Today I’m excited to share with you an article written specifically for The Nonprofit Collective from Clay Harmon at Aplos. If you haven’t checked out Aplos, here is a link!
Fund Accounting – What is it?
All nonprofits use it. Fund accounting is an accounting method nonprofit organizations use that focuses on accountability instead of profitability. In a for-profit business, people want to know what was spent, how much was earned, and how much was left over. But with a nonprofit people need to know that the money they have, receive, and spend is properly allocated.
Before we get into the meat of fund accounting, here are two important IRS resources you can take advantage of for your nonprofit accounting needs: FASB117 and FIN46. While those resources are more expansive, this article will be focusing solely on fund accounting and how it can be implemented in your organization.
What are Funds?
A fund is an area or purpose within the organization that should be tracked separately from anything else. This can include, but not limited to:
- Unrestricted, temporarily restricted, and permanently restricted net assets*
- Designated funds
*On August 18, 2016, the Financial Accounting Standards Board (FASB) issued new rules for nonprofits: “Accounting Standards Update 2016-14 “Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities. Starting December 2017, “temporarily” and “permanently” restricted funds will both be categorized simply as “restricted.”
When you’re trying to categorize the funds in your organization, ask yourself this: “Do I need to know how much money I have set aside for _____?” This is the key question. Some programs and software will name funds as classes or categories, but beware… these methods will allow you to track how much money you’ve received and spent for a class, but it’s very difficult to find out how much money you have set aside for it at any given time.
Write down your answers to the question above. These will be the funds you will want to track once you have your fund accounting system set up.
Fund Accounting – When do I use it?
Fund accounting is used for almost all nonprofit organizations, and will most likely be needed on a daily basis. Let’s walk through an example of how fund accounting becomes important in a nonprofit:
Your nonprofit helps abandoned animals, and your operations are pretty straightforward at the moment. You receive money from contributions, you spend enough to keep the lights on, but eventually decide to expand.
You apply for and are given a grant that provides $5,000 for veterinary functions. This money comes in the form of a check that you deposit into your organization’s checking account. Before this check you had $3,000 in your checking account.
Here come the questions for you:
- How are you going to record the receipt of this $5,000?
- How are you going to record the expenses that use this $5,000?
- How, at any given point, will you know how much money is left of this $5,000?
Fund accounting allows you to answer these questions and more. In a properly set-up fund accounting system, this fund would have its own asset, liability, equity, income, and expense balances; thus, making it a completely separate entity within your organization. Don’t worry, you would still be able to see simple information for your organization as a whole, but each fund would be independent of others.
Why do I use Fund Accounting?
Fund accounting is very detailed, and can get confusing… but ultimately it is the most accurate method of accounting. By utilizing fund accounting, you can maintain accurate financial records for your organization and all of its directives; thus, empowering you to generate powerful financial statements and make key decisions.
Don’t Use Excel: Accounting Software and Donor Management
Unfortunately, properly allocating funds doesn’t mean much if there are no funds to allocate! Knowing how to treat your donors is essential if you want to expect them to support your organization.
Getting too caught up in the numbers in your organization runs the risk of looking at your donors as simple statistics as well. Fundraising should be about building relationships, and your donors should never be seen as a means to an end. It’s important to have ways to build those strong donor relationships so you can turn one-time donors into lifelong supporters. When looking for software to aid you in your fund accounting, consider looking for features that will supplement getting that money into your bank account in the first place.
Professional third-party review sites like Capterra are great resources for people looking to make informed decisions about purchasing the right software. You can also ask friends in the industry how they feel about the software they’re using, but just remember to take those opinions with a grain of salt—all organizations are different, and require different needs.
Products made by companies like Aplos provide fund accounting software, as well as donor management software that will allow you to properly steward your donors, and then properly manage the money they give you.