I spoke recently with a prospective client that asked a simple question:  What makes nonprofit accounting software “nonprofit accounting software”?  I realized at that moment that there are software products in the marketplace that bill themselves as being “built for nonprofits” and there are others that claim to “work well for nonprofits”, but then the description of what distinguishes the product from other software solutions is either vaguely or misleadingly defined.

To answer this gentleman’s question, I had to think about it for a moment, but the answer was pretty simple:  It’s software that effectively facilitates performing “nonprofit accounting”.  You’re probably thinking “duh”.  The real answer lies in the definition, in the context of accounting systems, of what’s required of nonprofit organizations from a tracking and reporting perspective.

Here are some capabilities or attributes of what a nonprofit should consider critical when evaluating the suitability of a software solution for their organization:

• Consistent with FAS 116, can I effectively segregate activity according to the nature of donor restrictions?  For example, if I receive a grant restricted for a particular purpose, can I positively identify the revenue as temporarily restricted and keep that bucket of money segregated and accounted for both during the current and subsequent fiscal years until it is consumed or the restriction is satisfied?  In nonprofit accounting software, you should expect the system to facilitate this process in some way, particularly the closing of restricted funds to the proper designated net assets account.
• For the Statement of Activities and 990, am I able to distinguish between expenses according to whether they are related to programs, fundraising or management & general activities?  In a nonprofit accounting software package, it should be relatively simple to designate expenses at the time expenses are booked through a dimension or segment of the Chart of Accounts.  It is especially helpful if the Chart of Accounts is table-driven (segment values are assigned individually on transactions as opposed to linear (account segments are concatenated into a single string).  Either way, you need to be able to accurately record or allocate expenses to the proper bucket or you will end up doing a lot of work later to split it out for financials and 990 purposes.
• Produce proper financial statements for a nonprofit.  As mentioned above, nonprofit organizations have specific financial reporting requirements, originally outlined in FAS 117 that require income and expenditures to be reported on the Statement of Activities and, instead of a balance sheet, a Statement of Financial Position.  The two requirements above feed into the proper presentation of these financial statements and a good nonprofit accounting software package will make production of these financial statements directly from the software trouble-free and automatic when properly configured.
• Ability to accurately account for, budget and report on restricted grant funds.  This may include being able to track grant budgets and activities on a different fiscal calendar than what you use at your organization.  In a good nonprofit accounting software package, building budgets and running reports for those restricted funds across fiscal years should not only be possible, but relatively straight-forward.

Except as noted above, there are some other capabilities that are not uniquely important to nonprofits, but can be very helpful and should be expected by any organization considering new systems:

• Can I effectively budget and report at the level of detail that’s important for my organization?
• Can I allocate overhead and indirect costs in accordance with our cost allocation plan and OMB A-122?

Many of the requirements of nonprofit accounting go beyond simple software features and capabilities and can only be met fully with appropriate systems and processes for your overall organization.  Working with an experienced consultant who can help identify, configure and deploy the right tools can make life a lot easier in the long run.