When you think of the phrase “Nonprofit financial accounting system” do any of the following come to mind: easy to understand, flexible reporting, or efficient and timely?
Chances are none of the above are what you think of when it comes to nonprofit accounting – and we don’t blame you! Every dollar made by a Nonprofit goes back into achieving their mission, so when organizations first start out they usually choose a Finance system that is inexpensive and fits their current needs. The problem is that as you grow, your needs become more complicated and the original solution chosen may not be robust enough to accommodate your growth. An area where it can become very complex and overwhelming is the chart of accounts (COA). In this blog we’ll explain how a dimensions-based COA will give you much more flexibility than a traditional segmented general ledger (GL).
Traditional account structures in the GL are made up of different segmented series of numeric codes that represent the information you need to report on such as the natural account (cash, receivables, accounts payable, etc.), department, or location. You can think of all of the components of a segmented GL code as being in a single row or column in a spreadsheet – meaning that you can’t perform any analysis on the individual components.
When you use this type of account structure, you need to generate different codes for each transaction that are based on what the natural account is and what numeric code you’ve assigned to each segment. This gets especially complicated from a departmental perspective – for example if an organization has 50 natural accounts they need to report on for each department and they have 5 different department (5×50), that creates 250 different GL accounts! What you’re left with is a plethora of different numeric codes that are unintuitive to understand and some of which will only be used once.
A solution to this problem is dimensional accounting, which replaces the different account segments and just keeps the natural account. To capture the different information from each segment, you simply set up a dimension for each and tag each entry with the appropriate dimensions. This then creates a much smaller account list for you to maintain as you no longer have the many combinations of natural accounts with the various segments. With a logical chart of accounts you can think of all of the separate components of the GL code as separate rows or columns in a spreadsheet:
Our clients in both the Nonprofit and Education industries have felt the pain of having an inflexible COA as Ministry or Governmental bodies continue to ask for more detailed reports – to which their legacy systems just couldn’t keep up with. Dimensions increase reporting capabilities also improve the ability to track and perform analysis on key metrics such as departments and programs by funding source.
With a traditional account structure, reporting is a two stage process requiring IT to extract information out of their accounting solution and dump it into Excel – where Finance would then perform analysis and format the results. This makes it difficult to provide comprehensive financial reports to funders and other key stakeholders. An inflexible system is also extremely frustrating for the internal administrative staff as they can’t be as analytical and proactive as they’d like to be. Dimensions allow you to easily ‘slice and dice’ information based on whatever criteria you need, as all of the important information is no longer “living” in your account codes. You can get a much more detailed analysis quickly and with less effort.
Ultimately, dimensions-based accounting gives your organization the flexibility and agility to adapt to changes. As new business units, programs, projects, grants, etc. are created, the Finance Team must create a ton of additional new accounts – not to mention changes in reporting requirements that can require a full COA restructure. Dimensions give Finance the ability to start manipulating reporting categories without significant effort.
At Sparkrock, one of the biggest shifts we help our customers with is moving from a traditional chart of accounts to our flexible dimension-based one. Our client, Grey Bruce Health Unit, went from spending days preparing their quarterly Ministry reports, to getting this data out of the system in minutes – straight from their COA!
Since 2003, Sparkrock has been exclusive to the nonprofit and human services sector with Microsoft Dynamics NAV and since 2010 with Dynamics CRM. We work directly with the sector, so we truly understand the needs and challenges you face and have developed a product that helps you serve more people with less effort, stress, and expense!