Why the QuickBooks Class Feature is a Nonprofit’s Best Friend (Part 1)

Over the years I’ve worked for numerous not-for-profit organizations. Their services vary tremendously – companies serving children with disabilities, legal aid groups, animal rescue organizations, research and education firms, religious organizations, the list goes on and on. What each company has in common is the need to track expenditures by their functional classification. 

Let me back up for those of you who are not part of the 501(c)(3) world.

Every not-for-profit organization needs to know what portion of its expenses went towards program administrative, or fundraising costs. In other words, for an organization dedicated to finding a cure for a disease, how many cents from each dollar donated were actually put towards research? How many cents were used for fundraising events or solicitation letters? How many cents from each dollar were used to pay for the executive director’s salary and benefits? These are numbers not-for-profit organizations need to know and must manage well if they want to be successful. An educated donor will not contribute to an organization that spends only 20% of revenues on its programs.

That’s easy enough to understand, right? Then why is it so difficult for most not-for-profit organizations to monitor those numbers? The answer is that most organizations who use QuickBooks are trying to capture this information solely through the Chart of Accounts. Nearly every not-for-profit organization I’ve encountered has had a Chart of Accounts that includes items such as:

Income:

General Donations

Donations from 5^th Anniversary Event

2009 Golf Tournament Sponsors

2010 Golf Tournament Sponsors

2011 Golf Tournament Sponsors

Walk-a-Thon Registration – 2008

Walk-a Thon Registration – 2009

Walk-a-Thon Registration – 2010

Interest Income

Expenses:

Office Supplies

Telephone

Postage – general admin

Special Event Supplies

Golf Tournament:  Food and Beverage

Walk-a-Thon: Refreshments

Golf Trophies

General Fundraising Expenses

Annual Solicitation Letter - postage

Walk-a-Thon Ribbons and Certificates

Salaries and Wages

Payroll Expenses

Board Meetings

Sound familiar? Most not-for-profit organizations don’t have a concise, well-organized Chart of Accounts, and most are trying to capture functional expense allocations within that account listing.

So, how do we fix it?

The “class” feature in QuickBooks, in conjunction with a well-designed Chart of Accounts, can make a world of difference for not-for-profit organizations when it comes to managing their finances. Using classes adds another dimension to financial reporting. While the Chart of Accounts is used to classify income and expenses into their natural categories (i.e., postage, telephone, payroll expenses), classes can be used to further sort those expenses into functional allocations (program service, administrative, fundraising). Let’s look at an example.

Our organization is holding its annual golf tournament and has received a $250 invoice for trophies, along with a check to pay for a $500 sponsorship of the event. In the past, the bill for the trophies would have been recorded as:

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and the sponsorship would have been recorded as:

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In this setup, it is difficult to determine the net income from the event without exporting the data or filtering the report for the necessary accounts. One solution might be to memorize a report using only the accounts relevant to that particular event. This works, but what if the organization decides to add a silent auction to the event? It’s easy enough to add a new income account, but the person preparing the reports must remember to add that account to the memorized report. 

Coming up next: The easier way.