Selecting accounting software for nonprofit organizations.by Rogoff, Paul
Nonprofits have unique reporting and information gathering needs. Before buying software for such an organization, it is important to review various software packages to make sure those unique needs are properly addressed. A checklist is presented, which will assist in the process.
Nonprofit organizations frequently have specialized accounting requirements demanding distinct software features. The identification of these requirements should be integrated into the software-selection process early enough to decide whether an off-the-shelf package will suffice or if the software requires modifications to meet minimum requirements. Particular attention should be paid to the nonprofit organization's special characteristics with a careful analysis of the features needed.
While accounting, computer, and business literature is rich in descriptions of the generalized process of how to select and identify features of accounting software, little is written about selecting accounting software for nonprofit organizations. Of particular concern are those characteristics that are either unique to the field of nonprofit organizations or derive directly from the environment in which they operate. These characteristics are not commonly addressed in accounting software not specifically designed for such organizations.
Nonprofits and Their Environment
The field of "nonprofits" is incredibly diverse, encompassing colleges and universities, hospitals and nursing homes, religious organizations, museums and many others, all of which come in all sizes and shapes. The very large non-profits typically have sophisticated management information systems operating on main-frame computers. At the other end are many small and medium-sized organizations that may not have strong financial managements but have many of the same demands for financial information needs. It is this latter group that often turns to software vendors and off-the-shelf software for their information needs.
During the last few years, there have been some significant factors influencing financial reporting and information gathering at nonprofit organizations. Some changes include--
* Greater reliance upon more diversified funding sources;
* More complex reporting and information (e.g., the single audit requirements of Office of Management and Budget Circular A-133); and
* Calls for a greater degree of accountability
Changes in financial statement formats:
* SFAS 117, Financial Statements of Not-for-Profit Organizations, mandates changes in financial statement display (compliance required for years ending after December 15, 1994, and later for smaller organizations); and
* Industry audit guide for health-care providers.
What has not changed in the nonprofit sector is that change is constant and rapid, and with that change comes a requirement that the organization's information reporting system be quickly adaptable to such changes.
For example, in New York State, certain organizations must submit a Consolidated Fiscal Report (CFR) annually. That report is a multi- purpose document serving multiple agencies each with their unique information requirements and funding methods. For many of those agencies, the level of required information is at the site level, and in recent years the number of sites has increased rapidly. Some CFRs submitted include hundreds of pages. Compounding the situation, there have been so many changes to the CFR format that new manuals have recently been published bi-annually.
Other sectors of the nonprofit world experience change just as frequently. With the shrinking of resources being made available to nonprofits from governments and from the public, their managements are being called upon to use those resources in more innovative and creative ways, requiring timely and accurate financial information.
At the same time as information needs have increased, so has the availability of computer hardware and software to meet those needs. Disposable or off-the-shelf software operating on high-powered personal computers have stepped forward to provide information not previously available to the small and medium-sized nonprofit organization. Some vendors have responded to the specific needs of the industry and tailored their product to satisfy those needs.
These industry packages vary in capability and price. In addition there are more generalized accounting packages that can do much of what a nonprofit may require. To assist in the evaluation of the available packages, Table 1, identifies many of the unique needs of nonprofits. The checklist is an effective format for comparing the capabilities of competing packages.
Features That Are Responsive to Changing Reporting Needs
If the nonprofit organization judges flexibility in reporting as a concern, those features that best address this issue should be a priority. For example, an extensive report writing module in the accounting package of choice, capable of creating and modifying custom- made reports, may be a mission-critical feature. Further, the nonprofit organization will want to know if updates to the software will require rewriting reports previously created. Consideration should be given to the degree of difficulty in creating or modifying reports and whether the internal resources are available to make such modifications.
Another concern is the ability to export data from the program or modules for use in other applications. No matter how comprehensive or flexible the report writing capability of the package, there will frequently be times the data in the program will require additional manipulation or integration with other information. However, some software packages can only export ASCII data. The result can be a disorganized mass of information. An example will demonstrate the potential problem.
Example: Our example nonprofit agency has extensive reporting requirements that its accounting software is not capable of fully addressing either through standardized reports or the report-writing function. A problem it faces is that expenses that have not been assigned contiguous general account numbers cannot be subtotaled by the software using its standard report-writing capabilities. As well thought out as the initial chart of accounts was, additional expense categories and changes in how expenses should be subtotaled have caused the reporting needs to go beyond the software's abilities.
Our example agency has six cost centers (sites) including separate cost centers for administration and overhead, fund raising costs, payroll taxes, and related fringe benefits. There are approximately 150 expense classifications for each of the cost centers. The result is the need for another 900 individual expense amounts. The nonprofit determined that spreadsheet software would be used to summarize the data. But how would the data get from the accounting system into the spreadsheet? If the package only permitted the exporting of data in a text or ASCII format, the data coming into the spreadsheet would look as follows:
TABULAR DATA OMITTED
The spreadsheet would have to accept the 900 lines of expense information for the 150 expense accounts for the six cost centers. Initially, all 900 lines would not be filled because not every expense appears in every cost center. This would be particularly true at the beginning of the fiscal year when fewer expenses have been accessed. In our example, the software does not provide the option to create a spreadsheet row for a general ledger account where there is no balance. As would be expected during the year, new expense categories occur (a third party requests separate tracking for categories of insurance, a new cost is incurred, etc.). This causes the imported file to place all rows following the new account in a different position in the spreadsheet. The spreadsheet report is no longer correctly referenced and someone must spend significant time redoing the spreadsheet references. Although there are some techniques to make this task easier, it is still complicated and time consuming and not easily handled by data entry people. In addition, this kind of problem occurs often.
