Back in 1980, the following quote appeared in an issue of the Harvard Business Review:
Nonprofit organizations are under pressure to make their financial status better understood. Their managers, their board members or trustees, and taxpayers need to understand and deal with the reports that present their financial condition. Thus armed, they can press for better management of these institutions. Weaknesses in accounting controls, rather than in nonprofit accounting principles, have contributed to the difficulties that have plagued these nonprofit institutions.
Some things never change! Undoubtedly, the very same organizational challenges face non-profit organizations today. But perhaps somewhat more surprisingly, at many non-profit organizations, so too do many of the weaknesses in their accounting controls.
Every year we hear from hundreds of non-profit organizations contending with inadequacies in their accounting systems. The same themes tend to recur at non-profit organizations, regardless of size or mission:
- An overall lack of transparency into financial data
- Inefficient processes that drain budgets and take time away from delivering on the mission
- Difficulties providing reporting on restricted fund usage required for grant awards
- Challenges identifying the most effective fundraising methodologies
As opposed to the situation back in 1980, one of the major differences today is that effective, non-profit oriented software is now available to even smaller non-profit organizations at a fraction of the cost of the expected financial returns generated by such systems.
Blackbaud is one of the industry leading providers of non-profit software technology helping non-profits solve some of their toughest management challenges. Blackbaud’s line of products includes solutions for accounting, fundraising, grant management, budgeting, and other mission-critical non-profit processes.
In order to get a better understanding of the opportunities available to today’s growing non-profit organizations, I spoke with Michael Blanton from Blackbaud. Read on, for a practical overview of the most effective strategies, tools, and technologies for non-profits looking to manage fund restrictions, allocations, grant reporting, and budgeting for improved non-profit financial performances.
How can a non-profit’s financial reporting capabilities influence its fundraising capabilities?
There’s a number of ways that financial reporting can impact an organization’s ability to successfully grow their fundraising revenue. It starts with the ability to make better strategic decisions. With the right reporting in place, fundraising organizations can conduct regular and rigorous financial analysis around their efforts – from overall performance trends to specific appeals – and determine if those efforts are meeting their expectations. This type of analysis, including use of relevant metrics such as “cost per dollar raised,” “cost per new recurring donor,” or “donor lifetime value generated,” can inform which campaigns, partnerships, and tactics the organization should continue, or which ones need to be reconsidered or potentially outsourced. In addition, modern reporting tools can deliver real-time dollars raised or pledged vs. a budgeted amount, so organizations can foresee potential short-falls and better predict their cash-position.
Other significant benefits exist as well. It’s important for fundraising organizations to ensure that their development and financial offices are on the same page both in terms of strategy and the data they’re referencing. A tremendous amount of time can be wasted when fundraisers and financial officers have different interpretations of fundraising income. This often results from the use of different technology applications for the two functions which can cause duplicate or erroneous data entry in one or both systems. Automating data transfer or – even better – using a cohesive solution set across departments, can dramatically improve efficiency and data integrity, freeing up staff time in both areas.
How has financial reporting in the non-profit sector changed over the last 10-20 years and what are some of the most important tools and techniques used by leading non-profit organizations?
Well recently the FASB proposed the most sweeping changes to non-profit accounting since FAS116/117 became effective over 20 years ago – so we’re in exciting times! It’s actually a good question in light of the changes and really puts an emphasis on the importance of flexibility in an accounting system to accommodate policy changes.
Despite the potential changes to net asset classification, we all know that accounting doesn’t move fast. Many of the changes in financial reporting, in the daily-life of a forward thinking finance office, have come from technology advances in the form of automation, integration, connectivity, and more. To hit on automation a bit, enterprise technology has learned a good bit from consumer technology by way of making more intuitive software, and a lot of time is being focused on reducing things like data entry (manual journal entry for example). What we’ll see is that as cloud technology providers continue to get better at this, that business processes will also adapt. This theme of automation will also take on a whole new meaning no doubt as it matures into informing strategic decisions alongside more complex datasets.
A simple example of this is bank feeds within accounting software, which is a relatively new feature in the market. With it, transactions from an organization’s financial institution are directly mapped into their accounting software and auto-matched with their bank register based on a sophisticated algorithm, greatly expediting the bank reconciliation process, reducing errors, and allowing for a faster closing process. By utilizing this effectively, an organization can eventually consider shifting towards continuous reconciliation – a distinct and positive change in their accounting processes which isn’t feasible with manual reconciliation.
Worth noting that it’s important for non-profits to consider adopting a cloud accounting solution, not only for the portability and infrastructural benefits, but to ensure that they are subscribing to a service that’s continuing to innovate as the market evolves.
What are some of the differences between the software technologies used by smaller non-profits, in comparison to those used in large organizations. Is top technology available at scale to smaller non-profits?
A lot of the differences in the software being used is determined by the nature of the organization’s mission and revenue streams, and not necessarily its size. For example, many mid-sized service-driven non-profits (as opposed to those with significant contributions), may opt to use commercial software, and create the financial reports they need in excel. While it’s not optimal, some choose to do so because the nature of their organization more closely resembles a traditional business whose financial reporting needs are not quite as intense.
