Most Common Upgrades for Nonprofit Accounting SystemsOct 28, 2022
Your nonprofit accounting system is one of the most essential pieces of your organization. It contains all of the information you need to make decisions and improve your financial position.
However, oftentimes, nonprofit organizations are not building out their accounting systems to their full potential. They lack basic organization and are not using the right tools.
In most cases, nonprofits are due for upgrades. In this article, we will cover some of the most common upgrades needed for nonprofit accounting systems.
Upgrades for Your Nonprofit Accounting System
1. Chart of Accounts
A chart of accounts is a staple in every accounting system. It helps you stay organized and provides a description of every transaction.
However, for your chart of accounts to be useful, it needs to include numbers for identifying transactions quickly and be set up for the correct industry. Too often we see issues in this area.
An example of this would be finding the costs of goods sold as a category for nonprofits. This is a mistake because nonprofits don’t manufacture anything and therefore do not have physical products for sale.
Instead, nonprofits should be using classes and categories to track transactions within their chart of accounts. With a structure like this, you can more easily see if your programs and events are profitable.
2. Tracking By Class and Job
Tracking by class and job is another important upgrade to your nonprofit accounting system.
Frequently, nonprofits will have a profit and loss statement that spans multiple pages because each type of expense has a specific general ledger code for each event. While this is an essential step for coding transactions, it can get cluttered and confusing, making it tough to extract necessary information.
Instead, all expenses for each type should be on one line item and use the class.
When you track this way, you will be able to monitor expenses for each individual event or program easier and quicker.
3. Financial Statement Format
Financial statements contain critical information like what is happening to the money coming in and how it is being spent. Because of the importance of this information, the format in which these statements are presented can have a significant impact on their readability and, in turn, effectiveness.
Many times, financial statements are drawn out and board members are receiving balance sheets and income statements that are multiple pages long and use unnecessary lines. This can be confusing, inefficient, and often leads to misunderstandings.
With an upgrade similar to numbers 1 and 2, you can condense the reports to a level where your board can see all of the information they need and pinpoint significant issues without getting bogged down with all of the smaller, less important information.
There are multiple different ways to format your financial statements but what is important is that you format your statements in a way that best suits your organization.
4. System Automation
As a nonprofit, your accounting system holds all of your financial information. This means your system needs to be quick, up-to-date, and accurate. If you are still relying on traditional methods of accounting, you are likely lacking one, if not all three of these necessities.
The best way to upgrade your current accounting system is to automate it. When you rely on automation you’ll improve your overall efficiency.
Some of the benefits of automation include:
- Recorded transactions
- Receipt captures
- Electronic timesheets
- Document storage
Additionally, your automation will be more successful when you build a tech stack where all of your applications work together. Automating in this way will upgrade your accounting system.
5. Budget for a Surplus
Many businesses prefer for their budget to function down to the penny. However, for nonprofits, it’s beneficial to budget for a surplus. This ensures you’re able to cover unexpected expenses and leave room for organizational growth.
Typically, a 10% surplus will be enough to cover any surprise expenses.
For example, when you include a surplus in your budget and you go over your spending for a fundraising event, you'll have the padding and freedom to move your budget around and cover the excess.
Because many experts are predicting a recession in the coming year, including a surplus in your budget, could be the difference between success and financial struggles.
6. Professional Assistance
One of the best ways to upgrade your accounting system is to turn to a professional for assistance. They will be able to work with you to make the improvements listed above, along with other essential upgrades.
Additionally, they will handle all of your financial management responsibilities, making your job easier and ensuring accuracy.
If you are interested in working with a professional who is an expert in nonprofit accounting, contact Morris Verdonk Accounting! We’d love to meet with you and discuss how we can help your nonprofit grow.
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