Upgrading Nonprofit Accounting Software

Denise Henning December 22, 2023

There are five red flags that tell you it’s time for a better financial management platform.

As a nonprofit, you have a commitment to doing more with less. But when that commitment extends to your accounting software, you might be doing more harm than good.

Over decades of helping nonprofits become financially stable, we have seen our share of subpar financial management systems. They are often the reason that smart teams struggle, worthy causes flounder, and organizations lose funding and shut their doors.

It turns out that poor software causes a lot of needless pain. And we want to keep your nonprofit from falling victim to that.

So today, we’re describing five red flags that suggest your nonprofit accounting software may be harming rather than helping your mission. Here they are:

If the software you use has any of these traits, it may be time for you to upgrade it or replace it altogether with a more modern solution. Below we’ll look at each trait in more detail.

Let’s get started!

Lack of Customization and Flexibility

Every nonprofit is different. The people you help, your donors, and your grantors are a community unlike any other, which is a credit to you.

But if your financial software doesn’t allow customizations that account for this uniqueness, it’s a disservice to you.

Sign that your accounting software prevents customization:
It limits you to rigid templates that don’t align with your operating model. This shows up as a lack of drill-down in your financial reports and a lack of in-depth financial analysis from your team.

For example, standard accounting templates categorize expenses broadly as “administrative,” “program,” and “fundraising.”

There’s nothing wrong with these expense categories. But they’re overly general. They can’t capture all the financial activity at your unique nonprofit.

Most nonprofits need subcategories—sometimes a lot of them—for expenses. Detailed expense categorization is essential for good stewardship. This includes things like program-specific allocations and restricted fund tracking.

Without customization capabilities in your expense accounting tools, your nonprofit will struggle to:

Meet donor, grantor, and regulator reporting requirements with precision and speed.
Get clarity on your financial position. If you don’t have detailed financial visibility, you can’t develop a strategy or execute confidently on your plans.
Maintain transparency on your spending. If you want a loyal and growing community of donors, you owe them this information.

The bottom line:
Customization in your accounting software isn’t a luxury. It’s essential in telling stakeholders who you are, what you’ve accomplished, and where you need help. Without it, you can’t generate accurate reports, maintain compliance, plan beyond a very short timeline, or build donor trust.

Limited Grant and Fund Tracking

Another red flag in nonprofit accounting software: it can’t handle or report on the multiple funds that donors often require when they give restricted funds.

Signs that your accounting software limits grant and fund tracking:
Your nonprofit lumps all grant funds together in a general pool, which is known as co-mingling of funds. You can’t showcase the ROI or stewardship of any particular fund because your reports are missing the required levels of granularity.

Here’s an example of this problem: imagine a nonprofit that’s a community health initiative. This nonprofit has secured a grant to run a mobile health clinic. The grantor has mandated three different grant funds: one for clinic operations, one to bring innovative technology to the clinic, and one for community outreach.

But the nonprofit’s accounting software can track only a “mobile health clinic” grant. It doesn’t allow setup of the three individual funds within it. This prevents a true understanding of the nonprofit’s performance relative to the three funds.

And obviously, it isn’t compliant with the grantor’s requirements.

We see this type of shortcoming most often in nonprofits that use general accounting software rather than software designed for nonprofit financial management. The results are time-consuming workarounds for employees, underwhelmed donors, and something much worse: a high risk of noncompliance. A nonprofit that can’t monitor individual funds can’t see or enforce the restrictions on those funds either.

The bottom line:
Without clear separation of grant and restricted funds accompanied by robust fund tracking, your nonprofit accounting software is jeopardizing your compliance, your current grants, and your future funding.

Manual Data Entry Overload

If your current accounting software requires too much manual data entry, you likely need to replace or upgrade it with a modern system designed for the complexities of nonprofit operations.

Signs that your accounting software is excessively manual:

Your team takes too long to generate regular reports.
Your team can’t answer ad-hoc questions from you, your board, or other stakeholders.
Audit preparation is a massive, cumbersome, and stressful effort.
Reports contain too many errors.
You’re often in the dark about your financial position, or surprised by financial developments.
You’re disappointed in your donor engagement.
Your team is asking for better tools.

If you find yourself experiencing any of these signs, you’re not alone. Heavily manual financial software is a problem for many nonprofits (and for companies in many other industries, too). And it is the source of a lot of nonprofit pain points:

It hinders your growth. You can’t easily add programs when your accounting software requires custom development services to accommodate them.
It impairs donor relations and giving. The data entry errors rampant in manual systems lead to inaccurate reports, which erodes board and donor trust. And the lack of donor knowledge at your fingertips leads to weak messaging with them.
It prevents your responsiveness. Manual financial processes create a lag in your financial awareness, and thus in any action you need to take.
It squanders the time and talents of your team. They get little room for strategic financial analysis when they’re laboring over tools. Even if you have a stellar team who go above and beyond expectations to generate financial reports and reconciliations, that doesn’t mean they should have to.

Having said all this, fear not. Here are all the nonprofit financial tasks that can be automated (and integrated; more on that in the next section) with better software:

Donor contributions, gift processing, and communications
Membership renewal and subscriptions
Grant reporting and compliance
Expense tracking and reimbursements
Bank reconciliations
Invoicing and billing
Financial reporting
Payroll processing
Advanced security settings that allow very specific types of access to very specific types of data.

