Nonprofit Accounting Software

What Is Nonprofit Accounting Software?

Nonprofit accounting software is a type of nonprofit software that handles the specific financial transaction needs found within the nonprofit industry. As opposed to a general-purpose accounting solution, nonprofit accounting software helps nonprofit organizations (NPOs) manage fund sources and further their organization’s mission by properly using available funds.

For NPOs, most operating expenses are entirely made up from funds, grants, and donations. A customizable solution can automatically account for and allocate funds received from grants and donations, freeing up your organization to focus on actual outreach rather than behind-the-scenes administrative tasks.

NPOs are responsible for keeping detailed records of their donations, funding sources, and earnings. Without meticulous recordkeeping, NPOs can be subject to audits, fines or other legal consequences. Nonprofit accounting features enable NPOs to fully manage their sources of funding, ensuring every dollar and donor is accounted for while their accounts are accurate through proper bank reconciliation. This includes the financial management of online donations from crowdfunding or foreign sources, which must be reported along with an NPO’s main funding.

Note: Operating a faith-based organization? A specific church accounting software may be more appropriate for your needs.

Best Nonprofit Accounting Software Features

Nonprofit accounting software options allow nonprofits to accurately manage the complex financial needs for organizations of any size. Rather than depending on a general-purpose business accounting solution with basic accounts receivable (AR) and payable (AP) functionality, organizations prefer using nonprofit accounting software for industry-specific functions, primarily fund accounting and the real-time collection of donations.

Here’s a breakdown of the ways these functions meet the needs of an NPO:

• Fund Accounting: A self-balancing set of accounting tools allowing the reservation of cash and non-cash assets for specific purposes or activities. Includes fund class designations, hierarchical fund management, and encumbrance management.
• Invoicing: Helps customers pay your organization for goods and services you’ve rendered them. Includes automatic payment reminders, credit card payment processing, and notifications.
• Reporting: Create earning and expense reports to fully account for an organization’s funding, complete with detailed filtering options using transaction codes. Financial statements and reports can be exported in different formats, including CSVs, Microsoft Excel files, and PDFs, for use across departments.
• Donation management: Track donations and pledges from donors and fundraising campaigns. Measure and anticipate inbound donations, process recurring donations with ACH or credit card payments, corporate donations, matched gifts, individual giving and any other source of contributions to ensure accurate allocations.
• Grant management: Track an application’s status from the initial submission through to acceptance. When grants are awarded, funds can automatically be distributed to designated departments.

Benefits of Nonprofit Accounting Software

Some of the primary benefits offered by a nonprofit accounting software modules include:

Be Better Prepared for Tax Preparation

Nonprofit accounting solutions will need to help streamline your tax preparation and filing process. You’ll want to ensure your business is staying compliant and up to date with the latest IRS tax regulations, including IRS Form 990 which is required by federal tax-exempt organizations.

Set Up Recurring Giving from Donors

As individuals begin to see supporting an NPO as an investment, the more these individuals will open up to recurring giving options. Donor-advised funds (DAF) let the donor receive an immediate tax deduction and even get involved in recommending grants to the organization of your choice. These types of funds grew by 18% from 2014 to 2016.

Stay Current with Nonprofit Buying Trends

Our recent fund accounting buyer trends report analyzed the reasons NPOs buy nonprofit accounting software and detailed their most desired features. By reviewing over 500 notes from discussions with NPOs of all sizes, we identified key purchasing trends to help NPOs make the best purchasing decision:

• 37 percent of surveyed NPOs are replacing aging or dating systems–a statistic eight points higher than for general accounting software and 16 points higher than any other software category. For many NPOs, tight budgets and a “make do with what you have” mentality keeps organizations using outdated software solutions and equipment that are well past their prime. Some NPOs continue to rely on applications that are nearly 30 years old.
• 21 percent of buyers are seeking better features, including mobile apps and online fundraising capabilities with cloud accounting. Modern nonprofit accounting software can help build custom fundraising campaigns which account for all online giving and manage digital and mobile donations, which can’t be easily integrated with many legacy systems.
• 23 percent of NPOs would like to move to a cloud-based software solution. Cloud software enables organizations to keep all of their online and accessible through any web browser while reducing costs. Since cloud solutions are offered on a subscription basis, the software allows for lower upfront pricing and better long-term budgeting due to a predictable ongoing cost structure.

