Fund accounting: Tips and software for nonprofits
Nonprofit groups have some unique accounting needs because of how money moves through the organization and the conditions put in place by donors or legal considerations from regulatory bodies. Fund accounting in particular is a critical component of a nonprofit’s financial management, and one that can pose challenges if you’re not set up to handle things correctly.
But with the right software, you can increase transparency, maintain accountability to your funding sources and provide valuable assistance to those you serve. Here are some tips on how to manage your fund accounting processes and why new accounting software could help you improve efficiency in your nonprofit accounting processes.
Basics of fund accounting
Many nonprofits divide their assets among a number of different funds that all serve a unique purpose within the organization. These funds can come with specific restrictions, or no restrictions at all based on donor stipulations and what the money will be used for. There are three basic types of funds for nonprofits:
Unrestricted fund – As the name suggests, these funds come with no strings attached and the revenue can be used for any legal purpose.
Temporarily restricted fund – Donations to these funds must be used for a specific purpose in a specified amount of time and are generally targeted at an individual campaign.
Permanently restricted fund – With these funds, the donations themselves can’t be touched and only the income generated by the assets can be used toward the nonprofit’s goals.
Managing these funds effectively is critical for maintaining the financial health of your organization and being able to fulfill your mission. As DonorSearch notes, “A fund is like a separate company within your organization. Each fund has its own self-balancing set of books to track assets, liabilities, revenue, expense and fund balances or net assets. Revenue earned by nonprofits has different characteristics than for-profit businesses.”
This calls out two specific needs when it comes to fund accounting software for nonprofits:
You need robust accounting capabilities to manage day-to-day operations, including a general ledger, accounts payable/receivable and bank book management.
You also need to be able to segment these funds and manage them independently while still maintaining a comprehensive view of your financial health.
As for the second point, this does not mean that you need to actually separate assets into individual bank accounts that are tied to a specific fund. You also don’t need to set up a different fund for every program you manage or grant you receive. Instead, use program codes within each fund to track and allocate revenue and expenses as needed. Make sure any accounting software you consider allows you to create categories and dimensions to make it easier to track financial data across funds.
Security and transparency
One of the most important aspects of fund accounting (and accounting for nonprofits in general) is maintaining accountability and transparency for donors and regulators. Security is also extremely important both in protecting donors and the recipients of funds. So, you need to make sure that any accounting software you use has transparency mechanisms and robust security protections.
When it comes to accountability, look for accounting software that provides a full audit trail of every transaction made through your accounts. This will help you prove responsible stewardship of donor funds and can also act as a deterrent against fraud.
For security, look for a system that allows you to put user-level restrictions in place, granting access only to specific individuals in your organization, to better protect and manage funds. This is especially important for fund accounting where you may need to allow different permissions and access for each individual fund you manage.
Fund accounting software
Given the complex nature of nonprofit accounting needs and the stated goal of many nonprofits to help as many people as possible, it’s important to have software that meets your current needs while also enabling future growth. In addition to audit trails and security capabilities, consider the following features when searching for new fund accounting software for nonprofits:
A system that allows you to track multiple legal entities in a single database will make it easier to reconcile all of your financial data and get a complete picture of your nonprofit's financials. This is especially important for foundations and larger nonprofits that may operate a number of distinct organizations under one umbrella. This will also promote efficiency for your accounting team because they will no longer have to log in and out of databases each time they want to move between different parts of your organization.
Cloud-based accounting software for nonprofits allows your team to access your system from anywhere in the world while providing the security benefits associated with the cloud. This is particularly helpful if your organization is spread out across the country or the globe and will make it easier to onboard new employees as your organization grows over time.
Because fund accounting is so central to being able to fulfill your mission as a nonprofit, it’s essential you have accounting software that can meet your unique needs while also enabling future growth. By choosing the right accounting software, you can increase efficiency, accountability, security and transparency while giving you the financial management capabilities to continue serving those who need it most.
Want to improve fund accounting processes for your nonprofit? Schedule an online demo of Gravity Software® today to see how our powerful platform can drive efficiency and accountability for your organization.
Better. Smarter. Accounting.