Oscar Wilde once said, “It’s not art that imitates life, but life that imitates art.” In the nonprofit world, it’s not program that imitates finance, but finance that imitates program. Or at least it should be. There is an art to designing finance systems that reflect our programs. Well-structured financial systems amplify our mission effectiveness because they are designed around and in support of our programs and not the other way around.
Our approach to all things financial at Propel Nonprofits (formerly Nonprofits Assistance Fund and MAP for Nonprofits) is to begin with an organization’s mission and work outwardly from there. In our useful guide, True Program Costs: Program Budgets and Allocations, we outline a process that begins with defining an organization’s programs. While it is tempting to define our programs based on the latest funding source or trending social issue, nonprofits are stronger and more effective if programs are conceived as the natural flow of work that embodies our mission, values, and goals. Those long hours we spent doing strategic planning should be meaningfully evident in how our organization is structured programmatically.
Design—not software—for success.
If the programmatic structure of our organization mirrors our mission, then an effective financial system should mirror that same structure. As heretical as it might be to say this, the biggest challenge in designing a good accounting system for a nonprofit is not in choosing the right software. It is the design of the accounting system that makes it successful, not how much we paid for it or how complicated the software.
For an accounting system to be most effective, it should be as lean as possible. The programs, departments, or cost centers used should reflect our programs in their broadest, most organic sense. If we are truly required to track and report separately on a specific grant, only then should we use a secondary method (a subclass, a job, an additional segment, a table entry, etc.) to categorize those revenues and expenses. Our goal is to avoid a sprawling mess of classes, cost centers, departments, or other such segments in the software.
Break it down to put it back together.
We’ll be sharing very practical experiences related to this topic in a breakout session at our upcoming Nonprofit Finance & Sustainability Conference, March 3. Register here. For example, when constructing our system, we should set it up to provide great reports for our program managers, board, auditors, and funders. We should make sure that we properly track any restricted grant funds. See this sample of a simple Class List in QuickBooks that simultaneously tracks unrestricted and temporarily restricted funds, provides a functional expense breakout for the IRS Form 990, allows for allotting shared costs, and provides program by program reporting for management purposes.
When crafting our chart of accounts, there are two reasons that warrant creating an additional line item. Either the item is something we care about and manage around, or is it something someone else is requiring us to report on. If not, then it would better fit under an existing, more general line item. By producing printouts with a stultifying level of detail, we draw users into minutiae that have little to do with the strategic decision-making our organization really needs. We risk diluting the power of our reporting function. If detail truly is needed, be sure to structure the chart of accounts to allow for roll up accounts or summary accounts. Our intent is to present each audience with reports that focus them on their highest, most useful level of decision making.
Find sustainability in alignment.
Our aspiration is to set up an accounting and finance system to receive our financial data, track it using categories meaningful to us, and return it in the form of useful reports. The art is designing and structuring the system in a way that simultaneously fulfills our need for compliance, reporting, budgeting, forecasting, strategy, program management, and organizational decision-making. Aligning accounting practices with program augments our mission work in a powerful way. We want to ensure it is finance that imitates program and not the other way around.