• increased efficiency
  
• lower costs (less staff time supporting accounting activities)
  
• greater accuracy
  
• more timely reports
  
• better control

But the questions are: Will you achieve these results? And how quickly? One of the biggest mistakes an agency can make is to believe that an accounting system in trouble can be improved by putting it on the computer. This is virtually never the case: a mess put in to the computer can be worse than a mess on ledger paper.

Prerequisites to Computerizing an Accounting System
The most important factor to consider when deciding whether to computerize the accounting system is the accounting expertise of responsible people at your agency. People, not computers, do accounting. Computers add numbers very quickly, and enable you to enter the number into the system once for it to appear in all journals, ledgers and other reports. However, a human being has to decide where to enter that information and then to key the data into the system. Someone in the organization still has to understand debits and credits, decide what account code to charge each transaction to, determine whether an error has been made and, if so, how to correct that error. So, computerizing the accounting function does not automatically lead to greater accuracy or better control.

It is important to have "clean," that is accurate, up-to-date beginning balances to enter into your new computerized accounting system. This is one area where "garbage in, garbage out" really applies. Many organizations choose to enter data starting from audited financial statements to get them off to a fresh start.

What Accounting Software Should We Buy?
There is no one right answer to this question. To understand why, imagine answering the question, What's the best car to buy? In order to answer, you would first need to ask questions such as: How many passengers do you normally have? How much are you willing to spend? What features are important to you? One of these considerations might outweigh all of the others. Once you have all the information, there might be two or three cars which meet the criteria. The final decision will be based on personal preference. A similar set of questions and circumstances can be applied to selecting an accounting software package.

What to Look for When Selecting a Software Package
The following factors often play an important role in the final selection of accounting software for nonprofits:

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• Standard and Ad Hoc Reports
  The first consideration in selecting an accounting package is the type of reports you want the software to produce. Many packages lack the ability to easily define reports (despite their claims to the contrary), so it is important to look at those reports already built into the software. Be aware that every document the system produces is considered a report. Do not assume that standard elements of a manual system (including a check register, cash disbursements and receipts journals, trial balance, etc.) can be produced in the way that you are accustomed to seeing them, if at all.
  
  The following reports are often useful to nonprofits:
  
  • 
    
  • A printout of your general ledger, detailing each transaction posted to each account
    
    
  • A printout of a consolidated general ledger, not displaying detail
    
    
  • A bank reconciliation format, showing monthly receipts and disbursements
    
    
  • Income and expense statements for each program or grant and a consolidated (agency-wide) statement of income and expenses for the year to date
    
    
  • Balance sheet information for the entire organization and balance sheet information by fund, if applicable (see the Fund Accounting section, below)
    
    
  • A budget to actual comparison for each grant and/or the entire agency

  
  
  

• Tracking Transactions by Fund, Department or Program, or Grant
  
  Fund Accounting
  Fund accounting is a method for accounting for restricted gifts. Many nonprofits mistakenly believe that software which can accommodate fund accounting, because it was developed for the nonprofit sector, is the only appropriate software for nonprofits. Whether you need fund accounting depends on the nature of your restricted gifts, and the types of reports you want to produce. Most non profits are able to use so-called business software, that is typically less expensive than fund accounting software, to meet their accounting requirements. This software can often produce data that can be translated into fund accounting statements. However, larger nonprofits might be wise to invest in fund accounting software which will allow them to prepare the detailed reports they and their funders require on an ongoing basis.
  
  The nature of fund accounting is shifting due to new practices detailed in FASB's Statements of Financial Accounting Standards Nos.116 and 117. Be sure to check with software vendors for fund accounting packages to see how they are adapting the package to meet the new reporting requirements, and what the charge for those upgrades will be.
  
  Cash-Basis Accounting
  Most nonprofits want to keep their books on a cash- or modified cash-basis, instead of on a full accrual basis. For example, when a check is written, most nonprofits want to post it directly to the expense account. However, many software packages require these accounts to be posted through the Accounts Payable module.
  
  See Financial Management FAQ 5: What is the Difference Between Cash-Basis and Accrual-Basis Accounting?, for a discussion of the difference between cash- and accrual-basis accounting.
  
  Departments or Programs
  Many nonprofits need to track expenses and/or revenue by department or by program. For example, an organization serving the mentally retarded which has several residences might want to keep track of expenses for each residence. It may also have training programs in areas such as vocational skills, daily living skills, entitlements, etc. which serve all residents and by which expenses or revenues need to be tracked. Ideally, the software should report costs by residence or by training program across the whole agency.
  
  
• Ability to Keep Prior Months Open and Flexible Reporting Periods
  Many organizations find it convenient to make adjustments in prior months, and then re-issue statements for those months. Similarly, an important feature for some nonprofits is the ability to select which months to compile for reports, such as when preparing reports to funders for grants which do not correspond to your fiscal year. Some software will not permit you to make changes or access data in prior months.
  
  
• Exporting Data to Other Software Programs
  Typically, organizations want to transfer information directly from the general ledger into spreadsheet software (such as Lotus or Excel) for more flexible reporting. By exporting software to software you avoid mistakes from re-entering the data into the spreadsheet software.
  
  
• Cost
  Fund Accounting, and other more sophisticated high-end accounting packages cost more than software designed for small businesses, or low-end software. High-end software is often organized into separate components, called modules, for each accounting feature (General Ledger, Accounts Payable, Accounts Receivable, etc.) You pay for each module you will use. Low-end software is usually all in a single package with more limited functional capabilities.
  
  
• Other Factors to Consider
  Other factors to consider when evaluating software packages include:
  
  • How many checking accounts are permitted?
    
  • Can the software handle the payroll function, including W-2s and 1099s? How easily?
    
  • Is there room to grow into the software? Will it be able to accommodate your needs as they become more sophisticated?
    
  • Does the software include security features which prevent unauthorized personnel from accessing and/or manipulating data in the accounting system?
    
  • What installation and ongoing support is available?
    
  • How long has the company been in business?
    
  • Are there user groups or other support mechanisms outside of the vendor?

  
  

Can't We Just Put the Books on Spreadsheet Software?
No. Since there are so few controls for spreadsheet software, numbers can be easily changed, damaging the integrity of your financial reports. However, you can export, or electronically transfer, data from your accounting system into a spreadsheet package such as Lotus or Excel to prepare more customized reports.

Similarly, it is not a good idea to keep your books on database software which does not have the controls or reporting capability of accounting software. Finally, many consultants do not recommend using checkbook software for nonprofit bookkeeping. The attraction of checkbook software is that it is easy to use. However, most nonprofits outgrow checkbook software quickly because it does not use double-entry bookkeeping and its reporting capabilities are often very limited.

Alternatives to In-House Computerization
If you lack the resources for computerizing your accounting function in-house and still hope for the benefits from an automated system, you might consider using an outside bookkeeping service with its own computerized accounting system. These service bureaus will enter your data into their computer software, either directly from your checkbook or using forms you complete. From this data they produce monthly reports. Especially if you can find an accounting firm or other service provider familiar with nonprofit requirements, this might be a useful interim solution until you can afford to bring on more experienced personnel or train your staff.

The biggest drawback organizations have found with service bureaus is that the turnaround time can be slow, defeating the objective of producing more timely financial reports. Also, a service bureau does not pay attention to the management aspect of financial management -- making decisions about how much to spend, when to spend, variances with the budget, etc. Sometimes nonprofits are so relieved to have the accounting function managed by someone else that these other, equally important considerations are forgotten.