Nine Reasons You May Need a Fund Accounting Solution
By: Heather Burton

Financial management and accountability are critical for all types of businesses and organizations. For churches, the pressures are mounting. News stories about funding misuse have made the community more cautious. Accountability for your church's financial and program management is more imperative than ever.

Glenn Stephens, CPA, and CEO of ProSoft Solutions in Highland Village, Texas, a consulting firm serving ministries and nonprofits, said, "Internal controls are especially critical for churches, due to their need to properly account for the assets of the ministries, protect those assets, and maintain the highest level of integrity for the ministry."

What type of accounting system does your church use? Is it designed for for-profit organizations? If so, you may want to consider how a true fund accounting system could benefit your church.

Fund Accounting 101
There are two basic types of accounting packages on the market: fund and commercial. Commercial organizations, such as enterprises and businesses, have accounting systems that measure product, division, and company performance by gain and loss of profits.

Some small businesses have nothing more than a checkbook. Revenue is generated, and expenditures are paid. The same can be said for a church, but churches have social and legal responsibilities extending beyond the balance sheet.

The word "fund" is the key difference. Merriam-Webster dictionaries define "fund" as "a sum of money or other resources whose principal or interest is set apart for a specific objective." In other words, a fund is something restricted for a particular purpose. In its simplest form, a fund accounting program automatically keeps these monies separate to help ensure their use for intended purposes.

Does my church need a fund accounting solution?
"Many churches use commercial accounting products initially," said Stephens. "Once they have multiple donation or revenue sources, off-the-shelf accounting software won't meet their special tracking and reporting requirements. The process can grow impractical and difficult. At worst, it can open the door to costly errors and complex or erroneous audits."

To help determine your organization's specific accounting system needs, ask yourself the following questions.

1. Do we have certain funds that we must spend in particular ways or for certain purposes?
Churches must carefully track and report on separate restrictions on money used to support their programs. Major donations and grants are commonly given with a set of particular and unique requirements, restrictions, and responsibilities. The associated funds are either "restricted" or "unrestricted."

Failure to demonstrate that restricted funds have been used correctly can have serious consequences: termination of senior staff, loss of funding, or the loss of tax-exempt status.

Solutions built specifically for this type of accounting are designed to help churches meet those tracking responsibilities, plus handle any special requirements that come with new sources of funding.

First Presbyterian Church (FPC) in Albuquerque, New Mexico, is governed by a Session of 40 members, each serving three-year terms.

"Fund accounting software helps us account for our various funding sources, including an annual operating budget, sponsored activities, a capital budget, and restricted activities, in a way that's easily understood by anyone who uses reports," said Sam Mayer, FPC's finance administrator. "No matter how specific donors get, we can create an account for it. We can also sub-divide in many different ways."

2. Are we required to create reports for fiscal years that are scheduled differently than our own?
Fund accounting is also different from traditional business accounting in its time period flexibility. Each grant and donation may be applied for and granted annually, but each funding agency or organization may function on unique timetables that don't correspond with your church's fiscal year.

"Commercial accounting often assumes that fiscal years end in the same months each year, but churches regularly report to several different audiences, with diverse requirements and reporting timelines," said Stephens. "Many times, funding sources require reports covering unique accounting periods or multi-year reports. Thus, the ability to track and report across different time periods is critical for churches."

3. Do we have funds that must be recorded as encumbered?
Churches may require an accounting system where expenditures or purchase commitments are encumbered prior to receipt of goods and services. In encumbrance accounting, churches can track and report on spending commitments to significantly reduce the risk of fund over-commitment.

The ability to report on purchase commitments gives nonprofits tighter controls on spending, while fully using a grant budget. Fund accounting systems are specifically designed to address these reporting and tracking requirements.

4. Do we need to perform indirect cost allocations by funding source?
"Allocations of interest and program expenses can become very complex, depending on the funding source's requirements," said Stephens. "These allocations are not typically handled well by commercial accounting systems."

In fund accounting systems, allocations can be performed on virtually any account balance, at the program level, department level, or grant level, and across multiple segments at one time, with advanced calculation options, including fixed or dynamic percentages, unit measures, and more. Accurate allocations provide auditors and grantors with a complete audit trail, which demonstrates that allocated expenses have a consistent and reasonable basis.

5. Do we have multiple audiences, requiring us to provide various report types showing how money is being spent?
Continued funding and donations can depend on reporting accuracy. A church that can provide detailed levels of reporting may stand a better chance of seeing its funding, and the scope of its ministry, increase.

Each audience, and the reports specific to the church, will have unique requirements. Generally, churches need access to sophisticated, audit-level reports for good accounting, as well as simple, high-level reports that can be understood by less accounting-savvy audiences. Being able to easily generate necessary reports without custom report-writing is vital.

Good fund accounting systems provide flexible report detail and presentation, plus graphing and charting capabilities to improve the presentation of complex financials.

"Using nonprofit accounting software allows us to easily compile reports requested by the auditors," said Harry J. Richards, director of operations for the African Methodist Episcopal (AME) Church Finance Department.

6. Can we easily adhere to nonprofit-specific accounting rules?
Churches designated as 501(c)(3) organizations need to comply with stringent reporting standards. Audited financial statements must present information in accordance with the Financial Accounting Standards Board (FASB). Fund accounting software typically includes reports that make compliance easy, whereas commercial accounting software can require customization to produce these reports.

"Our fund accounting software greatly helps with FASB 117 reporting requirements by enabling us to easily analyze and report by program and/or restriction," said Dennis Williams, director of finance for Richmond-based Virginia Council of Churches.

7. Do we need to manage and report on multiple budgets?
In commercial accounting, budgets are primarily used for planning. Churches use budgets for planning, too, but they also rely on them as compliance and monitoring tools, as well as formal parts of financial records.

True fund accounting solutions enable organizations to produce unlimited budget versions, create "what if" scenarios, report on multiple budgets simultaneously, and use capabilities designed to prevent overspending.

8. Do we need a self-balancing chart of accounts?
Because of the nature of funds, a separate chart of accounts must be maintained for each fund. In commercial accounting systems, separate revenue and expense accounts are maintained, but then combined on balance sheet accounts.

For fund accounting, funds must be treated as separate entities, with their own general ledger and individual revenue, expense, income, and balance sheet reports. True fund accounting software automatically handles the offset postings to cash or payable accounts by fund, as well as the encumbrance processing, grant tracking, and budget controls.

9. Do we need integration with other mission-critical or back-office software?
Providing auditors, stakeholders, and key decision-makers with a clear look at the lifecycle of every dollar, from receipt to expenditure, will continue to be the focus for the future. This is why integration to church management, fundraising, and human resources software is essential for some churches.

Commercial accounting systems offer integration to other systems, but not those aligned specifically to the public sector. Fund accounting software has integration capabilities to allow non-financial, yet mission-critical, data to be recorded, tracked, and reported on within the software.

If you found yourself answering "yes" to these questions, you should consider how fund accounting software might better handle your church's unique requirements, so you can focus on serving your community.

Heather Burton is senior marketing manager for Sage Software's Nonprofit Solutions, including the Sage MIP Fund Accounting and Sage Fundraising products, www.sage.com.