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Accounting Software Considerations for Nonprofit and Government Organizations

By: Rick Shields, CPA, CFE, Principal

Few people outside the nonprofit accounting world have an appreciation for its complexities, and how they apply regardless of the amount. A person may say, “The organization has total revenues of $3 million, how difficult could it be?” Those who work in the field on a daily basis are aware that a $3 million organization can be more challenging than a $30 million organization, depending on the sources of revenue.

As nonprofit accountants know, every revenue transaction must be specifically considered for codification matters such as with or without restriction; natural classification that aligns with budget development; advances received for services not yet completed, i.e., deferred revenue; proper allocation among affiliate entities; proper allocation among internal funds; and the list goes on. Expense transactions have similar considerations. Certain assets may be restricted or used to track restricted net assets, such as investment accounts that are dedicated for endowment funds. In other words, with nonprofits, there is often an underlying debit/credit element in addition to the standard accounting apparatus.

When purchasing accounting software, nonprofits may have special considerations that could factor into the final decision. We certainly understand that many smaller nonprofits have budgetary constraints that limit the options for software purchases. The underlying concepts of these considerations would still apply, and it is the accounting staff of smaller nonprofits who need to maintain an awareness of these ideas to develop the infrastructure needed for compliance with various reporting requirements.

Nonprofit-specific Considerations for Accounting Software:

  1. Reporting based on grants or restrictions – Often when nonprofit accountants are tasked with developing grant reports it involves exporting a larger population set, such as a full general ledger, and then combing through the report for transactions that meet selected criteria (I.e., it is done “offline” via spreadsheets or similar methods.) Grant reports generated by an accounting software can be a huge time-saver, and many nonprofit accounting packages will boast of this attribute. However, it is important the nonprofit understand how it is accomplished.
  2. Is it via the chart of accounts prefix/infix/suffix?
    1. As an example, a nonprofit’s chart of accounts may have the structure xx-xxxxx-xxxxx. In this scenario, the first two digits (the prefix) are often the fund, the next five digits (the infix) are the “department” or “project code” or “cost center” and the last five digits (the suffix) are the object code, or the natural classification of the account.
      1. If the chart of accounts has this structure, can the software run a report that reflects the transaction detail and/or summary balances for accounts with the criteria xx-12000-xxxxx where 12000 is a specific grant?
      2. In the above scenario, the nonprofit would want this report to be accessible via standard report setup criteria and not require customized coding. The accountant would need to be able to specify the infix and the software would automatically exclude all other transactions.
        • Would this report display the infix description in the header? This can be needed to establish the proper grant.
      3. Again, in the above scenario, can a report be run with the criteria xx-12xxx-xxxxx where 12 is a particular grantor? If so, are transactions grouped into separate reports by infix number, and does the report provide an option for a Total column that sums amounts by column/grant?
      4. Can a report be run for property and equipment accounts where the infix is the project number? This can assist with monitoring construction costs funded by grants.
    2. If the chart of accounts is the primary determining factor for allocation to grants:
      1. Does the software have menu-access restrictions to limit the number of people who have rights to set up accounts, and potentially require separate approval before an account is activated?
      2. Does the software have a standard report that shows the description that correlates with each prefix, infix, and suffix? This can be helpful when coding revenue and expense transactions.
      3. And possibly most important…. when transitioning from one nonprofit software to another, can the chart of accounts be imported? When this question is asked it may be helpful to confirm the answer with the software company’s support staff in addition to the sales representative’s response. Changing the organization’s chart of accounts can create significant additional time. It is important to consider the value added in the process.
    3. Are grant reports generated through assigning accounts or transactions to a “department,” “grant,” “grantor” or similar data field(s) that is/are not part of the chart of accounts.
      1. Similar to the above, can reports be generated using these fields, and what is the flexibility level of those reports? Can a report be run for all transactions for a specific grantor as well as a report for all transactions for a specific grant?
      2. How is transaction detail presented, grouped, or ordered if a full general ledger is produced.
    4. How is personnel time coded? Consider how grants are reported. This needs to align if possible. I.e., if the “infix” method above is used, time should be coded using the same number mapping. If a separate data field is used for grant reporting, this field should be mirrored in time coding.
      1. Is personnel time coded to a separate system? If so, are there additional costs for a bridge module to import data from the payroll system to the general ledger, or does it have to be manually input via journal entry.
    5. Can you input separate budgets by individual grants? This can be very helpful, sometimes even critical, in monitoring compliance with grants to ensure you don’t overspend and have to cover the difference.
  3. Similar to the above for grant reporting, does the accounting software have a method of tracking expenses by program vs. administration/fundraising? This may be accomplished by setting parameters for grant reports. An example, a range of infix numbers correlate to a certain program, another range to administration, another range to fundraising.
  4. Does the software require “balanced” entries among funds? As a simple example, if Fund 01 pays a bill for Fund 02, does the software require a four-line entry that reflects both the reduction of cash (credit) and transfer (debit) from Fund 01 as well as the reduction of liability (debit) and transfer (credit) for Fund 02, thus keeping both funds in balance? If not, does the software alert the user when net of debits and credits for a particular fund is not zero?
  5. Does the software require approval for all entries posted directly to net asset accounts? This can help limit instances in which entries are directly posted to restricted net asset accounts as a means of tracking those balances, as the impact is that revenues and expenses are understated and journal entries will be required for reporting based on generally accepted accounting principles.
  6. Involve the organization’s development department. What is the software’s tracking mechanism for donors or members? If there are separate fields in the general ledger, consider the reporting options that will provide the information that development needs. If it is expected that the general ledger will bridge with separate donor-management software, discuss those procedures in detail.
  7. Ability to satisfy reporting required for Form 990, Return of Organization Exempt from Income Tax:
    1. Vendors paid $100,000 or more
    2. Employees paid $150,000 or more
    3. Donors of $5,000 or more
    4. Employees paid as officers
    5. Compensation of board members
    6. Lobbying expenses

