Setting up Useful Systems

From WikiAdvocacy

You must set up useful systems for all of your financial needs. Not only will this save you time, but it will also save you money. Successful organizations are held to high accountability standards and must document everything: board decisions, revenue, expenses, and any major activity. Although "audit" may conjure up images of a surprise visit from the IRS, your organization will need audits to prove financial health, and setting up good systems for tracking your finances is the first step to a clean audit.

A shoebox is not enough. You will need an accounting system for financial management. This system includes both the records themselves and the procedures and tools for managing and using them. Your organization must define accounts (assets, liabilities, net assets or balance, revenues, and expenses) and "journals"—systematic records of all transactions. These are used to create an overall picture in a "general ledger."

General ledgers can vary. In a small organization, the checkbook might double as journal and ledger. Most revenues and expenses will pass through the checkbook, and checking account statements may provide enough information to prepare the reports that a small organization requires. A larger organization may keep a general ledger for the big picture and manage entries directly in specific journals, whose information is used to complete the general ledger.

Procedures must be defined for any size organization. Even if a checkbook is enough for now, your organization should still establish policies and procedures for financial activities. Do you have a cash box for events? Who ensures its safekeeping, and how? Who can sign checks, or make deposits or withdrawals? Is a second signature required for amounts over a certain amount? How often do you review financial information, and who sees it? What filings is your organization responsible for, and when?

Writing it down will be useful every time you have a change in personnel, and having the requirements recorded can make it easier both to make deadlines and to get started with the work as it needs to be done.

Special tracking for nonprofits: 501(c)(3) organizations can receive donations that are tax-deductible to the donor, so they must carefully account for contributions. Nonprofits also receive special treatment for some of their assets in the context of capitalizing and depreciation. Many nonprofits operate on a "cash basis"—accounting for revenues and payments as they are received and made, rather than as they are incurred ("accrual basis"), as for-profit businesses do. Nonprofits must also report their expense by "functional expense classifications," such as program services and support activities.

"Should we computerize our accounting system?"

The answer to this question varies with the size of your organization and the expertise of your members. An organization small enough to use a checkbook as its general ledger may not benefit from a software-based accounting system. Even a larger organization may benefit from paper records if a staff member that really knows how to keep books isn't familiar with software tools.

As your organization grows in size and complexity, however, you will almost certainly switch to a computerized system to make it easier to store information and generate reports. When you switch over, consider some form of financial review to make sure you're starting with "clean" data.

"What software should we use?"

This is a large question that, like using software in the first place, is a highly individual choice. If you choose software, though, look at accounting software rather than using simple spreadsheets or hand-built databases. These products do not have controls and make it easy to change data without tracking the changes. (Exporting data from an accounting program to a spreadsheet in order to customize a report may be very useful, however.) Also, "checkbook software," while easy to use, may be outgrown very quickly by even a small nonprofit, which needs to manage entries in a way that most checkbook software can't do.

As you look at software packages, especially if you are comparing products, be sure you are getting the features you need, and consider what you may need as you grow. Packages may offer features you never thought of but can really use. Some software automatically generates thank you notes and acknowledgement letters. This can make it easy to ensure follow-through when donations are received and to manage spikes in donations that may occur after an event, a publicity effort, or in an individual's honor or memory.

TechSoup has an article to help you decide whether to use accounting software and what kind your organization needs.

Accounting Terms to Know

ACCOUNTS: An account is a basic categorization of the use or status of funds. Basic account types are assets, liabilities, equity, revenue, and expenses. Each account can show both debits and credits.

BALANCE SHEET: An itemized statement that lists the total assets and the total liabilities of your organization to show its net worth at a specific time.

CASH BASIS OF ACCOUNTING: In cash basis accounting, revenue and expenses are recorded in the period they are actually received or expended in cash. Cash basis is generally only in selected situations, such as for very small businesses or some nonprofits. (Ask your tax preparer.)

Compare to: ACCRUAL BASIS OF ACCOUNTING: In accrual basis accounting, revenue and expenses are recorded in the period in which they are earned or incurred regardless of whether cash is received or disbursed in that period. Accrual basis accounting is generally required in order to conform to generally accepted accounting principles (GAAP) in preparing financial statements for external users.

CLASSES: Subcategorization of accounts (such as "outside services" expenses or "hardware" expenses.)

DOUBLE-ENTRY ACCOUNTING is a system of recording transactions in a way that maintains the equality of the accounting equation. The accounting technique records each transaction as both a credit and a debit. For example, if you go to the store and buy a wireless card for $59.50, you are decreasing your cash in the bank by $59.50. You are increasing your expenses by the same amount—and there you have your two entries.

JOURNAL: In accounting, a journal is where transactions are recorded as they occur. Journal entries are usually backed up with a piece of paper, such as a receipt or invoice, which makes them easy to record and to maintain traceability for each transaction.

LEDGER: A book of accounts in which you enter the details from transactions recorded in journals, thus classifying and summarizing them.

PROFIT AND LOSS STATEMENT (P&L): Also known as an income statement. It shows your total revenue and total expenses for a specific period of time. The difference is your organization's net income. On a balance sheet amounts represent transactions over a period of time, and on a P&L statement the items represented on the balance sheet show information as of a specific point in time.

TRANSACTION DETAIL: If your books are computerized, you will find a good friend in your Detail Trial Balance and Detail Transaction Reports. These reports will show you the beginning balance for each account, what was added to or subtracted from that account over the month, and then an ending balance.

The Top Four Ways to End Up Out of Balance

1. Items entered in the wrong account

2. Items entered backwards (credit when you should debit)

3. Items overlooked

4. Items in which numbers were transposed when they were entered

The US Small Business Administration has detailed information about accounting terms and practices, as well as other business information, about business in general.

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