After you incorporated your nonprofit, you hit the ground running and likely haven’t found a second to breathe since. Your attention is divided between program operations, finding and stewarding new donors, recruiting volunteers, and building your team. And then on top of all of that, you have to figure out the many nuances of nonprofit financial management.
The good news is that just like there is dedicated software available to streamline your fundraising and volunteer management, there are also tools for nonprofit accounting, giving you the support you need to maximize your organization’s impact.
In this guide, we’ll walk you through the uses of accounting software for nonprofits and how to select the right tool for you.
Why do nonprofits use accounting software?
As we’ve already hinted at, one of the primary benefits of accounting software for nonprofits is reducing the administrative burden of financial management. When you started your nonprofit, you might have tracked your finances in a spreadsheet, which is a highly manual process and very prone to human error. Accounting software can take care of tasks like data entry, reconciliation, and migration automatically, which saves time and reduces the risk of errors in recordkeeping.
Another reason why nonprofits use accounting software is for better recordkeeping and data hygiene. As Heller Consulting’s nonprofit data management guide explains, data silos (which occur when data is stored in several different locations) can also lead to incomplete and inaccurate reports.
For nonprofits, financial transparency and trustworthiness are paramount—not only for building relationships with your donors, but also because it is legally required. With the scaffolding that accounting software provides, you’ll know where all of your financial data is and be able to adhere to best practices for revenue reporting and recognition.
As your nonprofit grows, your operations will expand to further your mission, and your financial situation will likely become more complex. Managing your finances in a spreadsheet is not a sustainable long-term strategy. Accounting software is a necessity for long-term financial health that will enable you to continue to serve your community for years to come.
What activities can accounting software support?
Now that we’ve covered the underlying reasons why nonprofit accounting software is beneficial for nonprofits, let’s cover what it can help your organization do.
Nonprofit accounting software capabilities usually include:
- Transaction record storage: Keeping track of fundraising and other types of income, expenses, and other financial data is the primary function of accounting software. Your bookkeeper will still need to provide oversight and record a few transactions manually, but the platform may be able to pull in some revenue and expense data automatically via integrations with other solutions.
- Restricted fund tracking: Honoring donors’ wishes for their contributions is legally required, which means restricted funds deserve special attention in your records. Your accounting software should allow you to track restricted funding separately from other revenue to ensure it’s used for its intended purpose.
- Budget vs. actual comparison: Not only can accounting software help you create an annual budget, but it can also keep you on track by automatically comparing actual revenue and expenses against your projections.
- Grant management: As part of the grant application process, you may be required to prepare a budget for how you’d use the funds if won—and after you’ve received funding, you may have ongoing reporting stipulations attached to the grant. Accounting software can support budget creation and reporting for grant management.
- Financial statement creation: Instead of creating the four main financial statements (income statement, balance sheet, functional expense report, and cash flow statement) by hand, accounting software can pull these reports automatically.
- Tax filing support: All of the above activities come together to help your nonprofit file its Form 990 with the IRS, because the financial information your accountant needs will be readily at hand. Some software can even create and store W-2s and 1099s for your employees and contractors.
Overall, accounting software exists to minimize errors and mitigate accounting-induced headaches, giving your financial team time back to focus on more strategic fiscal initiatives.
How to get started with choosing accounting software.
When the time comes to begin the accounting software procurement process, the following considerations can help you evaluate your options:
- Ensure the software has fund accounting capabilities. Jitasa’s guide to fund accounting defines this process as “a method of financial management that tracks the amount of money allocated to various operations at a tax-exempt organization.” The accounting software platform you choose doesn’t necessarily have to be created for nonprofits, as long as it can accommodate fund accounting through customization.
- Think ahead for your nonprofit’s growth. Choose a tool that can scale with your needs as your organization develops more financial complexity. Even if you don’t need advanced features like batch invoicing and accounts payable automation right now, you might in the future, so ensure you can upgrade to access those capabilities when the time comes.
- Look for cloud storage rather than hard drive storage. A cloud-based setup means multiple people can access and work with your software. This is an especially important feature if you’re working with an outsourced accountant, ensuring that everyone can view the most up-to-date financial data.
Ultimately, the best resource for selecting software is your nonprofit’s accountant. They’ll be able to provide a recommendation as to what software might be the best fit for your organization and what your accountant is used to using. Depending on your nonprofit’s size and financial complexity, getting advice that’s tailored to your unique situation is the best route. And, if you work with an outsourced nonprofit accounting firm, they may already include accounting software setup in their services.
What are some best practices for software implementation?
Once you’ve decided what accounting software and plan is the best fit for your nonprofit, it’s time to set up your accounting software by following these steps:
- Make sure all of the account settings are tailored to your nonprofit. Input your fiscal year start date, whether your organization uses cash or accrual accounting, user permissions, the company type as “nonprofit organization,” and your tax form.
- Double-check that your platform is automatically backing up your information, and sync the platform with your bank for transaction information. Now is the time to set up any integrations as well between your CRM, payroll system, donation platform, etc., with your accounting software.
- Organize your chart of accounts, which is the directory of all the information you store in your accounting software.
If you work with a nonprofit accounting firm, their team can take care of all of the software setup on your behalf.
An accounting platform is a necessary tool to keep your nonprofit’s finances in order. However, you also need to make sure that your nonprofit, no matter what size, has the right people in place to support your financial health. If hiring a full-time bookkeeper, accountant, or CFO isn’t feasible for your organization right now, working with outsourced financial professionals is a great option to ensure effective management and software implementation. Good luck!