Configuring QuickBooks for Use in a Nonprofit: Coding and Reporting

This is the final blog of my four-post series on configuring QuickBooks for use in a nonprofit organization. In my first blog post I mentioned that the very first step in configuring QuickBooks is to have a QuickBooks "implementation meeting" and I recommended using a questionnaire to facilitate the meeting and act as a centerpiece for determining key stakeholders and ultimate goals for using QuickBooks effectively at your organization. See my site for a sample QuickBooks Implementation Questionnaire you can use for this purpose.

My second blog post dealt with setting up the Chart of Accounts in a nonprofit environment. The third blog post dealt with the two steps of setting up and using the Customer/Jobs and Classes utilities in QuickBooks to assist nonprofit organizations in reporting by Funding Source and Program.

In this blog post we will cover the final two steps - coding transactions using the QuickBooks Customer/Job and Classes utilities and creating financial reports in QuickBooks for a nonprofit organization. Please join the discussion in the forums to share your tips on using QuickBooks at your organization as well!

Coding Transactions Using the QuickBooks Customer/Job and Classes Utilities

At this point, if you followed my suggested steps, you have accomplished the following:

1. After collaborating with all staff and written an implementation plan defining funding sources and programs
2. Setup the Chart of Accounts in QuickBooks
3. Setup the Customer/Jobs utility in QuickBooks
4. Setup the Classes utility in QuickBooks

And all of this was done after you and your accountant had gained a complete perspective of your organization from the 50,000 foot level. The perspective that collaboration with your staff gives you allows you to see all the moving parts of an organization. It illuminates how information from the outside world comes into your nonprofit and what information is required of your organization by third parties.

Now we are ready to begin to use the chart of accounts, Customer/Jobs (funding sources), and Classes (programs) to code each transaction that comes into the QuickBooks database. Remember, QuickBooks is simply a relational database and its ability to pull out relevant information into reports is entirely dependent on how you code each transaction entering the database. The chart of accounts, Customer/Jobs, and Classes utilities are simply database flags that are appended to each transaction. By correctly and consistently appending each transaction with each of these database flags QuickBooks can easily and quickly find the information you ask it for and create relevant reports by account, funding source, and program.

Staying Connected

One very important note here before we continue. The interface between the accounting department (often only one person) and the rest of the staff does not end here, it actually only begins here. It is absolutely critical that the accountant and all staff continue to collaborate and discuss lost grants, new grants, changes in grants, reporting requirements of grants, allowable and non-allowable costs of grants, and anything that impacts the accounting system or requires financial reporting.

The collaborative exercise of creating a written implementation plan with all stakeholders should have given the non-accounting staff the experience of walking a mile in the accounting staffs' shoes. The non-accounting staff should understand and respect the fact that the accountant needs to be brought in and communicated with regarding all new grants and proposals. Simply said, the accountant should not find out about a new grant by receiving a check in the mail from the XYZ Foundation because at that point it is difficult to create the Customer/Job, Classes, and possibly accounts that need to be used or setup for the new grant. And if costs have already been incurred on the grant, the accountant must now retroactively go back and re-assign coding to the grant.

Your accountant should be aware at all times of all current, pending, and possible future funding sources. So keep communicating or you will have to watch as your poor accountant runs out of the building yelling and screaming and pulling their hair out!! Accountants like order, not surprises, and they like to think that they have at least some control over their environment. That's why they are sometimes called controllers. It's more of a psychological description than a financial title in reality!

Assigning Transactions

Now that you have your database flags setup (chart of accounts, customer/jobs, and classes) you are ready to assign each transaction with a funding source, customer/job and account. Remember that the responsibility for assigning these database flags should rest with the budget manager and not with the accountant. Because of this, I recommend using a cover sheet for each check request or bill that will be entered into the QuickBooks system (see the attached PDF for a sample of a transaction cover sheet. I want to thank Vonda Paige, executive director of the Tavis Smiley Foundation for allowing me to share her organization's transaction cover sheet with Tech Soup's readers).

The use of a transaction cover sheet is an effective means of communication and will strengthen your organizations internal controls because it will show the approval signature of the person responsible for coding and the coding to each funding source and program. If the accountant is forced to assign coding to each transaction because the budget manager or program manager has not done so, they may put themselves in the unenviable position of trying to explain to a budget manager why he or she is over or under budget ' it should be the budget or program manager that is doing the explaining because they were the ones that should have assigned the coding (and rightfully so since that manager should be much more familiar with their program's day to day operations than the accountant).

QuickBooks allows the user to assign Customer/Job, Classes, and accounts in each entry screen used to enter a bill, write a check, enter an invoice, enter a deposit, or make a journal entry. View a short screencast that explains this concept. This short screencast will show you how you can assign the three major pieces of information - Funding Source, Program, and Account - to each and every transaction entering your QuickBooks database. It takes you through coding for entering bills, writing checks, entering invoices, making deposits, and creating a journal entry.

