No one starts a nonprofit because they want to do accounting. But sooner or later, you realize you need some sort of accounting solution if your nonprofit is to succeed. In case you are wondering what accounting can do for you, see our post “12 Ways Accounting Can Make You an Awesome Nonprofit Manager.” If you have already decided you want and need good accounting, read on.

Accounting software such as QuickBooks is a tool, not a solution.

If your plan to solve your accounting problem is simply buying QuickBooks, you’ll spend endless days in frustration over why you can’t ever get the financial reports you need or financial transactions processed. An accounting solution involves more than just buying software.

An accounting solution is an accounting system.

An accounting system consists of several components that all need to be addressed to have a successful system. In our experience an accounting system consists of…

1. Flow of Money and Assets through Your Organization.

What are the major types of transaction flows through your organization? What are your most voluminous types of transactions? What transactions are trickiest to record in your books? For many nonprofits, the answer to all three of these questions is payroll. Other important transaction areas are contributions, gifts-in-kind and purchases. During an audit, auditors will often create diagrams to illustrate how different types of transactions flow through your organization. Each step of the process will be mapped such as approving a purchase, making a purchase, receiving products or services and entering a purchase into the accounting system. If you are very small, you may not need much in the way of formal documentation just yet, but it’s still good to start thinking in terms of transaction flows.

2. Software

You have lots of choices for accounting software, such as QuickBooks Premier Nonprofit Desktop, QuickBooks Online, Aplos, Wave or Xero. Pick software that works for your most important transaction flows. We know how to make QuickBooks work very well for small to mid-size nonprofits. We tried Xero, but decided it’s not the best choice for our clients. Wave is a free online software that may work for very small or simple nonprofits. Aplos is impressing us as an affordable fund accounting software for growing nonprofits. Here is a link to an interesting article on other nonprofit software. By the way, Intuit discontinued QuickBooks for Mac and will provide support for 2016 Mac software through 2019.

3. Design of the Software

Once you decide on the accounting software, you need to design and set up the accounting elements within the software. Accounting software is NOT ready to go “out of the box.” This is where you will either want to use a professional or QuickBooks® To Go! which comes with a plug-and-play template company file. You will still need to do some customization, which may be a little or a lot depending on your organization. Even if you use a professional, he or she will greatly appreciate starting with QuickBooks® To Go! as it will make the job much easier. Consider going with software that will support your organization not only now, but over the next few years as you grow.

4. Data Entered into the Software

You’ve heard the old saying, garbage in garbage out. That’s never more true than with accounting. For starters, you need to have your beginning balances set up properly. You may want to have a professional get you started on the right foot here. We also offer basic guidance on setting up beginning balances in QuickBooks® To Go!. Besides beginning balances, you should set up bank feeds so you can download or import transactions from your bank and credit card accounts. This approach is much more efficient than manually entering each transaction. In some cases you may want to enter summary or batch totals from an outsourced service such as a payroll service or a third party software such as a donor database. Consider how data from your various transaction flows will be entered into your accounting software.

5. People Who Enter Data into the Software and Manage the System

Accounting software does not work by itself. Even accounting software that is properly set up and has correct beginning balances will not be easy to use for a non-accountant. We strongly recommend providing ongoing training and oversight for the people who enter accounting transactions. Often this can be accomplished by hiring an external professional bookkeeper or CPA who can provide on-demand help and who can look over the books periodically to make sure everything is staying on track. Also we recommend training for management in understanding reports produced by the accounting software. Management need to know what reports are useful for what purpose and how to interpret them.

6. Documentation on Bookkeeping and Accounting Policies & Procedures

More than once I have heard the lament, “Our bookkeeper left and no one knows how to do the books!” Don’t let this happen to you. Even when bookkeepers stick around, they still can use a reference for how to handle various transactions. We have free starter templates for you on bookkeeping procedures in QuickBooks® To Go!, which details steps to enter transactions into the accounting software. We also provide an Accounting Policies & Procedures Template, which gives guidance to management and the board about who does what with respect to financial transactions. These templates are customizable Word docs so you can edit them to reflect your organization’s practices.

7. Information Technology Infrastructure

If you use QuickBooks Premier Nonprofit desktop software you will need to have a reliable computer and backup system in place. One of the appeals of online software, such as QuickBooks Online or Aplos, is that you do not need to worry about installing or upgrading software or backing up your data. Also the accounting software is accessible by multiple users from anywhere you can access a browser. The desktop software still has strong appeal, especially if you manage multiple restricted grants or contracts, but you will need to maintain your own software and data backup.

Accounting software is only one part of an accounting system.

If you try to solve your accounting problem by buying accounting software first, you will find yourself adapting to fit that software. How much better it would be to consider your needs and resources first, then select accounting software that fits.

Also don’t go for the cheapest accounting software. There are several good inexpensive options you should consider. Cheap software can be very costly in the long run if it requires extra work to enter transactions and produce the information you need.

Before you buy accounting software, consider:

• How the software can accommodate your organization’s major transaction flows, especially payroll, contributions and program service revenue, if applicable
• How the software integrates with payroll, whether outsourced or in-house
• How the software could integrate with third party software to solve specific problems, such as expense reporting or time tracking
• Who will enter transactions, such as staff or an outsourced accountant or some combination thereof
• Who will supervise the accounting process
• In-house technology infrastructure to facilitate using the software
• How the software can accommodate reporting needs, such as grant reporting

Seek out the best combination of accounting software, in-house staff, outsourced services and third party software to fit your organization’s needs and resources.

Next we’ll take a look at an important (for many nonprofits it’s THE most important) area of transaction flows to consider before selecting accounting software in our post, “Select the Right Accounting Software for Payroll and Contractors.”