If you’re involved in the nonprofit world, then you’re well aware of the current pressures for organizations to become more transparent. Regardless of the size or scope of an organization’s mission, nonprofits are expected to demonstrate responsible stewardship to constituents through tangible data.
Even more, in our increasingly technology-driven society, stakeholders have round the clock access to real-time information, creating an even greater challenge for nonprofits in keeping up with the growing demands to produce more timely financial data.
However, technology can also provide the solution. For organizations dealing with funds designated for a specific use (i.e. grants, major gifts, endowments, etc.) generally accepted accounting principles (GAAP) require nonprofits to uphold donor expectations. 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.
Let’s take a look at five key financial management and reporting capabilities that your fund accounting solution should have in order to help keep your organization compliant and provide a complete picture of financial data for improved strategic planning and increased transparency to stakeholders.
1. A Complete Solution Suite for Managing Restricted Funds
Donor-imposed fund restrictions create complexities across various business processes, so the best technology to manage these restrictions is an Enterprise Resource Planning (ERP) solution built specifically for nonprofit organizations. The term “ERP” can carry various meanings, but, in this case, it’s a solution suite that can manage areas such as CRM, accounting, marketing, and more. By adopting a technology solution that is built to work together – either in combination or as a single application – an organization’s staff members can benefit from common and shared data, reports, and workflows. This provides a holistic approach to managing restricted funds throughout an organization, not just when it comes to financial statements.
One example of the benefits of a true nonprofit ERP is that development and financial offices are on the same page both in terms of strategy as well as with data. A tremendous amount of time and resources can be wasted when fundraisers and financial officers have differing 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. While system integration can solve for automating data transfer from a CRM to the accounting system, a better approach is to use a cohesive solution set across departments, which drastically improves efficiency, data integrity, and commonality in terms of things like verbiage within the systems — all of which free up staff time in both areas.
2. Cost Allocation Management
Allocations are very important for nonprofits and 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 painful to carry out, especially as funds increase. The right nonprofit accounting package can perform many of these calculations; however, this capability doesn’t come standard in most commercial accounting packages. Nonprofits 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.
3. Analytics Tools for Improved Decision Making
Whether or not a nonprofit can effectively manage and report on its finances can have a significant impact on its ability to successfully grow its fundraising revenue. It starts with the capacity for making informed, strategic decisions. With solid reporting practices 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 the use of relevant metrics such as cost per dollar raised, cost per new recurring donor, and donor lifetime value generated – can inform the organization as to which campaigns, partnerships, and tactics should be continued and which should be halted, restructured, or potentially outsourced. In addition, modern reporting tools can deliver crucial stats such as actual vs budgeted dollars raised or pledged so organizations can foresee potential shortfalls and better predict their cash position.
4. Robust Budgeting Capabilities
Nonprofits rely on budgeting not only for fiscal transparency but also to help guide strategic planning, cost management, and so much more. A good budget creation process is one that
1) Involves the right stakeholders;
2) Sets the vision early;
3) Provides the organization with a means to shift their game plan, if necessary.
Organizations that don’t plan for the unexpected may experience difficulties managing through headwinds, financially and organizationally. In the nonprofit sector, so much can change if even one major funding source doesn’t come through or a grant payment arrives late. So being prepared for various possibilities is good practice; a system that accommodates scenario planning can be a boon for any nonprofit organizations.
An effective budget should be centralized in the accounting system. Doing so allows stakeholders to come back to a singular source of data because budgets can – and sometimes should – be fluid.
It’s good practice to set up and establish a regular cadence for reviewing budget-to-actual performance. Software with sound budgeting capabilities will also provide dashboards that allow individuals to regularly monitor actual vs budget data and notify users when spending against a giving account or program will exceed budgeted amounts, which can inform purchasing approvals.
5. Grant and Project Management Tools
Organizations that depend on grant funding need software with robust tracking capabilities, particularly because most nonprofits with significant grant revenue are reliant on multiple funding sources, each with their own unique requirements. With each new grant comes added complexity.
To manage multiple grants in a scalable way, nonprofits need tools that can easily capture grant specific data and automate calculations such as 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 is as well as relevant reporting deadlines. Come level of project management features should also be included – such as the ability to assign tasks to individuals or schedule reports to ensure important deadlines are met.
Some systems even allow for built-in spending rules to improve compliance and reduce the chance for human error. Finally, advanced software can help automate complex tasks, such as performing cost allocations to determine reimbursement requests – something that is commonly still done in Excel today, which can be time-consuming.
Comprehensive fund accounting software is the pre-eminent technology to consider for increased transparency internally for improved decision-making capabilities and externally to demonstrate fiscal responsibility to constituents.