Keeping careful track of your nonprofit organization’s financial health is crucial to fulfilling your mission. Solid financial stewardship relies upon leadership equipped with a modern nonprofit accounting system. The accounting system is built on the foundation of its Chart of Accounts (COA). Your nonprofit chart of accounts should be well-organized to reflect your financial transactions accurately.
Older accounting systems are often built on a traditional, rigid chart of accounts structure; however, nonprofits can benefit from a more flexible nonprofit chart of accounts only available in cloud-based accounting solutions. In this article, we’ll explore how moving to a dimensional nonprofit chart of accounts can lead to more fine-tuned reporting and data-driven insights for improved financial management.
Is your nonprofit chart of accounts too rigid?
Nonprofits must account for funds, grants, projects, programs, locations, and more.
They also have to report back to multiple stakeholders, including the board of directors, donors, executives, and more. That is why it is critical to have a nonprofit accounting solution with robust tracking and reporting capabilities and flexible enough to accommodate changing reporting needs.
The nonprofit chart of accounts is a list of all accounts used in the general ledger. It serves as the backbone for financial transactions and provides an organized structure to track income, expenses, assets, and liabilities.
The chart of accounts defines classes of items your nonprofit accounting system will use to aggregate transactions into your financial reporting. Its structure determines how financial data gets entered and how it will be extracted for reporting.
Without an efficient and accurate chart of accounts, managing nonprofit finances can be chaotic if not impossible. It is essential to create a chart that reflects your organizational needs while adhering to broadly accepted accounting principles for nonprofit entities.
Accounting chaos: How a good chart of accounts goes wrong
Because the chart of accounts impacts nearly every task the finance team needs to perform, its structure needs to be in alignment with your mission and internal processes. A poorly organized chart of accounts causes inefficiencies, accounting headaches, and potentially, less accurate financial reporting.
Even a well-organized chart can become unwieldy and impede reporting as an organization grows. This usually happens with a rigid linear chart of accounts structure that cannot reflect all the transactional information needed. For example, in a linear chart of accounts, you may have 40 expense accounts, for 5 locations, 3 countries, and 12 departments. That creates 7,200 account code combinations for your chart of accounts. With a dimensional chart of accounts, you only have to maintain the 40 expense accounts. It’s a huge benefit in maintaining the integrity, simplicity, and effectiveness of your tracking and reporting.
A hard-coded linear chart of accounts structure tends to create an ever-expanding list of unique account numbers, resulting in thousands, or even tens of thousands, of account code combinations to maintain. Over time, it becomes unwieldy and susceptible to errors. For example, if you have 5 funds, 4 grants, 3 programs, and 1 restriction in a traditional hard-coded chart of accounts, you will need to set up 60 general ledger accounts for every natural one. It is easy to see the potential for errors, inconsistencies, and confusion.
Graphic 1: Example of a hard-coded linear chart of accounts
Next, let’s examine why upgrading to a table-driven, logic-based dimensional structure for your chart of accounts offers more flexibility to reporting quality and insights while adapting for change and growth.
Dimensions: This is not your mother’s chart of accounts
A table-driven chart of accounts offers much more flexibility than a hard-coded linear chart. Gone are the thousands of unique account codes. Instead, a table-driven chart of accounts lets you tag transactions with different dimensions that match your organization’s unique reporting needs. Examples of dimensions include location, department, project, employee, vendor, funding source, and more.
Graphic 2: Example of a dimensional chart of accounts
This flexible structure enables you to add more detail to transactions by tagging a single element with multiple attributes. You can report against any dimension or combination of dimensions, enabling you to gather both the big picture and granular trends and details with ease.
5 key benefits of a modern dimensional chart of accounts
The flexibility afforded by a modern dimensional chart of accounts structure generates important advantages for nonprofits.
- Reduced complexity: Because they reduce the number of account codes in the system, dimensions reduce complexity and save time.
- Easier, more accurate reporting: Slice and dice data and organize information in comparative (crosstab) or hierarchical (drill-down) formats.
- More insightful analysis: Dimensions help reveal deeper insights without having to export data to a spreadsheet for manipulation and comparison.
- Enhanced visibility: Instead of backward-looking reporting at regular intervals, dimensions enable dynamic, ad-hoc analysis in real-time.
- Greater transparency with donors: Cloud-based accounting allows you to tailor reporting for donors and combine outcomes with financial metrics to enhance your mission story.
“Streamlining our chart of accounts with the Sage Intacct dimensions, we’ve been able to get deeper into the detail. We’re able to pull data around donor reporting that we could never touch before. Our management team is looking at the financials for the first time and thinking ‘wow, they’re not 6 months old, they are from last week.’ The finance and accounting team has really risen in their sense of empowerment.”Shari Freedman, CFO, Room to Read
If you’re ready to take the next step towards modernizing your accounting system, consider adopting a dimensional nonprofit chart of accounts. The flexibility of this approach will help you streamline accounting operations and generate more informative reporting. You will gain better visibility and insights to adjust your strategic plan in real-time and increase mission impact. Download the e-book, The Modern Nonprofit Chart of Accounts (Hint: It’s not your mother’s general ledger) for deeper a discussion of the benefits of a dimensional chart of accounts and observations from five nonprofit leaders who made the move to modernize.
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