The useful accounting software feature that eliminates or minimizes this problem is the ability to export data in grid format. For example, each row is an expense category and each column is a cost center. Should an entirely new cost category be needed, it is far easier to provide for one additional row than to edit for a new row for each cost center in a table of 900 rows.
Many Users of The Reports
Often, the need for financial data varies by user. These multiple-user requirements account for many software features nonprofit agencies find so useful.
For example, a program manager needs to track expenses over which he or she has discretionary authority. A comparison to budget and identification of how much remains to be spent may be critical to effective management. As opposed to the information a small business sees as important (as well as most accounting software packages), revenue totals may not be of concern, and a balance sheet may be irrelevant.
When we consider the needs of the organization's accounting department, other concerns are added. Some nonprofit organizations may lean heavily on comparisons to budgeted amounts or analyses of budget variations. Others may have to carefully monitor accounts receivable collections or past-due amounts. Some nonprofit organizations are heavily service oriented where a third party pays for these services. These nonprofits may be more interested in displaying units of service and revenue, having flexible budgets dependent on the services delivered.
Very often, the largest cost a nonprofit organization incurs is on salaries and related costs. Some of these organizations may want their financial statements to focus on staffing levels and the categories in which staff are being employed (e.g., full vs. part timers; day shift vs. other shifts; different programs or sites; overtime requirements).
Once senior agency management, the finance committee, the board of directors, third-party funding sources, regulatory authorities, the public, vendors and banks add their special requirements, the number of reports eminating from the same information base increases rapidly.
Funds, Cost Centers
While some organizations may have only one fund to manage and account for, many others manage assets that have been temporarily or permanently restricted and need to exercise accounting control over these assets. If the needs are such that fund accounting is required, it is wise to secure software that has no limitations on the number of funds. Similarly, the ability to handle an unlimited number of cost centers (and subcost centers) may be extremely important.
Being able to combine funds, cost centers (and sub-cost centers) in any combination can result in generating needed reports directly by the accounting software rather than having to do manual reports or exporting data for further manipulation. We know of many organizations that have continuously shifting service patterns as needs and funding sources change. The ability of the accounting software to handle these shifts is crucial.
Anyone who deals with nonprofit organizations with many funds (or related companies) knows one economic event leads to multiple entries. Software that can generate the interfund portion of the entry reduces the time needed to make such entries and gives better assurance that interfund accounts are balanced and correct.
There is a need to probe into the detailed mechanics of the software to see whether functions that cut across funds or cost centers can be simply done. For example, will the software allow for combining payments from different funds or cost centers on a single check?
Beyond accounting software, there is frequent need to computerize fund raising functions at nonprofit organizations. Table 1 (item 10) addresses some specific features that should be evaluated with accounting software.
It is important to note the nonprofit sector may have other specialized needs aside from accounting. Table 2 provides an indication of some of the types of software available.
Software packages for medium-sized to small agencies that address a significant number of characteristics distinctive to the nonprofit environment are provided in Table 3.
Planning! Planning! Planning!
When selecting real estate, we all recognize that "Location! Location! Location!" summarizes the important consideration. When software is the subject of the selection process, "Planning! Planning! Planning!" best characterizes how to approach the subject. When a nonprofit organization selects software, it must go beyond the standard analysis and examine its very special needs to assure the best fit. The checklist provided is here to help. Permission to copy the checklist -- with credit to The CPA Journal and to the author -- is granted to readers seeking to use it as a starting point for their own analysis.
SOFTWARE APPLICATIONS SERVING SPECIAL NEEDS OF NONPROFITS
* Billing (Medicaid, etc.)
* Education and convention (registration, badge, ticket, exhibitor, continuing education, speaker)
* Grants management
* Planning-giving calculations
* Signing/signature software/hardware
* Tax-return preparation
* Trust funds management
* Client tracking and statistical reporting
* Fund raising
* Postage/mailing systems
* Subscription management
* Third-party billing
* Volunteer service management
NONPROFIT SOFTWARE VENDORS
Fundware |R American FundWare Corporation Denver, CO 800-551-4458
Echo Echo Consulting Services, Inc. Center Conway, NH 800-635-8209
Fund Accounting Software Services Executive Data Systems, Inc. Atlanta, GA 800-272-3374
Fund E-Z Fund E-Z Development Corporation Tarrytown, NY 914-332-0900
MIP Fund Accounting Micro Information Products, Inc. Austin, TX 800-647- 3863
Paul Rogoff, CPA, is partner-in-charge of the Nonprofit Organization Services Group of Paneth, Haber & Zimmerman. He chairs the NYSSCPA Accounting for Nonprofit Organizations Committee.
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