Fund Accounting: Unique Needs Require Unique Solutions
Accounting seems like a straightforward world where the terminology is clearly defined. For the most part, this is true. However, some standard terms have important nuances when used by different types of organizations. One example is fund accounting. In philanthropy, nonprofit charitable service providers and funding organizations may perform similar basic accounting tasks but look at fund accounting from different perspectives. These organizations will have unique accounting software needs based on their respective workflows.
Fund Accounting for Nonprofits
For nonprofit organizations, fund accounting describes the approach to tracking the inflow and outflow of monies received for a specific purpose or timeframe. Revenue sources could include individual donations, grants, government funds, or others. For example, a nonprofit might receive a donation to support a specific program, such as a children’s after-school program. While the nonprofit may deposit the donation into a general operating checking account, the organization must be able to verify the funds were only spent on the intended purpose.
One way to track this donation would be to set up a separate checking account. However, as a nonprofit receives more and more donations for specific purposes, it would quickly become unwieldy and be a banking nightmare. Some nonprofits use standard accounting software and create workarounds to manage the separate funds. An even more streamlined and efficient alternative is to use an accounting system specifically designed for nonprofits that allows money to be combined, but still tracks income and expenses against the money received for a specific purpose. This type of “fund accounting” system enables an organization to produce an accurate balance sheet specific to the source and use of funds.
Fund Accounting for Community Foundations
While community foundations and other grantmaking organizations have needs similar to those described for nonprofits, they also require fund accounting specialized for the work of community foundations. Community foundations manage many types of funds created in partnership with donors, frequently known as “fund advisors” or ”fund managers.” These fund types include donor-advised funds, designated funds, and field-of-interest funds (FOI) among others—all of which typically focus on providing funding to nonprofits and causes related to a donor’s goals.
Like nonprofits, foundations managing fund advisor relationships can increase operational efficiency and effectiveness with a software solution designed to meet their unique needs. For example, community foundations are expected to provide their donors with a high level of transparency and communication regarding fund status. This requires sending accurate fund statements by email or regular mail. Software with mail merge functionality can save significant time.
Fund advisors may also want to track grants made from their fund, investment performance, or fund agreements they have signed. A solution with a secure online portal makes this possible. Additionally, while organizations of any type may receive planned gifts like annuities, community foundations frequently have to manage more complex financial instruments. A software solution that automates the ability to spread investment activity across funds and enables sophisticated gift management can streamline these activities.
Just as NonprofitCore is designed to meet the needs of nonprofits, CommunitySuite enables community foundations to manage their core operational needs with robust accounting functionality, constituent relationship management (CRM), and the ability to track and pay grants and scholarships.
All philanthropic organizations can benefit from a core solution that reduces data silos and streamlines tasks—freeing up more time to focus on mission-driven activities. Understanding your organization’s nuanced financial management requirements will help ensure you choose the right tool for your needs.