Use Software Developed for Your Industry

Though general-purpose accounting software is often less expensive than industry-specific solutions, NPOs must work harder to make general solutions fit their unique needs. For example, there needs to be ways to differentiate different donation types, like money brought in from grants versus those from donors. Unfortunately, general accounting solutions don’t offer ways to manage separate funds. This results in organizations trying to make square pegs fit in round holes, relying on patchworks of solutions and following online tutorials to make general-purpose software work for the NPO.

Take Advantage of Easy-to-Use Systems

Unless you’re a power user or an accountant, business accounting software can be difficult to use. Most end-users lack accounting experience. This is most apparent at smaller, volunteer-run nonprofits that “do the books” manually or with Excel spreadsheets. Cloud-based nonprofit accounting software solutions are far more user-friendly than their previous counterparts, enabling users to tap into easy-to-use web-based interfaces to carry out their accounting work.

Custom software solutions save time for nonprofits by performing the exact tasks necessary to run your NPO. Automation tools from these solutions fill out tax forms, track donations, or simply check your bank account all from one source.

What Does Your Organization Need?

The exact software your organization needs depends on several factors, such as what exactly your NPO does. Do you mostly perform outreach? Organize charity events? Both? Different accounting solutions can better accommodate your needs.

Depending on the size of your organization, you’ll have a varying level of functionality needs:

Small and Local Organizations

Start-ups and other small nonprofit organizations want to ensure their basic needs are met while keeping costs down as much as possible. This requires basic income and expense tracking in a general ledger, managing your money via bank reconciliation, and using proper reporting tools to stay compliant with the IRS. Ease of use is critical here, as smaller organizations won’t have the funds or personnel to dedicate to advanced accounting processes.

Industry-specific solutions (software developed with nonprofits in mind) can start around $75/month. Small businesses wanting to stay below that total may need to consider a more generic software such as Xero or Sage 50c.

Mid-sized Nonprofit Organizations

Mid-sized NPOs have a tricky balance to maintain. Too big for small scale solutions but not large enough for enterprise-level software, they need something in-between. Fortunately, customizable NPO accounting software can hit that sweet spot. In addition to the functionality described above, you’ll need extra features. For example, if you receive any money from grants and need to ensure expenditures can be allocated to them appropriately, you’ll want to ensure your software has fund accounting functionality.

Your organization may also be growing in size and adding on paid staff members (rather than being fully volunteer run), meaning payroll and time tracking are features you can no longer ignore. Both fund accounting and payroll are pieces of functionality that can be bought as stand-alone or add-on software features to existing accounting packages. Looking for a fully integrated (all-in-one) option will be the better long-term option to avoid integration issues and paying multiple software vendors a month.

Large Nonprofits

Larger nonprofit organizations will need enterprise level software with advanced accounting features with large donor management databases. This level of organization will want to ensure board members have full clarity of the organization’s finances through proper bookkeeping, cash management, and reporting. Forecasts will be far more important to predict the health of your organization into the following year.

Unlike the accounting needs of similarly sized for-profit organizations, larger NPOs put a heavy focus on fundraising campaigns and customer relationship management (CRM) to ensure continued support of satisfied donors in the long run.

Is QuickBooks a Nonprofit Accounting Software?

QuickBooks Online can be used by a nonprofit organization, but you’ll want to make sure your staff can put up with the “for-profit language” of the program. As pictured below, the dashboard has mentions of profit and loss, sales, and other terms not commonly used in nonprofit environments.

Intuit previously offered an industry-specific version of QuickBooks built exclusively for nonprofits. However, as software solutions have migrated into the cloud, Quickbooks no longer offers a specific standalone piece of nonprofit accounting software. Current versions of Quickbooks must instead be customized to enable nonprofit-specific functionality. For organizations, this requires savvy Quickbooks experts who are capable of customizing the software to meet their organization’s particular need. Many NPOs instead look to adopt new nonprofit accounting software solutions that work out of the box.

For organizations set on sticking with what they know, Intuit has been recommending QuickBooks Online as the accounting system to have for nonprofits. The solution has one of the lowest cost of entry points starting at $15/month.