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by Eileen O'Loughlin,
Market Research Associate
Last Updated: August 29, 2015


Fund accounting is used by government organizations and nonprofits to separate funding amounts and spending by individual project or grant provider. Leveraging a nonprofit accounting software system built specifically for fund accounting, government organizations and nonprofits can create reports that prove how each funding amount is used responsibly and in accordance with its original purpose.

Here’s what we’ll cover:

What Is Fund Accounting Software?
What Type of Buyer Are You?
Benefits and Potential Issues
Market Trends to Understand
The Vendor Landscape

What Is Fund Accounting Software?

Not-for-profit accounting software keeps track of funds, expenses and transactions with accountability and stewardship as chief concerns. This attitude contrasts with the profit-maximizing motives of many commercial industries. A fund accounting system provides a self-contained, self-balancing ledger designated for a specific project, grant or donation. (For example, churches may use a church management suite with a fund accounting module to track member contributions.) The bottom line is transparency, accountability and responsible spending. The most desirable software for nonprofits reflect this priority with rich reporting capabilities, such as customization and automatic transmission. Other capabilities include donor management, grant management, multiple expense ledgers and Governmental Accounting Standards Board (GASB) compliance.

What Type of Software Buyer Are You?

Before you can evaluate software, you’ll need to assess what kind of buyer you are. We believe 90 percent of buyers fall into one of the following categories:

Small organizations with limited budgets. Some nonprofit organizations, who are smaller and have limited budgets, sometimes opt for a “low-end” solution. This doesn’t necessarily imply inferior quality; these products simply don’t support functionality as broad as the more robust systems. These systems often cannot handle monetary figures as large as those processed in other software; nor can they consolidate checks for multiple invoices. This may be well worth the price trade-off when size and budget are considered.

Nonprofit organizations. Nonprofits need software to track donor-provided funds—separately from other funding sources—in order to report to providers on how each sum was spent. It can link spending information to individual projects, tracking project completion rate as well. Grant management support keeps records of past and future grant activities, tracking relationship and funding information to eliminate confusion.

Government organizations. Government organizations need government software to meet the demands of citizens who inquire about the use of public funds—this is where the individual ledger system comes in. Nonprofit financial software provides the precise fund tracking capabilities to make transparency possible through informed government reporting methods.

Benefits and Potential Issues

A fund accounting solution should help the nonprofit or government organization ensure that funds are spent responsibly, and that adequate funds remain for future plans. These systems should also benefit grant providers with satisfactory reports.

Keep individual funds separate. The top priority of fund accounting is to establish each funding source as a self-contained amount; this way, the spending of grants or donations can always be traced back to the source. Funding providers must know how each donation or grant is spent.

Increase accountability of the organization. If a nonprofit agency can’t prove to funding providers that grants and donations are being used responsibly and constructively, there’s no reason to expect continued funding in the future. Keeping track of these funds with software, and providing reports, is therefore essential for the success of a nonprofit organization. Similarly, government offices must keep strict track of spending in order to keep citizens informed.

Deliver clear, informative reports. In order to establish the accountability mentioned in the point above, a software system must be able to deliver reports. Reporting is critical for evidence of responsible spending. Therefore, a system has an advantage if it includes numerous customization capabilities and sophisticated reporting options.

Association with relevant projects. In addition to keeping funds separate from one another, fund accounting systems should allow expenses to be easily viewed in the context of specific projects. This is directly related to the system’s ability to report how each fund has led to effective action, thus increasing accountability and the likelihood of further funding.

As with most business technology, there are also potential issues and risks involved with fund accounting software. One major risk in any business system is the loss of critical data. There are several ways in which data loss can occur; an obvious example is physical damage to the database. Since this can occur with both an on-premises system and a cloud-based one, it’s important to keep backup files in diversified arrangements. For example, a nonprofit organization using a cloud-based system can download their data to a backup file to be stored on-premises; that way, in the event of damage, the data is much more likely to be salvaged. Consequently, buyers should look for applications that allow them to easily download and store backup files.

Market Trends to Understand

You should consider these market trends as you select a product.

Software as a Service (SaaS). SaaS tools have become very popular. Lower upfront costs, fewer or no hardware requirements, greater accessibility and easier implementation are all reasons to consider SaaS.

Business intelligence. Reporting is one of the most important capabilities; as such, companies are constantly releasing new customization options to allow improved business intelligence. You should make sure to check the reporting options of each system.

Increased reseller specialization. Value-added resellers (VARs) and consultants, in general, are increasingly specializing in specific products for specific industries. The nonprofit sector specifically has attracted much of this specialization. As a result, nonprofits are likely to benefit as more independent software developers (ISVs) produce more third-party add-on and consulting firms offer better support services.

The Vendor Landscape

This type of buyer... Should evaluate these systems
Nonprofit organizations FastFund Nonprofit, Sage MIP, Lawson S3 Financial Management
Government organizations Sage MIP, Sage Accpac, CODA Financials, Microsoft Dynamics AX, Microsoft Dynamics NAV, Microsoft Dynamics SL

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