Posted by Cyndi Hupperts on August 12, 2019
Nonprofit accounting is a unique beast to tackle. Unlike profit-minded businesses, nonprofits focus on obtaining the funds they need to further their mission. For organizations like yours, making money takes a backseat to making a difference in the world.
However, that doesn’t mean money isn’t important for nonprofits. Without funding, it’s impossible to work towards your mission, grow as an organization, and make an impact on the world.
Just as it’s important to obtain funding for your nonprofit, it’s equally important to focus on effectively managing those finances.
Switching to an updated fund accounting solution to manage your nonprofit’s finances holds plenty of benefits that can help your organization succeed. Some of these benefits include:
- Creating an informed budget.
- Streamlining strategies through integrations.
- Establishing trust with donors.
- Tracking organizational growth.
- Keeping tabs on internal operations.
Ideally, all of your nonprofit’s software is interconnected. This interconnectedness allows you to streamline the transfer of information between different solutions. From your fund accounting solution to your CRM, updating technology is a great way to launch into a more effective nonprofit strategy.
Let’s get started discussing how updating your fund accounting solution can boost your organization’s overarching strategy.
Creating an informed budget
When you start considering how fund accounting will improve your nonprofit’s strategy, this is likely the first benefit that comes to mind. Effective fund accounting can help your nonprofit create an informed budget.
As mentioned earlier, the accounting process for nonprofits is unique. Instead of using classic accounting measurements, nonprofits benefit from separating their income into distinct funds. These funds are used to help organize the income based on the level of restriction attached to each.
Your donors, grantors, and any other source of income may come with restrictions about how the money can be used by the nonprofit.
For instance, a major donor may request that their donation is only used for a scholarship the nonprofit offers. This means the donation will be placed in a restricted fund.
It’s close to impossible to separate these funds from one another with a classic accounting solution. However, with a fund accounting-specific software solution, you can separate the funds as necessary for the financial health of your nonprofit.
But what does this have to do with your budget?
Well, when you craft a budget for your organization, you’re planning the spending of your hard-earned finances. It’s hard to know exactly what money is restricted and what funds are available for different aspects of your budget without breaking them into individual funds.
For instance, you may choose to use your unrestricted funds to pay your employee’s salaries, hire a technology consultant, or pay the water bill. However, the major gift we spoke of earlier was restricted for a scholarship. Therefore, it can’t be used for unrestricted purposes like the other, more general fund. You’ll need to use that gift for the payment and processing of the scholarship only.
When you craft your nonprofit’s technology plan to tune up (or overhaul) your nonprofit’s software arsenal, be sure to discuss the fund accounting solution that will be best suited to your nonprofit’s needs. This software should allow you to plan your budgets directly in the solution in accordance with the necessary restrictions and allocations naturally incorporated in your accounting.
Takeaway: Between the various sources of income, restrictions and multiple projects your nonprofit handles, your finances are unique, to say the least. Fund accounting helps keep everything organized for better budgeting.
Streamlining strategies through integrations
Once you’ve established your budget, you’ll be well on your way to incorporating smarter financial planning into your nonprofit’s strategy. However, in order to maintain this effective financial management, you should take your fund accounting solution a step further.
When you work within integrated software ecosystems, you can streamline your operations to maintain that effective hand on your finances. For instance, you can immediately see new donations made through fundraising software in your CRM and accounting software. A big-picture view of your data helps you see day-to-day fluctuations in fundraising income and budgetary updates whenever you need.
Consider what this looks like in practice:
When your nonprofit works with multiple software solutions from a provider like Blackbaud, you can rest assured all of your software solutions integrate with one another. Your Blackbaud Financial Edge solution should work seamlessly with other solutions like your Blackbaud Grant Award Management tool, making it easy to access grant funding as soon as possible and incorporate it into your budget along with necessary restrictions.
Or, if your nonprofit uses Blackbaud’s fundraising solution Raiser’s Edge, you can easily report the new donation information into Financial Edge. This allows you to adjust and readjust your campaign strategy according to up-to-date financial records. For more information about Raiser’s Edge, check out this DNL OmniMedia article.
Streamlining the flow of information from each of your software solutions has some major benefits for nonprofits:
- Minimize human error by allowing the tech to directly share data.
- Save time and energy by automatically reporting information instead of relying on manual inputs.
- Don’t lose important information during the reporting process.
Takeaway: Streamlining data reporting between your fund accounting software and other solutions through integrations helps maintain more up-to-date financial records, which results in more effective budgeting. Plus, software integrations free up time for your employees to focus on the mission rather than manual input of financial data.
Establishing trust with donors
One of the primary reasons nonprofits choose to use a fund accounting system to track finances (besides the fact that it’s simply easier for internal processes than general accounting) is that nonprofits need to stay accountable to donors.
Imagine if you gave $1,000 to an organization that you whole-heartedly believe in and specified that you wanted the money to go towards new backpacks for kids. Later on, you found out that the money was misplaced and used to purchase gym equipment instead.
