Nonprofit Accounting Software

Introduction

Nonprofit accounting software is, as the name suggests, accounting software that focuses on managing the books of charitable organizations. Charities and nonprofits in Canada are granted certain tax exemptions, but they also face strict scrutiny relating to accounts to ensure that everything is above board. Like many tools, the right tool for the job can save time and money, and nonprofit accounting solutions are designed for this job specifically.

In essence, this type of accounting software provides the same core set of features that other types of accounting software providers, but with the minutia of those features designed for charities rather than commercial businesses. This focus starts with small things, such as the terminology used throughout the software, and extends to significant aspects of nonprofit accounting, such as governmental compliance and payroll management. As with many accounting software solutions, it is often possible to connect to banks directly for reconciliation between the charity’s accounts and the actual transactions that have been made.

The benefit of this type of software to charitable organizations is one of convenience and compliance. Being designed specifically for nonprofit accounting, this type of software is much better suited to the task, making accounting tasks less time-consuming and more efficient due to the lower likelihood of errors. It also makes meeting the requirements of the government easier since the software can ensure that the charity’s books are in full compliance with all relevant tax laws.

The most obvious comparisons to draw when it comes to other categories of software are those of alternative accounting software solutions, such as church accounting software and construction account software. Like those examples, this software provides accounting tools geared towards a specific industry or sub-category of business.

The features included in nonprofit accounting solutions can typically be separated into core and common features, with common features differing depending on the software solution in question. Core features, on the other hand, are often considered essential for a piece of software to be considered as part of the category and should be present in all non profit accounting software solutions. Below are some of the core features that a software solution should offer to be considered as part of this category:

• The ability to track and manage accounts receivable, though not every solution will support accounts payable, every nonprofit accounting solution should allow for the handling of funds owed to the organization
• Fund accounting is an integral part of running a non-profit organization since, as the name supplies, the goal is not to make a profit. Therefore, fund accounting should be supported in all nonprofit accounting solutions
• The ability to perform bank reconciliation should be part of any good nonprofit accounting solution, as this can reveal discrepancies between the books and the actual transactions
• Financial reporting will be a fundamental feature for most solutions in this category, as non-profit organizations often have to be far more open about their accounting than commercial companies

What is Nonprofit Accounting Software?

Nonprofit accounting software makes the process of keeping the accounts of charitable organizations more efficient and accurate. Like other types of accounting software, nonprofit accounting solutions provide the means to track finances, create reports, pay bills, and more. The difference between this and other types of accounting software is the fact that this software is specifically geared towards non-profit organizations. The differences can seem minor, but non-profit organizations operate differently from more typical commercial organizations.

One of the most common ways nonprofit organizations operate differently is in the openness of their accounting. While commercial businesses need to be able to account for all of their expenses and income, they don’t have to be quite as public about it as charities do. Nonprofit organizations must be completely open about how money is spent and—for PR purposes—often have to put this information into easily digestible presentations. For this reason, financial reporting tools are essential for this type of software.

Many nonprofit accounting solutions boast specialist features that allow the tracking of certain non-profit-specific items, such as tracking Gift Aid contributions, which allow charities to claim an extra 25p for every £1 donated on qualifying payments. They will also provide donor management systems that allow a charitable organization to record different kinds of donations, sometimes even providing the facilities to take payments directly through the organization’s website. Modern nonprofit accounting solutions—indeed, modern accounting solutions of all kinds—are increasingly moving towards cloud-native and Software-as-a-Service (SaaS) models, making it easier for users to access the system remotely.

What are the benefits of nonprofit accounting software?

Most benefits of using nonprofit accounting software for Canadian businesses are focused on making accounting more simple and efficient. For the most part, regular accounting software intended for commercial organizations would be able to meet the needs of a non-profit organization. However, nonprofit accounting solutions incorporate functions that are designed specifically for dealing with non-profit accounting. Below are listed some of the more specific benefits that come with the use of a nonprofit accounting software solution:

