about switching to nonprofit fund accounting software.
Why nonprofits face many financial challenges.
One of the biggest challenges is preparing and presenting financial information to funding sources and board of directors. Off-the-shelf accounting systems are are simply not designed to meet your unique tracking and reporting requirements.
United Communities Against Poverty, a nonprofit whose mission is to provide solutions to help reduce poverty, had outgrown their off-the-shelf accounting system. Their fundamental problem was that their system could not handle the segregation of restricted and unrestricted funds and the proper allocation of functional expenses to management, programs and fund raising.
What exacerbated the situation was that their system allowed them to change transactions, even after the books were closed! As a result, their auditors recommended that they find a system specifically designed for nonprofit fund accounting and one that had better internal controls.
What happens when you don’t have the proper nonprofit financial tools.
Nonprofit fund accounting software can prevent costly accounting errors and erroneous audits, which can cause your nonprofit to be forced to shut down. Worse yet, if funds are not properly allocated, your nonprofit may face a lawsuit and other serious consequences. Donor intent and transparency matter.
Accountability and transparency are essential goals for nonprofits.
Accountability and transparency for your nonprofit organization’s financial and program management is an absolute necessity. Nonprofits have social and legal responsibilities that extend beyond the balance sheet. It all comes down to being able to track where every donated dollar is spent. For example, a nonprofit may receive a $100 donation that is designated to various programs – $50 to the children’s program, $25 toward the operating budget, and $25 to purchase school supplies. By using a fund accounting program, the money received will be allocated to its intended purpose.
How to know when it’s time to switch to nonprofit fund accounting software.
To help you determine that it is time for your nonprofit to dump your off-the-shelf accounting software in favor of a nonprofit fund accounting solution, ask yourself the following questions:
- Do you have specific funds that must be spent in accordance with certain restrictions?
- Do you need to measure performances of a specific program or activity?
- Are you required to create reports for fiscal years that are scheduled differently than your own?
- Do you have funds that need to be recorded as encumbered?
- Do you need to perform allocations of indirect costs by grantors?
- Do you have multiple funding sources that require you to provide various financial reports showing how the money is being spent?
- Can you easily adhere to nonprofit accounting regulations?
- Do you need to manage and report on multiple budgets?
- Do you have the need for a self-balancing set of funds?
- Do you need to integrate with other mission-critical software?
If you answered yes to many of these questions, then it’s time to look for proper nonprofit fund accounting software that will help your nonprofit become more accountable. Nonprofit accounting is different from for-profit accounting. It all comes down to tracking and reporting segregated accounts in the form of “funds,” which must be treated as separate entities with their own general ledger and must provide individual income statements and balance sheet reports.
What to look for when it comes to nonprofit fund accounting software.
In order to become compliant, your nonprofit fund accounting system must be able to:
- Meet unique financial reporting requirements
- Handle grant and endowment management
- Ensure donor and grant restrictions and intent are met
- Provide internal accountability
- Make timely financial information readily available to donors and possible donors
- Provide actionable data to managers to use in strategic decision making
- Demonstrate accountability to donors, volunteers, the public, state and federal agencies and your board of directors.
As an added bonus, your nonprofit can cut overhead costs because nonprofit fund accounting systems allow for timesaving and improved accuracy.
Why off-the-shelf accounting packages don’t fit your nonprofit needs.
If you are a growing nonprofit and want to continue to grow, an off-the-shelf accounting system will become inefficient to support your growth. If you find the limitations of your off-the-shelf accounting software is causing you to create too many spreadsheets, then it’s time to consider a more efficient way to track and report to funding sources. Off-the-shelf packages are not designed to segregate funds, secure transactions from editing which can prevent your nonprofit from becoming more accountable, transparent and sustainable.
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