The bottom line:
Financial software that’s too manual is taxing on every facet of your nonprofit—your mission, your donors, your team, your understanding of your financial reality, and your nonprofit’s very existence. The savings it may show on paper does not translate to real-life gains.

Poor Integration with Other Systems

Another trait that makes your accounting software ready for an upgrade: it doesn’t seamlessly integrate with the other systems you use to run your organization.

A lack of integration among your financial, donor management, program management, and other operational systems forces a lot of duplicated effort. Duplicated effort leads to crossover yet disparate data. And disparate data breeds confusion.

Sign that your accounting software doesn’t support integration:
The information you get is inconsistent. You operate without a solid, 360-degree view of your financial position, your performance against goals, or your donors.

If your accounting system isn’t integrated with your other systems, here is what’s happening in your nonprofit as we speak: the same information is getting entered in more than one place at more than one time, often by more than one person, and with more than one set of metadata.

As you can imagine (and might be experiencing), the reports you get from a setup like this are disorganized at best and inaccurate at worst. And sound financial management becomes challenging if not impossible.

Here are several examples of where discrepancies occur in the case of just two unintegrated systems—a fundraising platform and an accounting system:

Amount totals. Donor contributions may be automatically captured into a fundraising platform but manually entered into the accounting software. This leads to data entry errors that can be quite dramatic. An incorrectly placed comma or an extra zero means large discrepancies that your team must reconcile.
Timing. Online donor contributions may be recorded immediately in the fundraising platform, but there’s a delay in manually entering them into the accounting software. This leads to a timing difference that makes the true contribution date ambiguous.
Data detail. The fundraising platform and the accounting software may use incompatible data formats. This means that even if you’ve created a workflow that instantly transfers the data from one system to the other, that data isn’t recorded with the same structure. Fundraising platforms often record a contribution as a lump sum, while the accounting software requires a breakdown into specific fund allocations.
Data updates. Data in your systems is living, not static. So in unintegrated systems, account activity is captured in only one of them, meaning the other is inaccurate until you duplicate efforts and record the data there too. For example, if a donor requests a refund, the fundraising platform may process that activity and not share it with the accounting software.
Regular reports. In the absence of integration, your team must manually extract and reconcile data between the fundraising platform and the accounting software. And they must do this regularly throughout the year. The resulting reports are too error prone to be fully trustworthy, and the time required is usually too burdensome for resource-strapped nonprofits to allow.

The bottom line:
Accounting software that stands alone and doesn’t integrate with your fundraising, donor management, program management and other software is not giving you an accurate or full picture of your nonprofit’s health. It’s also causing you more work. Trusting a system like this with decision-making, compliance, donor relations, and team morale is risky.

Lack of Cloud-Based Access

If your accounting software does not operate in the cloud, then your nonprofit does not operate with all the security, collaboration, or responsiveness it needs.

So if you’re still using on-premise accounting software that offers no cloud access, it’s probably time for an upgrade to a more modern accounting system. It’s at least time for a cloud-based add-on to what you already use.

Signs that your accounting software needs cloud capabilities:

Your nonprofit carries an IT burden in the form of maintaining servers, performing upgrades, and archiving data manually.
Sensitive data travels within and outside of your organization via email.
You don’t have a firm plan for handling events like hardware failures and natural disasters that cause data loss, or you’ve already experienced a data loss.
Your team can’t work remotely, even if you have a remote work policy.
The institutional knowledge at your nonprofit resides in employees’ heads, and not in a place where all team members can access it.

We understand the objections to putting your nonprofit’s financial data in the cloud. You may be concerned, rightly, about its vulnerability there.

But when it comes to protecting data, cloud-based financial solutions have the edge over on-premise ones these days, for the following reasons:

Security. Cloud service providers invest heavily in security measures, often exceeding what individual nonprofits can achieve on their own. They implement encryption, firewalls, and multi-factor authentication to safeguard data. They also make data accessible via logins to a secure site, which means that you don’t have to make it accessible via email attachments, which are much more vulnerable to interception.
Ownership and control. Cloud vendors include explicit data ownership policies in their terms of service. These policies specify that you retain ownership of your data, and the vendor’s access is limited to providing the contracted services.
Portability. Cloud vendors also provide options for you to download, move, and retrieve your data. You can always export your data in standard formats, meaning that you’ll always have access to it even if you choose to discontinue using the vendor’s services.

We can also put your mind at ease about the cost of upgrading to cloud-based accounting software:

Cloud-based solutions typically use a subscription model, where you pay only for the features you need. Plus, there’s built in flexibility: you can scale as your needs evolve.
Your upfront costs and ongoing capital expenditures are lower because you don’t need to pay for physical servers, hardware upgrades, and IT contracts.
Many cloud providers offer discounted plans for nonprofits.

The bottom line:
Accounting software without cloud capability risks your nonprofit’s data security, which is a risk you’re passing on to all your stakeholders. It also limits your team’s real-time collaboration and adds to your capital expenditures. Cloud-based platforms often have a lower total cost of ownership than on-premise software does.

If you think it may be time for an accounting system upgrade at your nonprofit, Denise Henning CPA is here to help. We’ll evaluate your needs and examine your workflows, and then set you up with financial management software that fits your mission, budget, culture, and stakeholders. We’ll even provide training to make your team power users—and free them up to do the important work you hired them to do.

We can start helping in one conversation. Reach out to us today, or call us at (412) 719-8900. We look forward to hearing from you!