Creating a system of reconciliation for your fundraising and finance offices

Development and Finance both report financial numbers to the Board of Directors, but sometimes the numbers reported don’t add up. Questioning Board members wonder, “Whose numbers are correct?” While embarrassing at times, it may just be that neither one is wrong.

There are a few things that you need to undertake from a development perspective that may help to reconcile these differences.

Here is what I recommend:

1 – First, you must determine which system of accounting your finance department uses. Is it a cash method, in which donations are only counted when the money is in hand and not when the donor pledges to contribute. Or, is it an accrual method? This is a method in which income and expenses are recorded when the transaction is made, such as when a donor makes a pledge, even when the money may not be received for months, or even years, later. It should be noted that the rules of generally accepted accounting principles (GAAP) require general ledger information to be entered in one way, while development information may need to be entered differently.

For instance, let’s say a donor made a $5,000 pledge payment this year for a pledge made last year. The development department enters this as $5,000 and reports it at month-end. The accounting department has to follow GAAP rules and, thus, applies this $5,000 against a pledge receivable recorded last year. This revenue is counted when the pledge is made. And so, for accounting purposes, no new revenue is reported for this period. Since the development department counts this revenue in the period paid, the reporting is off by $5,000. But, no one is really incorrect.

Another common example of different treatments for the same transaction can occur with grants. A grant letter typically spells out the terms, restrictions, and conditions, if any, of the donor. For example, let’s say a foundation awards your organisation a grant for $100,000. The development department will want to carefully track this grant through its donor database. Reports will be printed showing the receipt of this grant.

The accounting department, however, has to follow GAAP. This $100,000 grant example may have a condition attached (called “conditional” gifts), such as the need for some uncertain event to occur in the future. This condition may preclude this grant from being recorded in the accounting system until the condition is resolved. These “conditional” gifts create the potentially bizarre situation of the development department reports reflecting $100,000 of revenue while the accounting reports show zero!

Timing may also be an issue. Accounting may receive the gift and record it, while the development department does not receive it until the next day. While this may not have an impact mid-month, this can pose an issue at month-end when reporting contributions received in a particular month.

Development and Finance may also record stock gifts with different valuations.

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2 – Determine how your development department is going to recognize your gifts. Most development departments use a cash method. As noted above, this means that pledges are just “cash in the door”; they are not counted in the year that they are made. Development officers know that pledges can be unfulfilled.

3 – Draft policies and procedures so that both departments understand how to treat various types of contributions.

4 – Ensure that both the donor database and the accounting system are using the same general ledger numbers to designate contributions tied into a chart of accounts.

5 – Determine a method of reconciling the differences between Development and Finance. I recommend that this reconciliation process be done monthly. Otherwise, in a more significant development office, this process can become unwieldy if left to quarterly or annual reconciliations. If the departments are both using the same family of systems, this can become more seamless than if using two different software suites. Monthly reconciliation should catch errors, timing issues, and all the other issues already discussed

6 – Determine the discrepancies and reconcile with Accounting.

7 – Decide how you can streamline the two systems so that data entry is not happening twice. Perhaps, Development enters in the donor’s entire information so that the system has all the information needed to recognize donors. Then, Finance receives a summary report from the donor database that shows the total dollars by account from which they can enter a single journal entry to record the day’s contributions. You may also consider purchasing an integrated system where data entry only happens once. However, all of the other conditions noted above must be determined and placed in a policy first.

This topic is an important one that will maintain harmony with your finance office, and will accurately portray your numbers to the Finance and Development Committees and the Board – or at least explain the differences documented in a policy.

For a free 30-minute fundraising coaching session or to learn more about our interim fundraising services, visit us here at www.hireacfre.com or book your fundraising coaching session at http://calendly.com/developmentconsultingsolutions/30min.

For a free 30-minute fundraising coaching session or to learn more about our interim fundraising services, visit us here at www.hireacfre.com or book your fundraising coaching session at http://calendly.com/developmentconsultingsolutions/30min.

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