Leverage Automation to Manage Revenue under New Nonprofit Guidelines
Having the right tool is essential to getting a job done efficiently. Can you imagine trying to play baseball without a bat or cut hair without scissors? If you’re a nonprofit finance leader, you probably have several tools that are essential to maintaining compliance. When it comes to managing revenue, I’d like to talk about one tool Sage Intacct can add to your arsenal—automation.
FASB has recently issued significant Accounting Standards Updates impacting nonprofits. I shared tips for a smooth transition on the Next in Nonprofits podcast. While some organizations have been early adopters, others are mid-transition, and some are still trying to determine the impact of the new standards. No matter where you fall on that spectrum, being compliant and adjusting for change requires both a plan and the proper tool for the job. Let’s consider a few of the standards and assess how leveraging automation as a tool can ensure compliance and save time.
Automating revenue recognition
Last year, as a follow on to the ASC 606 changes, FASB issued ASU 2018-08 (Topic 958) to clarify the scope and improve the accounting guidance for contributions received and made by nonprofit organizations. These standards require nonprofits to evaluate their revenue sources and to consider how to adjust internal processes to ensure proper revenue treatment. Some of the key changes require nonprofits to track conditional grants as deferred revenue until conditions are met and to state deferred versus recognized revenue at year end. This change affects revenue types where money is collected versus earned over a period that crosses fiscal years such as events, tuition, and dues.
This means that you need to assess the different revenue streams that affect your organization and where they fall on the deferred revenue spectrum. For many nonprofits, the result is manual work to track reminders for recognition in spreadsheets—not their accounting system. For example, we work with many organizations who receive conditional grants. Without automation, these organizations use spreadsheets to track progress on the conditions required for recognition, which is time-consuming and error prone. Instead, by leveraging automation in their accounting system, they can automatically create the journal entries necessary for compliance, which not only reduces the risk of error but also prepares them for the next audit.
Tracking spend toward mission achievement
Another component of FASB 958 broadens the applicability of the statement of functional expenses. With this change, all nonprofit entities must demonstrate the correlation between functional expenses and natural expenses. This standard has caused some nonprofits to re-think how they allocate expenses as they provide more insight into program spending toward mission achievement.
Consider, for example, an executive’s salary and benefits. In the past, some organizations would record this expense to the Management & General section. The standard now says that you must allocate a share of the salary and benefits towards the programs in which time was spent in order to accurately state the expenses associated with program delivery. While you may be able to gather the salary portion from your payroll system, allocating benefits is often a different story that involves spreadsheets.
Using automation, allocating indirect expenditures doesn’t require a spreadsheet. Instead, you can generate allocations based on cumulative activity already recorded in your accounting system. For the previous example of benefits, you can set up the allocation parameters one time—many do this by having the benefits mirror the allocation of salary. Then for every period after, the system dynamically generates the journal entries. This allows all information to be centralized in your accounting system, eliminating the need for outside spreadsheets. The allocations can be set up as recurring or scheduled, meaning you don’t need to lift a finger to run them after the initial set up. That said, you still need to monitor them and update the parameters with any changes to your allocation policy.
Tell your financial story with disclosures
FASB 958 also included changes to disclosure requirements. For example, a new liquidity disclosure requires not only quantitative information about the availability to meet cash needs for general expenditures, but also a qualitative discussion explaining availability of funds. In relation to functional expense, disclosures are now required for items like explaining the method you used to allocate costs amongst program and supporting functions.
Note that in addition to the new disclosure requirements, we’re seeing an overall greater emphasis on using disclosures to tell your financial story. After all, the numbers are the numbers, but you can clearly convey the in-depth financial position of your organization using disclosures. This increase in focus on disclosures is labor intensive if you handle it as a once-a-year exercise to assemble all the quantitative and qualitative information you need.
Instead, using automation in your financial system to create a repeatable method to deliver quantitative reports and qualitative conversation reduces your administrative burden. We’ve provided a centralized place to store both the financial numbers and the story behind them to ensure your entire team is on the same page and can be compliant with FASB guidelines.
In short, nonprofit finance leaders need the right tools in their efforts to maintain compliance while empowering mission achievement. Wherever your organization falls on the spectrum of implementing the changes from FASB 958, automation enables you to achieve your goals and overcome the challenges in managing revenue. To learn more about the ripple effects of the FASB 958 update on managing revenue, listen to my interview on the Next in Nonprofits podcast.
Katie McCloskey is a Principal Product Manager at Sage Intacct.