training program developed by: your part-time controller, llc copyright © 2013 by your part-time...

Reconciling Your Fundraising and Accounting Systems

Training Program Developed by:

YOUR PART-TIME CONTROLLER, LLCCopyright © 2013 by Your Part-Time Controller, LLC. All rights reserved

Has this ever happened to you: You are making a presentation to your board

and you discover that development and accounting numbers don’t agree???◦ Rather embarrassing at the least and unnerving

to your audience◦ The presentation falls apart as everyone starts

questioning the numbers

Introduction

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What is the problem we are trying to solve? ◦ Fundraising and accounting numbers often disagree

What are the causes? Why does this happen?◦ We will discuss the most common reasons

What are the solutions?◦ Good news: we can solve these issues!

Double data entry into the donor database and the accounting system: ◦ How to eliminate the wasted effort

Should your fundraising/donor database have an integrated accounting software component?◦ Does this solve the problem?

Our agenda for today

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Your board is having their quarterly meeting. ◦ Your development department presents a

financial report showing support of one amount, while;

◦ Your accounting department presents a financial report showing support of a different amount

Who is right? Can they both be right? How is your board supposed to interpret

and understand this conflicting information?

The Problem

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Here is an example of two reports presented by the accounting and development departments:

NOTHING AGREES! ◦ How do you explain this to your board?

The Problem

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Accounting Development

Support:

Individuals $17,000 $19,500

Conditional Corporation

$0 $75,000

Fabulous Foundation $300,000 $100,000

Wonderful Foundation

$0 $50,000

Total $317,000 $254,500

We will break down the most common reasons why fundraising and accounting information may not agree.

The causes

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The concept of “cutoff” is very important when reporting numbers of any type, financial or non-financial

Say a contribution received from an individual arrives by check on the last day of the month.◦ If the check went to accounting, they may record

it on the last day, but development might not receive notification until the next day, so they record it on the first of the next month.

◦ The opposite could also happen if development got the check first

Cause 1: Timing issues

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Assume $17,000 of individual contributions were recorded by development and accounting in the same month

But there was a check for $2,500 that came in to the development dept on the last day. ◦ Development recorded it in their software this

month, accounting did not

Cause 1: Timing issues (continued)

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Accounting Development

Support:

Individuals $17,000 $17,000

Individuals $0 $2,500

Total $17,000 $19,500

The general accounting rule is that a “conditional” contribution may not be recorded until and unless the condition is met. ◦ (There are some exceptions, such as if the

condition is unlikely to come into play.)

Cause 2: Conditional Gifts

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Assume Conditional Corporation contributes $75,000 but adds a condition that the money must be returned if a particular condition is not satisfied.◦ The accounting department cannot record this yet

as revenue. (They record increases to assets and liabilities instead.)

◦ However, development may enter the gift in their fundraising software . The following report may result:

Cause 2: Conditional Gifts (continued)

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Accounting Development

Support:

Corporations $0 $75,000

Accounting rules require all the revenue from a multi-year gift, a foundation grant for example, to be recorded as revenue in year 1 ◦ Provided there are no conditions and the gift

meets several other accounting requirements.

Cause 3: Multi-Year GiftsThe First Year

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Fabulous Foundation grants $300,000 over three years. They send a check for Year 1 of $100,000.◦ Provided the grant meets the accounting rules, it

is recognized in its entirety, as revenue in Year 1. (We will later address the topic of restrictions)

Cause 3: Multi-Year GiftsThe First Year (continued)

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Accounting Development

Support:

Fabulous Foundation

$300,000 $100,000

Wonderful Foundation gave a grant last year for $150,000. They are paying the grant over three years◦ Accounting recognized the revenue last year, so

this year’s grant payment is a reduction of a receivable

◦ Development might show a report listing the $50,000 payment

Cause 4: Multi-Year GiftsSubsequent Years

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Accounting Development

Support:

Wonderful Foundation

$0 $50,000

How should gifts of stock and other nonfinancial assets be recorded?

It commonly happens that development values the gift at one price and accounting uses a different price

Example: Board member A donates 100 shares of ABC Corporation to pay off their outstanding pledge balance of $3,000. ◦ Assume that accounting values the gift net of

commissions at $2,940. Perhaps development credits the donor for the full $3,000. Reports are now off by $60.

Cause 5: Gifts of Stocks and other Nonfinancial Assets

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Differences between classifying gifts for:◦ General operating support vs. programs vs. capital

campaigns Differences caused by reporting on funds that

are:◦ Unrestricted vs. temporarily restricted vs.

permanently restricted Differing treatment of pledge payments Cash vs. accrual presentation differences Communication breakdowns:

◦ Development recorded a pledge but accounting never got a copy of the pledge letter, or vice-versa

Additional Possible Causes of Differences between Development and Accounting

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There could simply be a mistake, or several mistakes, by one department or the other

Plain Old Errors!

