Connections for Success

 

03.02.11

Not-for Profit Accounting Solutions: What You Need to Know
Lindy Antonelli

Reducing costs, while increasing operational efficiencies and insights are key operational goals for not-for-profits today. Improving the not-for-profit’s accounting software is one way to achieve this.

Until recently, the conventional wisdom was that only software packages designed specifically for the not-for-profit market could adequately meet the specialized needs of tax-exempt organizations. Today’s advances in technology provide multiple choices.

Certainly, compliance is a key area of concern, but other criteria such as financial statement reporting, budgeting, purchasing controls, and the capital expenditure vs. operating expenditure of the purchase all need to be considered.

Net Asset Processing
Tax-exempt organizations must report activity by category of net assets, causing a need to produce both profit/loss statements and balance sheets by net asset category.  This inter-fund capability is often the cornerstone of systems specific to not-for-profits. Some of the general-purpose accounting systems can handle this as inter-company transactions, and others have add-on products for this purpose. Most of the industry-specific products have this capability in optional “public sector” modules. Therefore, if this capability is important to your organization, look very carefully at the software packages you are evaluating.

Grant Management & Project Accounting
Many not-for-profits receive grants or manage projects. In fact, some of our clients have grants that fund multiple projects, as well as projects that are funded by multiple grants. Often, the funder requires reports at a level of detail or in a format different from internal reporting and management reporting.

One option here is using a chart of accounts with multiple segments. This method has a drawback though; if the grant/project year is different from the organization’s fiscal year, or spans multiple years, reporting becomes more difficult.

An alternate approach with most accounting software is to use project/cost accounting modules. Although most project accounting modules offer comprehensive capabilities, sometimes they have more features than are needed and users find them difficult to implement and cumbersome to use.

Encumbrances
We have found the term “encumbrance” used in many ways. Some clients want an alert during purchasing if budgeted funds are not available. Others want a warning for requisitions but rejection or “hold” for purchase orders that exceed available funds. Others want committed funds to be posted to the general ledger or an encumbrance ledger.

Most low-end accounting solutions do not handle encumbrances “out of the box.” Some of the middle-market packages have third-party modules that provide a budget check during requisition entry, but few provide budget checking during purchase order entry and very few post commitments to a ledger. Some of the high-end products have optional modules for commitment accounting.

When you are researching encumbrance software, you must be very diligent in determining if the products under consideration provide the capabilities directly from the vendor’s offerings or if third-party modules and/or customizations are required.

Budgeting
Budget needs vary typically by the size of the entity.  Excel seems to be the method of choice for smaller firms while larger not-for-profits require extensive entry, routing, and approval before roll-up into the budget. Most not-for-profit products do not offer these capabilities, while higher-end products do.  Another issue is tracking budget modifications. In some organizations, once the “board-approved budget” is finalized, every change to it must be tracked by date, reason and approver. In this case, many products for not-for-profits possess this capability while the general purpose accounting systems do not.

Allocations
Some not-for-profits have sophisticated methods for allocating revenues and/or expenses. Using today’s technologies, spreadsheet-based allocations can be directly linked with the products. Some of the higher-end accounting products for not-for-profits have allocations features weaker than that offered by the general-purpose products.

Cloud Computing
Is your organization is ready for a “Cloud” approach?  This is also referred to as Software as a Service.  Financial decision-makers today are choosing Cloud for a few key reasons – namely to reduce the costs of owning and maintaining software, shift IT risk, and increase the functionality of their system offering, therefore, increasing employee productivity.  There are several accounting choices in the “Cloud” today.

Every organization is different. Today’s technologies offer not-for-profits a wide array of choices. Before selecting a new accounting system, each organization must carefully evaluate its short-and long-term needs as well as its budget, and then using the criteria detailed earlier, evaluate how well the software solutions in their budget range meet their needs.  Seeking out assistance from trusted advisors such as your CPA firm is a good first step to success!

Of course, if you have any questions regarding your software needs, feel free to reach out to me at 630.868.5050.

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