 

General Considerations for Accounting Software:

These are not specific to nonprofits but may be of considerable importance depending on your organization.

  1. It’s possible the software company would be willing to write custom code for specific reports or other needs of your organization. If so, discuss all requests and all steps involved in detail before making a decision. You can use your sales rep to improve your leverage to get more of what you want to be written into the sales agreement.
  2. Cloud-based vs. local networks. Cloud-based may perform slower but might limit the impact of ransomware on the organization since the live data is not stored on local servers or personal computers. It also limits the impact of lost or stolen equipment. Local servers may be faster and not require an internet connection but can be more vulnerable to attack and loss of data. Also, updates are automatic for cloud-based software while locally housed software requires manual updates.
  3. Does the software allow journal entries for revenues/receivables that adjust the account but do not have a customer or donor number assigned to the entry? Same for expenses/vendors. This can provide the accountant with the ability to correct the general ledger balance to agree to a sub-ledger amount when the two respective balances do not agree, but it also has security concerns that the organization would need to consider. These concerns can generally be alleviated by monthly reconciliations to sub-ledgers.
  4. Security matters such as menu-access restrictions, username/password, password strength, ability to require password changes, and multi-factor authentication. Also, accessibility of audit trail for all transaction postings – entry and approval.
  5. Reporting:
    1. What format can reports be exported to – spreadsheet, text, word-processor, print-manageable?
    2. Also, what do the reports look like, and can the format be modified? Organizations may want to take some time discussing the presentation of reports and the software company’s ability to customize the appearance in advance of making a final decision. If reports have to be exported and then manually formatted in a spreadsheet or similar software, this can be time-consuming and impact the cost-benefit element of the software.
  6. Ability to bridge/import data from other software, such as third-party payroll services, or separate modules, such as depreciation reporting, into the general ledger module. Request detailed demonstrations and discuss technical support procedures for each.

A comprehensive list of considerations would be much more robust than the above, but this provides a reference point when organizations are comparing among software options.

Blue & Co. is here to help! We can provide assistance with developing solutions for your organization that will enhance your efficiency and enable your accounting staff to meet the needs and objectives of your organization. Please contact us with any questions you may have.

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