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The solutions generally fall into four broad areas:1. Better communication2. Report formats3. Monthly reconciliations4. Document all policies and procedures

The solutions

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Cutoff Development department needs Accounting department needs and

accounting rules Chart-of-accounts Cash versus accrual issues Timing issues

Better Communication

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Reports, if formatted correctly, can show the information both departments want to show, and the information will agree

Example

Report Formats

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Your fundraising and accounting systems MUST be reconciled to each other at least monthly!◦ This should catch errors, timing issues, and all the

other issues already discussed

Monthly Reconciliations

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Document everything!◦ Prepare something that both accounting and

development can use to know how to prevent the problems we have discussed

Documentation

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What is the problem we are trying to solve? What are the causes? Why does this

happen? What are the solutions? Double data entry into the donor database

and the accounting system: Should your fundraising/donor database

have an integrated accounting software component?

Recap: Our agenda for today

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Some organizations enter all contribution information, donor by donor, into their accounting system even after it has already been entered in detail into the fundraising system◦ If you only get a few donations per day, this is not a problem◦ However, if you get dozens, hundreds, or more, this is a

problem SOLUTION: enter the details in the fundraising

software, and summary information only into the accounting system◦ This is similar to how many organizations handle their

payroll if processed by an outside vendor Coordination is required between the departments

Double Data Entry

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A fully integrated software system in theory should solve many of the problems discussed, but in reality it often times does not◦ Coordination between development and

accounting is still necessary PROS and CONS of integration DonorPerfect has a new bridge to

QuickBooks

Integrated or not?

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One of the first slides illustrated “the problem” by showing a hypothetical set of reports produced by the development and accounting departments side-by-side.

With better communications between departments, redesigned report formats, monthly reconciliations, and documentation of polices and procedures, the following report formats might have been produced.

EXAMPLE: One Possible Report Format

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One Possible Report Format Solution

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Accounting

Development

Note

Support: Part 1

Individuals $17,000 $17,000 (A)

Individuals $2,500 $2,500 (B)

Fabulous Foundation $300,000 $300,000 (C)

Total REVENUE $319,500 $319,500 (D)

Pledge and receivable payments:

Part 2

Fabulous Foundation $100,000 $100,000 (E)

Wonderful Foundation $50,000 $50,000 (F)

Total pledge & receivable payments

$150,000 $150,000 (G)

Conditional awards: Part 3

Conditional Corp (cash received)

$75,000 $75,000 (H)

Conditional Corp (no cash yet)

$0 $75,000 (I)

Part 1: ◦ This part of the report shows revenue. The term

“revenue” has a very specific meaning in accounting. Its calculation is governed by GAAP (Generally Accepted Accounting Principles). However, GAAP does not prevent the accountant

from portraying information in helpful ways using different formats, charts, graphs, etc., such that the user of the information can better understand what is happening.

Report Format Notes

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Note A:◦ In our original example, there were no differences

between the development and accounting reports for reporting these individual contributions, so nothing special is needed here.

Note B:◦ The original discrepancy of $2,500 resulted from a

miscommunication between the accounting and development departments. With better communications, both departments were able to record this gift in the same month.

Report Format Notes

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Note C:◦ Two separate and distinct events happened with

Fabulous Foundation. We received an unconditional grant award letter for

$300,000 We received a $100,000 check for year 1

◦ With better communications between departments, both development and accounting can both show the full $300,000 in revenue. Other reports may show some of the grant as

unrestricted and the remaining amount as restricted.◦ In Part 2, both departments can show the $100,000

of cash.

Report Format Notes

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Note D:◦ Now, as a result of better communications and

policies explaining how gifts should be recorded, both departments can produce reports showing the same amounts of revenue.

Report Format Notes

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Part 2:◦ Merely showing revenue, as in Part 1, is usually

NOT sufficient. Other activity is happening which development will want to communicate to management and the board. Examples of other activity include receipt of pledge

payments, receipt of other receivable payments, conditional awards, and more.

Report Format Notes

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Note E:◦ In this section both departments can show the

year 1 payment received from Fabulous Foundation, while the revenue of $300,000 is shown in Part 1.

Note F:◦ Both departments can show the $50,000 pledge

payment from Wonderful Foundation now while the revenue was recorded last year.

Report Format Notes

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Part 3:◦ There are other events which may cause

differences between accounting and development reports. Conditional gifts or grants is one example.

Report Format Notes

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Note H:◦ Assume Conditional Corporation has sent you an award

letter for $75,000 along with a check for $75,000. The award has a condition, however, which will require the funds to be returned if the condition is not met. Both accounting and development may show the receipt of the $75,000, however from an accounting standpoint, no revenue has been earned.

Note I:◦ In this scenario, the conditional award letter was received

without a check. From the accounting standpoint, because of the condition, there is no entry. However, development should enter this into their fundraising software in the appropriate place.

Report Format Notes

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President and Founder of: ◦ Your Part-Time Controller, LLC◦ Offices in Washington, DC; Philadelphia, PA; New

York, NY Email Eric: EricF@yptc.com See Your Part-Time Controller’s website:

www.YPTC.com Read Eric’s blog on nonprofit financial

management best practices: www.EricYPTC.com

Follow Eric on Twitter: @EricYPTC

Eric Fraint’s Contact Information

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Questions?

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