• Data centralization: As most modern accounting solutions are either provided as a cloud-native service or provide a cloud-native portal, users can benefit from the centralization of data relating to donations, donors, and any other data the organizations need to store. Having data centralized reduces the opportunity for mistakes and delays because of miscommunications or inaccurate data since everyone will be working from the same information.
• Easily searchable donor information: Having a single source of data is not the only advantage of having centralized data. Information on donors, suppliers, and other entities containing the organization will be working with will be easily searchable. Having this information available quickly and easily can be essential, particularly when working to bring more donors on board.
• Dedicated nonprofit features: While regular accounting software can handle most of the tasks a non-profit organization will need, nonprofit accounting software is designed for this purpose. As a result, there are additional features tailored toward charitable work, such as tracking Gift Aid donations and enhanced financial reporting capabilities. These additional features make the overall process of accounting for a nonprofit organization a little bit smoother.
• Reduced software maintenance costs: When switching to a software as a service option reduces the cost of maintaining the accounting software because that responsibility becomes the service provider’s. Additionally, because the service provider’s sole business model is providing these cloud-native solutions, they can put more time and effort into maintaining and upgrading that software than a typical business could. This is especially important for charity organizations, where every penny matters.
• Improved insight: As with many business solutions nowadays, AI and other clever algorithms to gain useful insights are increasingly common in nonprofit accounting solutions. These insights can help in the decision-making process for several things, such as matters relating to seasonal performance and the most effective marketing strategies. Integration with other systems: Modern software solutions have become adept at integrating with other systems to provide a more cohesive experience, and nonprofit accounting software is no exception to that rule. It is often possible to link these software solutions to relevant systems, such as inventory management and marketing strategy software.

What are the features of nonprofit accounting software?

The features of nonprofit accounting software are focused on making accounting easier for charitable organizations. There tend to be core and common features, with core features being present in almost all nonprofit accounting solutions. Common features, on the other hand, can vary from solution to solution. Here are some of the most common features found in nonprofit accounting software solutions:

• Accounts payable: Non-profit organizations still have to pay their bills, and most nonprofit accounting solutions provide the functionality to track accounts payable. This will typically include the ability to receive notifications when bills or invoices are due, and factor money owed out into financial reports.
• Accounts receivable: Charity organizations do not only deal in the collection of donations. They can also sell merchandise, organize fundraisers, and run physical stores in much the same way a regular business does, and for this, they will need to manage money owed to them. Accounts receivable are typically part of a nonprofit accounting solution and will allow an organization to track money that is still owed to them.
• Fund accounting: Fund accounting is a system primarily used by non-profit companies. It allows for the tracking of cash assigned to different purposes without the notion of profit tracking being involved since the goal of a non-profit is, of course, not about profit. Charity organizations may have several funds set up for different purposes, and fund accounting makes it considerably easier to manage everything.
• Bank reconciliation: Bank reconciliation provides a good deal of convenience when dealing with an organization’s accounts, but it also makes compliance easier. Charitable organizations face higher scrutiny to be open and honest with their accounts, both from the government and the public, so making compliance easier can only be a good thing. This works by connecting the software to bank accounts so that logged transactions can be checked against the actual transactions that have gone in and out of the bank accounts, making it easier to spot discrepancies.
• Financial reporting: Running a charity comes with higher expectations in terms of visibility and openness of accounting. It’s not just the government that needs to see the accounts, but the general public also. Indeed, a lack of visibility about how money is being spent by a charity can lead to distrust and, in turn, less support and fewer donations. Part of that visibility is made possible by robust financial reporting tools, making it possible to disseminate the organization’s accounts in an understandable way for general consumption.
• Gift Aid tracking: Gift Aid is a government scheme that allows charitable organizations to claim an extra 25p for every £1 donated on eligible payments. Nonprofit accounting software will often have a specific feature for tracking this money, along with similar schemes and alternatives in other countries.
• Contact management: Building relationships with repeat donors is an effective way to secure funds, and that means being able to find the details of the donor in question when it is needed. Nonprofit accounting solutions will often include fast, simple search functionality for finding the contact details of past donors, suppliers, and other organizations the non-profit has had financial dealings with.
• Donation management: There are many ways to donate money or raise funds. Furthermore, it can help a charity organization know which of those ways is most effective or which methods are perhaps underperforming and would benefit from a change of direction. Donation management allows an organization to look at amounts and trends based on donation type.

What should be considered when purchasing nonprofit accounting software?

