For non-profits, choosing the right accounting system can be even more complex than for a traditional business. Non-profit organizations have unique needs, including managing donations, grants, and ensuring compliance with strict reporting requirements.
What is an accounting system?
An accounting system is a set of tools, processes, and software that businesses and organizations use to track, manage, and report their financial transactions. It serves as the backbone for recording and summarizing financial information such as income, expenses, assets, liabilities, and equity. Accounting systems help ensure that financial data is accurate, up-to-date, and readily available for decision-making, compliance, and reporting.
1. Non-Profit Specific Functionality
A standard accounting system may not offer the features your non-profit needs. It is important to look for a solution that caters specifically to the non-profit sector, including:
- Fund accounting: This is critical for tracking multiple funding sources (e.g., donations, grants) and ensuring that funds are spent according to donor restrictions.
Written by,
Aaron J. Nichols
Accountant, HBE LLP
- Donation tracking: The system should allow you to track donations and manage donor relationships easily.
- Grant management: Non-profits often rely on grants that come with specific financial reporting requirements. Choose a system that simplifies grant tracking and reporting.
2. Compliance with Financial Reporting Requirements
Non-profits are subject to various regulatory and compliance standards, including IRS requirements and state-level financial reporting. The right system should be able to: produce IRS-compliant reports such as Form 990, track revenue and expenses in line with accounting standards like FASB (Financial Accounting Standards Board) rules for non-profit organizations and generate reports for specific donors or funders, particularly when they require detailed transparency on how their funds are being used.
3. Budgeting and Fund Allocation
Non-profits often have to balance multiple budgets for different projects, programs, and funding sources. A suitable accounting system should offer: multiple budget management tools, the ability to allocate funds accurately between restricted, unrestricted, and temporarily restricted funds and variance analysis tools to compare actual performance against budgets and ensure financial health.
4. Donor Management Integration
Since donations are the lifeblood of many non-profits, an accounting system that integrates with a donor management system (DMS) is vital. Ideally, the system should: automatically update donor records and provide donor activity reports, track pledges and matching gift programs and provide insights into donor behavior, such as donation frequency and average gift size, which helps with fundraising efforts.
5. Grant Reporting and Management
Managing and reporting on grants can be complex for non-profits. A good accounting system should help: track grant funds from multiple sources, each with their own restrictions, provide detailed grant compliance reports that meet the expectations of funding agencies and forecast cash flow and spending to ensure grant funds are used within specified timelines.
6. Cloud-Based vs. On-Premises Solutions
As with any organization, non-profits must decide between cloud-based and on-premise accounting solutions. Cloud-based systems offer flexibility and remote access, which is especially useful for non-profits with staff working in different locations. They also offer automatic updates and backups. On-premise systems might provide more control over data but often come with higher upfront costs and require more technical support. Cloud-based solutions may be more attractive to non-profits due to lower initial costs and the ability to access financial data from any location.
7. Security and Data Protection
Non-profits deal with sensitive donor and financial data. Therefore, data security should be a top priority. It is important to look for systems that offer data encryption to protect donor and financial information, access controls that limit financial information to authorized personnel only, regular data backups and disaster recovery options and to ensure the software complies with industry standards for data protection, such as GDPR or CCPA, if applicable.
8. Scalability and Flexibility
As the organization grows, having an accounting system that can grow is important. The accounting system should scale with the size of the non-profit, from small grassroots operations to larger, multi-program organizations. Add users and functionality as needed, such as fundraising modules, volunteer management tools, or CRM integrations. Scalability is crucial to avoid outgrowing your system and needing another costly transition down the road.
9. Cost and Affordability
For non-profits, budget considerations are particularly critical. When evaluating systems, consider not just the upfront cost but the total cost of ownership, which includes: license fees or subscription costs, implementation and training costs, ongoing maintenance, support, and upgrade costs and some vendors may offer discounts or special pricing for non-profits, so be sure to inquire about these options.
10. Reporting and Analytics
Transparent and accessible financial reporting is essential for non-profits, particularly when reporting back to donors, boards, and stakeholders. A good accounting system should provide customizable reports that can track specific program or fund performance. Dashboard views that provide at-a-glance information on key financial metrics and automated report generation.
Final Thoughts
Selecting the right accounting system for your non-profit is a critical decision that impacts financial transparency, compliance, and operational efficiency. By focusing on non-profit-specific features, reporting capabilities, security, and scalability, you can choose a system that supports your mission and helps you achieve your goals.
