This post was last updated on November 23rd, 2021 at 01:29 pm.
Nonprofit Accounting Software Introduction
When selecting a nonprofit accounting software there are some features that are a must-have. There are certain financial standards that nonprofit organizations must follow. As many know, for-profit companies use Quickbooks or Freshbooks. However, traditional accounting programs aren’t equipped to follow the financial standards required by nonprofits. To be successful as a nonprofit, the church must choose the appropriate nonprofit accounting software.
Feature #1 — Tracking & Managing Donation Categories
Donations to churches come in all sizes such as grants, gifts in kind, dues, events, bequests, and so on. These gifts require tracking as the donation (i.e. the money) moves through the system. The first step is entering the donation on the donor’s tax statement. Next, the church must account for the donation in its accounting system. Beyond the IRS and FASB financial standards that churches must adhere to, the church will want to know the effectiveness of the donations in each donation category. It’s these categories that make for-profit and nonprofit accounting vastly different.
After the church receives money and it is entered into the accounting system, then the fun begins in tracking expenses paid by the donations. The best way to explain this is by comparing a man’s wallet to the envelope money system. When there’s money in the wallet and you go through your day spending it, there’s not much ‘tracking’ aside from what you have left in the wallet to spend. However, when expenses happen in an envelope system it’s recorded on the outside of the envelope. For example, if you need food you pull money out of the food envelope and the same goes for other broad categories like gas, housing, insurance, utilities, loans, and so on. How is this different than the wallet method?
The wallet vs. envelope money management methods
Unlike the wallet method where a person tracks one sum, the envelope method requires tracking sums of multiple categories, simultaneously. In other words, when money is removed from an envelope, the amount removed is recorded and a new sum is annotated.
Let’s review an example to clarify these two methods. Let’s start with $1,000.00 in the ‘food’ envelope at the beginning of the month. The first week, you remove $200.00 for a trip to the grocery store and enter that amount on the food envelope. Now subtract that from the $1,000 and you now have $800.00 left to spend on food. This allows you to track and manage each category separately from all the other categories. On the contrary, a wallet has intermingled money for food, gas, and housing, thus only one sum is available. The sum is not broken down into categories. The wallet example represents a for-profit company while the envelope example represents the nonprofit organization.
Feature #2 — Separate Category Budgeting
Budgeting is important in all organizations — for-profit & nonprofit. However, depending on the type of organization the budgeting architecture differs. Nonprofits budget on categories like General Operations (ie General Fund), Mission Operations (ie Mission Fund), and so on. Some churches may only have one fund and do all their budgeting out of that one fund. Others will have multiple funds they want to budget on. Nonprofit accounting software must accommodate both.
Why is it important that nonprofit accounting software have the capability to budget on different categories? In the nonprofit world, donations can be restricted and these must not intermingle with unrestricted monies. Category budgeting enables the organization to review the budget of just one category to ensure it is meeting the demands and mission(s) of that area.
For example, the church uses the Mission fund to track and manage the Haiti, Mexico, and Guatemala missions. The church also has a General fund that pays monthly bills. If these two funds were on one report, it would be very difficult to track what expenses were used for the missions and what was used for monthly bills. As we saw with the envelope example, nonprofit accounting keeps money separated, and allows reports to track income and expenses by category. This avoids confusion when reviewing expenses for one area.
Feature #3 — Integrating Financial & Member Records
We need to address this head-on. If your accounting package doesn’t integrate with a member record system, it’s futile. Church software companies that don’t have an accounting package will simply tell churches to use Quickbooks which can get the church into trouble with reporting. Why do these companies suggest it? Because they want to make a sale and their product does not offer accounting. The bottom line, they can’t sell what they don’t have.
Another reason they push the more difficult task of accounting off to another company, is they are increasing their profit margin. A drawback of this second system recommendation is the church is paying much more for two systems. Let’s go over both of these issues — increasing profit margins and paying for two systems.
Increasing profit margins
Accounting support is much harder to provide than say membership and donation support. Accounting questions get complex and take more time. It’s the time aspect that costs the company money. For example, a membership technical support call will typically average about five minutes. On the other hand, accounting questions will average about twelve minutes, or twice as long. Time is money as the saying goes. The more time spent on the phone for each call, the more money it takes to provide that service and that lowers the profit margin.
So, if you have two software companies that charge the same amount for their services and one provides accounting support while the other doesn’t, then the non-accounting software company makes more profit per client. Why does the non-accounting software company make more profit? Because the non-accounting software companies are spending five minutes per call whereas the accounting software company is spending twelve minutes per call. In simple terms, the non-accounting software can take care of two clients for every one client the accounting software company handles; thus making the accounting software company use twice as many resources. Providing these resources will cut into the profit margin.
Paying for two systems instead of one
Non-accounting software companies are quick to point you in the direction of an accounting application like Quickbooks. There are several issues for the church in this scenario. One is the church pays more money than they have to by using two different systems — church membership and an accounting system. The second is getting a recommendation from a software company that doesn’t have accounting expertise.
A quote from Dave Ramsey – “Broke people giving financial advice is like a shop teacher with missing fingers.” Using his analogy, we can agree that it’s best to get financial advice from people seen as experts in a field. When deciding on an accounting system, the church should do the same. It’s always best to listen to software companies that actually provide nonprofit accounting, instead of software companies that only specialize in membership. And remember, wrong advice may lead the organization into an IRS audit.
Feature #4 — Automated Donations & Payment Processing
Every church needs the ability to process payments for donations and events. Many churches host concerts, dinners, marriage seminars, etc. where the church takes in money. The vast majority of people don’t carry cash or a checkbook. So where does that leave churches when it comes to processing these payments? They can either make the payments via an online payment processor or miss out on the revenue.
Churches can certainly enter the fees and payments into the accounting system manually but wouldn’t automation make it easier? Automation helps the church that’s already pressed for resources, to keep its cost low and still fulfill its mission. Tracking payments for events can be overwhelming for many reasons. First, you have processing payments for the event, then there’s checking people into the event based on what they paid, and ensuring they receive what they paid for, and so on. On the flip side, automation helps by applying the donation payment to the donor’s account without manual entry. This saves hours of manual data entry each week for donations.
Nonprofit Accounting Software Summary
There’s a lot to think about when selecting a nonprofit accounting software. The church has to keep in mind all of the intricacies like budgeting, managing, and spending by categories. These categories are one of the biggest assets of a nonprofit accounting software. Keeping the money straight is one side of the equation but there’s another side to it. The church must have a membership module to tie everything together. In other words, the financial and membership records are integrated. Without the integration, the church’s leaders will have a tough time deciphering where the organization stands — financially.