Using spreadsheets for nonprofit financials causes frustration and unreliable results. This blog post explores the potential dangers of preparing nonprofit financials with off-the-shelf spreadsheet software.
Pitfalls of Spreadsheets for Nonprofit Financials
Financial Statement preparation and presentation are key elements for nonprofit financial sustainability, transparency, and stewardship. The fiscal responsibilities for nonprofit organizations can sometimes be burdensome, time-consuming, and inefficient. Many accountants rely on spreadsheets for nonprofit financials to formulate reports for their Board, outside funding sources and independent auditors.
Unfortunately, using spreadsheets to prepare financial statements can introduce significant risks for your nonprofit, and may sow doubt as the accuracy of the financial picture that is presented. Spreadsheets can easily be changed, lack internal controls, and are susceptible to human error. Management may have a false sense of confidence in the reports, because they have always prepared financial reports in this manner. But nonprofit Boards and management should be aware of the risks associated with the use of spreadsheets when preparing financial statements.
Why use spreadsheets?
Spreadsheets are typically put in use when the main accounting software being used at a nonprofit cannot produce proper accounting reports that segregate activity by donor designation, functional area, and grants. Off-the-shelf accounting software is not designed for the intricacies of nonprofit accounting reporting, and the multi-level reporting that is required by multi-program, multi-funded nonprofits. So, data is exported from the accounting system into a spreadsheet program and financial statements are created in the spreadsheet. This procedure introduces multiple risk factors that can be easily overlooked or ignored by management.
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Lack of training
Without proper training, creating financial statements from downloaded accounting data is fraught with potential problems. Errors can be introduced by incorrect links, inaccurate formulas, or simple typos. These errors can undermine the accuracy of these reports. If specific policies and procedures are not put in place and documented, errors will be more common, and lack of consistency will raise concerns during annual audits.
Higher probability of human error
There was a study that found that 88-90% of spreadsheets contain errors. Even with the advances in spreadsheet technology, there is still a high probability of human error. Mistakes can create a misleading financial picture, resulting in misguided Executive decisions, and potential loss of funding. Without an audit trail linked to financial statement spreadsheets, it is virtually impossible to find and correct errors when they occur.
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Complex reporting requirements
If your nonprofit is small, with limited programs and funding sources, you may be able to do all your financial reporting in a spreadsheet. But, for a multi-program, multi-funded nonprofit, your financial reporting is much more complex, so you need a more robust financial reporting system with better controls and oversight.
Major problems using spreadsheets for nonprofit financials
Here are some major problems that using spreadsheets for nonprofit financials create:
- Spreadsheets contain a lot of formulas, that without proper training can lead to errors and costly mistakes.
- Planning is critical to proper set up of financial statements in spreadsheets. You need to plan for growth and the possibility of changes in your account structure that will require constant changes in the report format.
- Is there an honest mistake in the spreadsheet, or is it fraud? Since it is easy to change information, without an audit-trial, accountability that protects against fraud is impossible.
- There can be many copies of the same report, with no clear indication of which is the ‘true’ financial report.
Benefits of using dedicated nonprofit accounting software
Given all these potential problems with creating your financial reports in a spreadsheet, here are a few reasons why dedicated accounting software, designed for nonprofit is better for your organization:
- Financial Reports right out of the box. An accounting system designed for nonprofits will give you the ability to generate nonprofit specific financial reports directly from the application, with an audit trail that backs up the numbers in the report.
- Data is reliable. Because the financial reports are generated directly from your accounting software, there is much higher confidence in the accuracy and reliability of the data. This eliminates the possibility of human error that can occur when transferring data to a spreadsheet.
- Data is secure. Since there are no extra steps in creating the reports, there is a high level of security and confidence in the financial statements.
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To alleviate the inherent problems with preparing financial statements in spreadsheets, replace the accounting software and spreadsheets currently in use with software designed specifically for nonprofit accounting. Dedicated nonprofit accounting software can automate steps, simplify reporting processes, cut down on errors and eliminate the potential of internal control deficiencies.
Choosing nonprofit specific software to replace ineffective software and spreadsheets enables more timely delivery of reports, more accurate data, with a direct audit trail to source transactions. This will provide management with better information to help them measure the effectiveness of their program and grant activity and improve their financial outcomes. Ultimately, this leads to better services provided to the community and a more sustainable nonprofit.
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Did you find this article useful? We welcome your thoughts and comments.
Neal Schaefer says
Well said, and it’s true whether NP or for-profit entities. The “spreadsheet trap” begins when management wants to see a slightly customized version of a standard report. Then the reporting organization addresses the request by pushing data through a spreadsheet to tweak the report format, often giving birth to a growing monstrosity. An excellent argument for customized reporting features within the accounting package.
Joseph Scarano says
Thanks for your comment and reinforcing the points made in our blog.