I would like to start off by saying that we don’t sell accounting software. I own and manage NonProfit Fiscal Management (NPFM), an accounting firm that manages the finances of nonprofit organizations. Our clients, like many nonprofits, have a wide range of revenue sizes and types along with multiple programs, projects and funding sources that they must track for reporting purposes. These complexities make nonprofit accounting challenging.
Which Nonprofit Accounting Software?
We are frequently asked about our experiences working with nonprofit software and which tools and features assist us most in servicing our clients. When I first started in nonprofit accounting, I evaluated the various nonprofit programs available and came across one product that contained all the features we needed. That product is called Abila MIP Fund Accounting (MIP). Back then, we decided we would use this product to standardize the accounting across all the clients we manage even to the point that we will not accept a client who does not install the software. It is a decision that we have not regretted to this day. Here are several reasons why.
Nonprofit accounting, no matter the size of an organization, is complicated because NPOs don’t account for their revenues and expenses in a single straight line like many commercial businesses. NPOs need to account for not only their total revenue and expenses for IRS and Generally Accepted Accounting Principles (GAAP) purposes, they must also account for their revenue and expenses along program and funding source lines. These programs can be numerous and often also have sub-programs which are frequently referred to as projects. One of the main purposes of creating these costs segregations is to satisfy the most basic criteria of nonprofit accounting, which is complying with donor restrictions. Donors can be foundations, individuals, corporations or government entities. Many of these donors have their own rules on what they will fund and how they would like to see expenses reported. This is particularly true for government funding sources; they are well known for wide-ranging rules and specific data formats.
MIP
In MIP, the various areas where costs are segregated are referred to as segments. A segment allows you to track costs in total and as many subcategories as necessary. Other nonprofit software products have similar features, however, they are very limited. For example, QuickBooks only allows an account and a class code. MIP allows the user to define the number of segments an organization requires to meet their particular needs.
As far as we know, the breakdowns are unlimited; however, we have not found the need to use more than five or six for any one organization. That may seem like a lot but we use segments for purposes other than just programs and projects. We use them to track the costs of all employees by person as well as special events. A typical setup for one of our clients would appear as follows:
Segment – 1 Programs
Segment – 2 Projects
Segment – 3 Funding sources
Segment – 4 Employees
Segment – 5 Special Events
Segment – 6 One for good luck
We always create a segment for future growth because you never know what else you may need to track.
The real power of MIP is how easy it is to enter data and run reports along segment lines. You can run a simple trial balance by just the general ledger account codes and then, with the simple addition of a feature called a filter, you can have the same report run for any of the segments listed above.
The next major advantage of MIP over a program such as QuickBooks is that MIP uses an input feature called a distribution code. A distribution code is basically a method of cost allocation that an NPO would use to allocate a particular shared cost. Once you develop your allocation method you create a distribution code to use during data entry. The code allocates the total cost of the invoice automatically into the desired segments. You no longer have to manually calculate allocations and amounts because the software does it all for you. You can use these distribution codes for any type of entry. For example, if you want to correct an allocation of an expense you can use the code in a journal entry. During payroll entry you can create payroll distribution codes for each employee which automatically allocate salaries to the programs and projects where your employees work. If your organization uses a third-party payroll provider, these codes can be used during the import process enabling you to import and allocate the data right into MIP. When using a code to track employee data you can then run any segment’s payroll and see the exact detail of the staff charged to a program, project or grant. You can reverse the sort order easily and run a report for a single or multiple employees to see how their individual salaries were allocated amongst your segments.
Multiple Segments and distribution codes are two of the crucial basic elements that make this software essential for NPO accounting but there are many others, including a built-in, flexible report writer and budget tracking system that lets you create reports in any format preferred by a funder or your own internal management. The software even has a statement of functional expenses reporting feature that allows you to create this difficult report in a columnar fashion with ease.
We are limited as to how much we detail we can provide, but it suffices to say that the right software will make all the difference in properly managing the finances of your NPO. MIP can advance your capabilities to levels far greater than many of its competitors, particularly QuickBooks, which is commonly employed because it is so inexpensive. MIP is not cheap, but a single user license would normally suffice for a small to medium organization and the additional cost is well worth it in the long run.
We hope you can appreciate the reason we won’t accept a client unless they agree to install MIP. There may be other NPO-specific products with similar features but we don’t want to have to reinvent the wheel each time we start a new engagement. In addition, we know that typical inexpensive software created for the for-profit sector does not have many of the features needed for NPO accounting.