When purchasing nonprofit accounting software, it is essential to consider the benefits the software will provide for the organization. Most cloud-native solutions will likely work out more cost-effective than more traditional software solutions. However, it is worth ensuring that the features on offer and the price of the software will result in a net positive for the organization. Especially given how important it is to reduce unnecessary spending. With that in mind, below are some of the more specific considerations a charitable organization should have when considering purchasing a nonprofit accounting software solution:

• What are the key features of the software? In most cases, the first thing to consider when looking at new nonprofit accounting software is the key features offered by a given solution and whether they meet the needs of the organization in question. The features of this software can vary, and it can also be challenging to distinguish between accounting software that offers non-profit features and accounting software that is exclusively designed for nonprofit use. Regardless, checking the offered features against what the organization needs will yield positive results in most cases. This can also help reduce the cost of the software since additional features typically mean higher costs, and choosing a solution that doesn’t have certain features that the organization doesn’t need should bring the costs down.
• What is the cost-benefit of purchasing the software? Once the features have been checked off, the next thing to consider is the cost-benefit ratio of the potential software. This is a different calculation from the pure cost of the software, as it factors in the potential savings the software will make. For example, halving the time it takes to perform a particular task will result in lower costs in terms of time and wages. That saving can be used to offset the cost of the software itself. So, while a particular software solution may be more expensive in terms of pure cost, it can work out cheaper when any savings it will create are factored in.
• Is the software cloud-native? In this day and age, the downsides to moving away from traditional software models to cloud-native applications—particularly for services like accounting—are so far outweighed by the positives that it makes little sense to not switch. Cloud-native applications allow users to connect from anywhere with an internet connection, which is particularly useful for charities, which often use volunteers that could be spread across the country. It also allows the organization to benefit from centralized data, which means any changes to the system will be immediately visible to other users of the system.
• Does the software offer integration with HMRC? It is becoming increasingly common for accounting software to integrate seamlessly with HMRC to allow companies to do things like automatically submitting tax information from within the software itself. This can be a valuable time-saving function and eliminates the possibility of mistakes being made in copying the relevant data from the accounting software to the HMRC website.
• Will the software integrate with existing systems? Non-profit organizations will typically have to make use of many types of software in the course of business. From event organizing software to inventory management. To ensure smooth operation, any potential accounting solution should work well with these other software solutions. If those other solutions are also modern cloud-native apps, there is a chance they could integrate seamlessly with the accounting solution.
• Does the software provide robust financial reporting tools? As mentioned above, charities have higher expectations of transparency when it comes to their accounting, as not only does the government need to see where the money has gone, but the openness with the public can lead to more trust and donations. Having adequate financial reporting tools makes it much easier to export and share that information with the relevant parties.
• Does the software have adequate access control based on permissions and authority? Charities will often have a lot of people working for them, be it as paid staff or volunteers. It can make running the organization much smoother if all the people who need to log financial data or record payments can have direct access to the accounting software. With adequate access control, users can be assigned permissions that determine what they can access and what sort of changes they can make in the system, allowing for more users to have access to the accounting software without compromising security.
• How does the software handle user data? From suppliers to staff members to donors, a nonprofit accounting solution will need to handle and store a lot of user data. This is a particularly contentious issue in a time when personal data and privacy are hot-button topics. Most software as a service solutions should have a robust data security policy in place, but it is always worth making sure any potential solution meets all relevant regulations regarding personal information and data security.

What are the most relevant nonprofit accounting software trends?

The most relevant nonprofit accounting software trends are related to integration and artificial intelligence. As the world of business moves ever more into the cloud, integrating with other systems and services lessens and even removes various points of friction for donors. Here are some of the most relevant trends within the field of Charity accounting software:

• Integration: Integrating with other services through APIs and partnerships will create more opportunities for charities to receive donations. This is likely to be a focus for nonprofit accounting software developers going forward, as the easier it is to make donations, the more effective a charity can potentially be.
• Artificial intelligence: Artificial intelligence has opened many doors relating to gaining insight from large sets of data. Charities—like any other business—can benefit immensely from detailed analysis of past data and trends, and so the greater insight offered by AI will likely continue to be a focus for developers.
• Direct donor interaction: Offering ways for donors to make donations directly is an effective solution that removes any middlemen from the equation. Nonprofit accounting software is likely to continue to make use of this while also borrowing from other crowdfunding methods, such as allowing subscription-style repeat donations and providing a dashboard for donors to manage their payments.

Sources

The features highlighted were identified based on their relevance and the percentage of products in Capterra’s directory that offer them. The following sources were used for this document:

1. Wikipedia - Nonprofit Organization (Date accessed: Tuesday, June 28th, 2022)
2. Accounting Tools - Fund Accounting Definition (Date accessed: Tuesday, June 28th, 2022)