Is your software optimized for non-profit or government usage? If not, you may be missing an opportunity to lower costs and better meet your organizational goals. For the non-profit or public sector organization, success isn’t defined by generating profits. Accordingly, nonprofits and government entities use different accounting methods. A primary difference is the use of “funds.” A fund accounting software approach allows you the visibility into your financials to understand exactly how each dollar is spent. With improved financial clarity, you’ll be better equipped to lower operational costs and maximize the impact of each dollar.
This guide will help provide information on the following topics:
Fund accounting software is designed to enable improved allocation management of resources which have been designated for specific uses. Funds, in particular, are a special type of accounting entity which provides a self-balancing set of accounts allowing the reservation of cash and non-cash assets for specific purposes or activities. Fund accounting is most commonly used by nonprofits and government entities because these organizations need to track expenditures and balances across multiple funds and have them appropriated at certain times.
|Fund class designations||Fund class designations allow the identification of different funds by type, such as restricted versus unrestricted, temporary versus permanent, or organizational versus custodial|
|Hierarchical fund management||The ability to divide funds into smaller tracking segments and assign parent-child relationships allowing for more granular control of spending|
|Encumbrance management||Encumbrance management allows for the reservation of funds for future spending commitments|
Fund Accounting typically comes as a module in a complete accounting software and will have integrations with other complementary features to provide a full suite of accounting, such as:
|Accounts payable||Accounts payable software provides the ledger and related functionality for managing money owed by an organization|
|Accounts receivable||Accounts receivable software provides the ledger and related functionality for managing money owed to an organization|
|General ledger||General ledger software functionality provides the ledger and related functionality for providing a complete record of the financial activity of an organization, including transactional records and account structures|
Many claims can be made for the effectiveness of having a quality software. As someone who may be in a position to better their company or organization through the use of technology, it’s up to you to weed out what is generic “sales copy” that promises you the world, and what can be taken as factual, real-world experience from organizations just like you. Below are just a few of the most common benefits you hear about when speaking to companies who use fund accounting software:
A fund is essentially a unit of financial organization with a self-balancing set of accounts designed to record cash and other assets together with related balances and liabilities. Fund accounting software provides the ability to create financial statements and balances sheets for each fund.
Just as there are accounting packages designed with the manufacturer or retailer in mind, software developers have created fund accounting software to meet the specific accounting requirements of nonprofit and government organizations. Using software geared for commercial operations can lead to a number of issues for nonprofits and government entities.
Many organizations will attempt to use departmentalization at the general ledger level to accommodate what could be more easily set up as fund accounting. After investing time to set this up, this approach may prove useful in tracking income and expenses, but it rarely provides the necessary controls in tracking assets and liabilities necessary for accurate balance sheets. While the profit motive may not be behind it in the case of nonprofits and government entities, every organization is looking to maximize their efficiency. Fund accounting software provides an accounting approach designed to eliminate time-intensive workarounds necessary to make standard commercial packages work.
Organizations who provide funding often require clear reports detailing how funds have been spent. Fund accounting software provides reports designed for this purpose. By improving your ability to document the impact of previous expenditures, you can help promote your ability to receive future funding.
Fund accounting software modules provide a number of inherent benefits. Donations, grants, and endowments are frequently provided to the non-profit organization with specific instructions on the usage of the funding. Tracking these financial assets in funds allows the non-profit organization to easily see how each dollar was spent. The results of failing to meet specific spending restrictions can have negative consequences, including discontinued funding.
The first step of meeting spending restrictions is knowing where every penny is allocated. For the government entity, GASB standards actually require that accounts are kept on a fund basis. Fund accounting software allows governments to track a variety of different funds including general/operations, special revenues, capital projects, debt services, permanent, fiduciary, and proprietary funds.
Which Fund Accounting does your business need? You may just need a solution that can handle the management of funds/grants, or you may need a complete accounting system that includes the functionality, on top of other back-end accounting functionalities like accounts payable and a general ledger. Accounts Receivable is generally not as big of a staple in fund accounting software systems, as companies who use this type of software aren’t generally collecting invoices or recording profits in a way a traditional for-profit company would.
Once figuring out what you need, you’ll need to explore the vast amount of available products. Again, this could be a nonprofit accounting software that has fund accounting included, or you may be looking for a stand-alone fund accounting solution that will work side by side your existing accounting solution.
In a recent study conducted by our company, we found that companies who were looking to replace QuickBooks and find a new nonprofit accounting solution were most likely to review the options listed above than any other nonprofit accounting solution.
Given the low cost of entry for QuickBooks, it’s one of the most popular solutions for organizations with tight budgets, which rings true for many nonprofits and government organizations.
QuickBooks advertises itself as being a viable solution for both nonprofits and government organizations who need accounting. They allow for automating of fund and program accounting, and customization to create lists of members/donors and track budget by programs or funds. QuickBooks does have nonprofit versions of their Desktop Enterprise solution, and a large community of QuickBooks users take to the internet to help each other save money with the software by giving tips and tricks on how to make the software work for them.
Some internet chatter feels QuickBooks falls short when it comes to “true” fund accounting, as what QuickBooks consists of is:
These are usually handled by using classes, which are a custom list you can create in the program. However, it seems to fall short in preparing a balance sheet for each fund. Although this problem can be remedied via a third-party add-on, or by tracking fund balances in a separate program such as Excel.
QuickBooks does seem to have a smaller market share in fund accounting than other verticals. Our Fund Accounting Software Buyer Trends report found that only 20% of software buyers are replacing QuickBooks. That number is significantly lower than companies looking for general accounting software, where 35% of companies were found to be replacing QuickBooks.