While both are good causes and both help further the nonprofit’s mission, you’d likely feel the nonprofit was being disrespectful or irresponsible with your hard-earned money. They didn’t put it towards the cause you specified.
While this is a fairly small scale example, just imagine if the stakes were raised and you had donated $100,000.
It’s important to establish a fund accounting system that takes these restrictions and preferences into consideration: Your donors expect you to honor their wishes.
If you don’t honor these, even if it’s by mistake, you’ll lose your donor’s trust and potentially their future support. Plus, nonprofits are legally required to adhere to restrictions, or else you could risk losing your 501(c)(3) status. Fund accounting ensures you have the tools you need to maintain this accountability. Then, you can transparently communicate financial information to donors.
Be sure your fund accounting software solution helps your nonprofit take the following action:
- Create financial reports pre-organized to be FASB-compliant.
- Craft effective annual reports according to these standards.
- Access past records to analyze changes in finances over time.
With tools like Blackbaud Financial Edge, your nonprofit can go through each of these steps quickly and easily, encouraging transparency with your donors.
This transparency gives donors confidence in your organization’s management and direction. When you openly communicate your annual report and annual funding plans, your donors have a clear understanding of what your organization does on the day-to-day. And when your donors trust you, they’ll keep supporting your organization into the future.
Takeaway: Fund accounting gives you the tools you need to effectively organize your financial information to stay in line with ethical and legal requirements. Effective organization leads to better reporting; better reporting leads to increased transparency; increased transparency leads to improved trust with donors.
Tracking organizational growth
Your nonprofit’s finances is a great proxy measurement for tracking your organization’s growth from season to season. As your finances grow, you have more to dedicate toward your mission and the various projects your organization launches.
There are a couple of ways you can approach this:
- Track financial information on a software dashboard. Analyzing year-over-year financial information is always a good idea. A dashboard provides a quick glance at the big financial picture for your nonprofit.
- Compare year-over-year budgets. Be sure your fund accounting software allows you to view and save budgets from previous years. Compare these budgets year after year to see where you’re consistently spending and the most successful fundraising campaigns.
In order to track this growth, you’ll need fund accounting software that grows along with your organization.
If you think you’ll grow out of your solution, go ahead and invest in a new one now. It’s a major hassle to switch software solutions, and you may lose access to the dashboard, or have difficulty looking through budgets after the switch. It’s better to do so sooner rather than later and make sure your next solution will support your growth.
If you’re interested in working with a tech consulting service to help you through the migration, implementation, and training process, especially for more heavy-duty solutions like Blackbaud’s, check out our guide to these consulting services here.
Takeaway: Save past financial data to compare over the years and gain an understanding of your organization’s growth. Then, support said growth with software that will grow with you. Finally, be sure you have access to support from IT experts as you work through your nonprofit’s tech solutions.
Keeping tabs on internal operations
Internal operations require financing just as your mission does. This is a somewhat controversial topic in the nonprofit world because many supporters expect organizations to minimize their overhead to an unreasonable degree. This actually ends up holding the nonprofit back.
Think about it: Nonprofits that spend less on things like employee salary and benefits likely have a higher turnover rate. This results in them actually spending more on new hire training. To put it another way, if a nonprofit constantly needs to patch a water pipe, they could be spending more in the long run than if they simply repaired it properly from the beginning.
The majority of these operational costs will come from your nonprofit’s unrestricted, or annual fund (see how handy it is to split them up by funds?) due to the less regulated nature of this fund.
When your nonprofit plans the annual fund budget, look at the internal operational costs as investments. You’re investing in effective team members and a proper water pipe. Sometimes the minimal, most frugal approach won’t be enough for long-term success.
Of course, you should be careful not to overspend with this budget either. That’s why many nonprofits find it helpful to hire a consultant to help guide their annual fund strategies and grow their fundraising capacity. A consultant can help with everything from fundraising to more effectively budget your unrestricted annual fund.
Takeaway: Your annual fund is uniquely set up to help your nonprofit pay for internal operational costs. But overhead can be very tricky. Hiring a consultant can help keep you on track and support growth by not over- or underpaying for internal investments.
Fund accounting is uniquely positioned to help nonprofits break up their finances into appropriate funds based on the necessary restrictions and allocations. Effectively managing your fund accounting with the best software and tech solutions can also help you with your overarching strategy!
Everything in the nonprofit tech and accounting spheres are connected to strategy. From maintaining good relationships with your supporters to managing your growth, effective fund accounting will help keep you organized and ready to succeed.
Zobrio is a preferred Blackbaud Channel Partner for Financial Edge, the industry-standard in Fund Accounting Solutions. Countless government entities have made Zobrio their trusted advisor, relying on our expertise and premium support for their fund accounting solutions. For more information on Zobrio or Blackbaud’s Financial Edge Fund Accounting Solution, call us at 800.796.4984 or visit www.zobrio.com.