That said, there’s certainly a general correlation between size and complexity of software. Large organizations may have a bit more appetite to pursue multiple “best of breed” solutions, to solve specific needs in the organization (for example, choose a separate vendor for Payroll, Accounting, and Inventory), because they have the skills to integrate various solutions that are each deep in a specific area. Small non-profits generally find it more cost-effective to narrow their list of applications if possible. Solution suites are particularly popular with non-profits, however, as there can be difficulty finding top-notch software in every functional area that accommodates all the intricacies of their org. Another difference might be the level of customization required by large institutions, who can be very particular about security and availability (for web-delivered services).
With the rise of cloud-service models and subscription pricing, and just the general evolution of software – there’s more value available to smaller organizations than ever before. Without the infrastructure and upfront costs faced in the past, organizations can now adopt technologies that were previously cost-prohibitive, and – generally speaking – accounting technology has innovated like other applications, with new automation features. That said, there’s always going to be a balance between ‘ease-of-use’ and functional depth or customization. Today, there are many small non-profits who have successfully moved to a robust technology, but often times that success is dependent on having quality personnel within the organization who can navigate the organization through a significant process change – and the selection of a vendor who can provide the level of service needed to produce the desired outcomes.
What specific technologies are most beneficial for non-profits managing the unique challenges related to fund restriction and cost allocation?
Fund restrictions are usually donor-imposed, so one of the most common technologies is an ERP (Enterprise Resource Planning) solution built for philanthropic organizations. “ERP” can mean different things to different people, but in this case, I mean a solution suite that can manage areas such as CRM, accounting, marketing, and other areas. By adopting technology meant to work together (either in combination or as a single application) – organizations can benefit from common data, reporting, and workflows which provide significant advantages to organizational efficiency.
Staying with fund-restrictions – a strong fund-accounting solution is the pre-eminent technology to consider. For organizations dealing with funds designated for specific use – whether they be grants, major gifts, endowments, or any other form – it’s required by law to ensure they uphold those restrictions. Fund-accounting solutions are designed specifically to ease the burden of reporting against these restrictions, and for organizations with diverse funding sources, should be seen as a must-have.
Allocations are very important for non-profits. While I’m generalizing “non-profits” a bit, allocations are used in a variety of ways. For example, large endowments are concerned with allocating interest income to funds, while the most common need for allocations in charities is cost allocation to comply with regulatory requirements and ensure reimbursement from funding sources. Regardless of the need and methodology, these calculations can be extremely complex, and extremely painful to perform as funds increase. The right non-profit accounting package can perform many of these calculations, but it doesn’t come standard in most commercial-accounting packages. Non-profits should do their homework on this one as it’s a fundamental and challenging aspect of their regular reporting, and solving this need after-the-fact can be costly.
Beyond basic fund accounting capabilities, what reporting features should a capable non-profit oriented accounting software provide to facilitate improved grant management?
For organizations that depend on grant funding, there’s a real demand for robust tracking capabilities – particularly since most Non-profits with significant revenue are reliant upon multiple funding sources, each with their own unique requirements. With each new grant, comes added complexity.
To manage these in a scalable way, non-profits need tools that can easily capture grant-specific data and automate calculations around things like indirect cost. While the list is long, some examples of basic grant management functionality in accounting software include native grant-record data fields such as who the grant manager is, and the relevant reporting deadlines. Some level of project management features should be included, such as the ability to assign tasks to individuals or schedule reports to ensure no dates are missed.
For more mature organizations, they’ll want to think about the ability to establish regular relationships between grants and projects or programs to ease reporting and data entry. Some systems can allow for built-in spending rules to improve compliance and reduce the chance for human error. Finally, advanced software can begin to help automate more complex tasks, like performing cost allocations to determine reimbursement requests —- something that is commonly still done in excel today, which is much more time-consuming.
As you mentioned, good-old “fund-accounting” can’t be under-emphasized, and if grants can’t be tracked outside of the account structure in a system, then all these other features are a bit superfluous. Likewise with the ability to generate reports across multiple categorizations, such as grants for a specific program by “net asset classification” is a must-have.
What are the best practices for a non-profit organization looking to improve on its budget creation and tracking process?
Budgeting is so important for non-profits. It’s crucial for transparency, strategic planning, cost management, and so much more. I believe most of our clients would say that a good budget creation process is one that 1) involves the right stakeholders, 2) sets the vision early, and 3) provides the organization with a means to shift gameplans, if necessary. Non-profits who don’t plan for the unexpected have trouble managing through headwinds, financially and organizationally. In the non-profit world, so much can change if a few funding sources don’t come through – so having planning for various scenarios is a good-practice, and having a system that can accommodate scenario planning is similarly important. It’s also important to set the right expectations at the program-level, to ensure that each is performing as expected, so agreeing to the right level of granularity needs to be determined early.
In terms of tracking, an effective budget should be centralized in the accounting system, without a doubt. Doing so allows stakeholders to come back to a singular source of data, because we know budgets can — and sometimes should be – fluid. If the software has sound budgeting capabilities, it will also provide dashboards to regularly monitor actuals versus budget, and notifications when spending against a giving account/program/etc. will exceed budgeted amounts – which can inform purchasing approvals and many other decisions. Many of our clients setup and establish a regular cadence for reviewing their budget-to-actual performance in product dashboards, and also schedule reports to ensure they are expediting their regular reporting.