Accounting for nonprofits, or NFPs, is often quite complex. This may be a counter-intuitive thought because most people think that nonprofits have no money. Accounting, therefore, should be very simple, right? This is just not true.
Nonprofits’ Fund Accounting Is Complex
Would you expect your zoo’s financial management team to raise funds to build a new habitat for the lions without financial oversight that reviews budgets and expenses, as well as being accountable to funders, auditors and the board for how efficiently incoming funds are used?
For-profit accounting is actually simpler than NFP accounting because a commercial business needs only to focus on sales and profitability.
Nonprofits, on the other hand, collect funds from multiple generous sources by offering a great mission and story, then use those funds to fulfill the mission and explain to donors, grantors, and other fund sources how those funds were spent in support of the mission and work. This is the basis for fund accounting or being accountable for expenditures.
Complexity is layered in because each source of funds requires and deserves its own regular report showing how the mission is progressing and proves that the generosity extended to the NFP is being used to create good in our world. A single NFP can have literally hundreds of funds/grants to manage, which is another reason fund accounting is considered to be so complex.
For NFPs there are two primary classes of funds – with and without donor restrictions. These encompass the traditional unrestricted, permanently restricted and temporarily restricted definitions. Unrestricted funds are monies that can be put to use in any way the NFP management deems appropriate, from administrative and payroll costs to marketing a fundraising effort.
Restricted funds are when income for the organization must be spent for a specific purpose either legally or by written agreement with a donor or other income source, or have to be used within a specified time period. These funds will be named and/or numbered in an accounting system and all transactions entered in the system must have a fund attached to it.
Further, a real fund accounting system needs to manage balancing by funds and fund classes, as well as manage releases from restricted funds to unrestricted expenditures.
But what happens when you share expenses across funds, or programs or grants? For example, you may want to allocate the cost of your electricity bill across multiple funds, each of which is responsible for some of the cost. Rather than calculating percentages of your electric bill by hand, you should have an accounting system that can do that for you—multiple times. And if you pay the entire electric bill out of the funds of one account, there should be balancing entries from other funds to show they owe the first fund money. This is called an automated inter-fund transaction.
Good fund accounting software should do this for you, and keep clear, accurate tracking of the balancing transactions for the audits most NFPs have annually. Bad fund accounting software will often force after-the-fact or batch processes to make this happen.
Other must haves in good fund accounting include:
- Automated release of restrictions as time or obligations have been met
- Year-End Close by Fund and Net Asset Accounts
- SFAS 117 (Statement of Financial Accounting Standards Number 117) Standard Reports
- Cross Fiscal Period Reporting
In addition, good fund accounting software will also add in specialized industry functionality so that your nonprofit can implement an end-to-end solution that tracks and manages such areas as:
- Grant management
- Employee inquiries and entry of time, expense and requisitions
- Ad Hoc Reporting
- Business Intelligence
- Electronic approvals and budget controls
In short, if you’re running a nonprofit, you’ll want to get software that can manage your fund accounting needs for multiple funding sources, net asset restriction management and automated allocations across funds and time periods.
If you’d like to talk more about fund accounting, please let us know. Leave a comment below or contact us at firstname.lastname@example.org. We’d love to share your journey.