In each QuickBooks screen for each of these types of transactions, QuickBooks allows the user the opportunity to assign the Funding Source, Program and account. If the Quickbooks user accurately and consistently assigns these database flags to each transaction, QuickBooks is able to use standard reports within the software to report by Funding Source, Program, and account ' which leads us to the final step and subject of this blog post in the series: 

Creating Financial Reports in QuickBooks for a Nonprofit Organization

The real keys to useful reporting in QuickBooks are:

1. Proper implementation and setup of QuickBooks based upon a shared vision of your nonprofit by all stakeholders
2. Communication between accounting and non-accounting staff
3. Proper, accurate, and consistent coding of all transactions entering the QuickBooks database
4. Review of financial reports on at least a monthly basis by all pertinent staff

Reading and understanding financial reports is not a talent or skill reserved for bookkeepers, accountants, or CPAs. In fact, if after setting up QuickBooks using the steps spelled out in this blog series, you need these people to interpret these reports to you or your organization's non-financial staff you can bet dollars to donuts that there is probably something wrong with:

1. The Organization's QuickBooks implementation and setup (Chart of Accounts, Classes, Customer/Jobs, and so on.)
2. There is a failure to adequately communicate within your financial and non-financial staff.
3. There is not proper, accurate, and consistent coding of all financial transactions.
4. There is not a review of financial reports on a frequency that will allow for the correction of mis-codes.

We as accountants do our best to create reports that management can easily read and understand. If financial and non-financial management have had a hand in building the infrastructure from which these reports are derived, they should be able to make sense of all financial reports coming out of the system. So if you feel that a particular report is not quite right, follow your instincts and backtrack to see where the problem may reside. Perhaps program managers are not adequately communicating the coding of expenditures by  Funding Source or Program to the accountant or perhaps your accountant is assigning these costs themselves without asking for the allocation from pertinent managers. Using the expenditure cover sheet attached to this blog is a very good best practice and audit tool to give you a glimpse at where the breakdown may be occurring.

If your QuickBooks system is setup correctly and you have put procedures in place to properly code the financial transactions coming into your system, you can use some basic standard Profit and Loss reports in QuickBooks to produce very useful information as follows:

• Profit and Loss Standard (Used to report on the nonprofit on a high level "combined basis")
• Profit and Loss By Class (program)
• Profit and Loss by Job (funding source)
• Budget versus Actual (combined basis)
• Budget versus Actual by Class (program)
• Budget versus Actual by Job (job)

All of these reports are standard QuickBooks reports and the only modification you need to make to use these reports is to use the filter tab to select which Funding Source or Program on which you wish to report. You then set the period for which you wish to report. View a short video that explains the reporting using the concepts in this blog.

I have truly been amazed at the versatility and capabilities of QuickBooks especially in the nonprofit environment and I have to keep reminding myself that this software is (without exaggeration) thousands of dollars less expensive than the industry specific fund accounting software on the market today. Make no mistake ' QuickBooks is NOT a fund accounting software and may not be appropriate for all nonprofits but for the money it can be easily setup to meet the needs of  most small to moderate sized nonprofits. Eligible nonprofits can request donated QuickBooks Premier Editions through TechSoup.

In fact a new feature of the QuickBooks Enterprise 2011 version is the ability to assign Classes to balance sheets accounts and run a "Balance Sheet by Class" report. This moves the software even closer to fund accounting (but even this new feature does not make the software a Fund Accounting system and I have not yet tested this new feature for myself).

I sincerely hope that my blog series has at least sparked some discussion among nonprofits using QuickBooks and has hopefully assisted them in using the software more effectively and efficiently. I know that some may agree or disagree with my suggestions in this blog ' and certainly my suggestions may not be appropriate for all nonprofits ' but I wanted to share what I have seen work in my small smattering of the nonprofit community. Please share your experiences using QuickBooks in TechSoup's community forums.

I am honored and feel blessed to work in the nonprofit industry. The people I have had the privilege to come to know have truly inspired me and taught me that it is much more than accounting that makes a nonprofit tick. They remind me every day (as I get older and more cynical) that we can change the world for the better! I hope these blogs have helped you. Here are some other resources (with other suggested methodologies) to which you can also refer:

I certainly welcome your comments about this blog. I wish you and your nonprofits the very best in achieving your missions.

Resources for Setting Up QuickBooks at Your Nonprofit

• Running QuickBooks in Nonprofits, by Kathy Ivens.
• Mastering QuickBooks for Nonprofits, by Real World Training.
• Take the tutorials in your QuickBooks software! Run the sample nonprofit company (many samples are included with your copy of QuickBooks but depends on your version.)
• Find a QuickBooks Pro Advisor.
• MAC Implementation Questionnaire for use in setting up QuickBooks or redesigning your existing setup.
• Nonprofit Connect is a community of nonprofits, people who work for nonprofits, consultants to nonprofits all sharing resources. (Join the new QuickBooks users group.)
• McCallick Accounting & Consulting or contact me at mmccallick@mac-cpa.biz.

Mark McCallick, CPA.CITP has a practice dedicated to nonprofit organizations and small business. See www.mac-cpa.biz. He has served nonprofit organizations for over 25 years and is a Certified QuickBooks Pro Advisor. He is also the founder of the website www.nonprofit-connect.com whose mission is to provide nonprofit organizations with a forum to collaborate with one another and share access to resources and best practices in the nonprofit industry. You can contact Mark McCallick at markm@mac-cpa.biz or markm@nonprofit-connect.com.

Photo: bjmccray