Setting up accounting software and getting it working properly for your business or non-profit organization can earn you a badge of honor. Or, it can be stumbling block for bookkeepers, accountants, and CFO’s.
Who should perform the set up and conversion? Should you run dual systems during the conversion? Should you ditch your old chart of accounts and start over? Are you dreading entering in your customer and vendor data bases? Did you budget enough time and money for the conversion? Or maybe you don’t even know where to start.
I am offering these tips which are based on experience with all kinds and sizes of businesses and non-profit organizations.
Use a checklist
I can’t tell you how important it is to have a roadmap for an accounting system conversion. Where can you get one? You can start with the checklist provided by the accounting software manufacturer. You can ask your CPA for one. You can go on-line and find one. Or, you can develop one yourself, a method that I think is best. However, any checklist is better than no checklist.
Map out a timeline and budget
Do not plan a software conversion during your busy seasons. Schedule it for the slow times. Can you import your old data into your new software? If not, and if you are going to lose your historical data (which these days you should be able to avoid), then you’ll probably need to do the conversion at year end, which may unfortunately also coincide with your busy times. And, it will probably cost more in time and money than you have in your budget.
Build the bones of the system: your chart of accounts
The most important detail to attend to is what to do about your chart of accounts. It needs to be the right size and have the right level of detail. But how do you know what this is? A chart of accounts is meant to group your assets, liabilities, equity, income and expenses by broad, commonly accepted categories so that anyone looking at your trial balance can instantly understand the categories used and make meaningful comparisons to other entities. For example, it is not common practice to have separate general ledger accounts for each employee’s cell phones. Instead, common practice is to use a general ledger account called “Communications Expense” or “Telephone expense.” Here is a good overview from Wikipedia.
While there can be an architecture to the chart of accounts, it needs to follow a logical pattern. If you are going to use departments you need to decide whether you are grouping cost centers or revenue centers. Revenue centers are true divisions of a company or NPO – both income and expenses are tracked by location, program, or function. Cost centers involve only tracking costs of a department or function, and not the revenue. Fund accounting can be even trickier: if you are using sub-codes to track restricted funds, you can’t use these same codes to track spending by grants. While a restricted grant may be a sub-set of temporarily restricted net assets, the inverse is not true. It’s best to think through your architecture before implementation by drawing it out on a piece of paper.
Non-profit organizations have the most complex charts of accounts relative to their size because they are required to report to outside grantors, contributors and governments in ways not required by for profit entities. Remember: the more complex your chart of accounts, the longer it will take your bookkeeper to post even “simple” transactions, because each item of income and expense will need multiple sub-codes attached to it.
That is why it is sometimes it is simply not cost effective to try to build an elaborate and integrated chart of accounts that satisfies these requirements. It can be easier and less time consuming to reserve grant reporting and fund tracking to an off the books solution such as Excel, especially for smaller organizations with limited resources.
Set up your data bases for customers and vendors
Hopefully, you’ll be able to import your customer and vendor data bases from your old software. But, if not, you’ll need to input all of your vendors and customers names, addresses, and other information into the software, prior to using it. These data bases form the platform for the accounts payable and accounts receivable subsidiary ledgers. In some software programs, incorrectly identifying a customer as a vendor, and vice versa, can cause you to lose valuable historical information about that customer or vendor, so it is critical to get these data bases set up in advance, and not input them “on the fly” even though this will be tempting. You’ll notice that I’ve said nothing about setting up employees. This is because I rarely recommend that a company or NPO run its own payroll. A service bureau should be employed to do that for you – it is more efficient, less expensive, and exposes you to far less risk of errors and penalties. However, you will need to develop a posting journal/process, and you’ll also need controls over the payroll input and output from the service bureau.
Ready, set, go
Once you’ve got your historical balances, beginning balances and budget information into the chart of accounts, you are ready to start using the system. Many CPAs recommend using parallel systems for at least the 1st month, but I think that is optional. As long as you have put in adequate controls and reconciliation processes, you should be able to have confidence in the new system right away. These controls typically include: month end bank reconciliations for all bank accounts, month end reconciliations to all subsidiary ledgers (accounts receivable, accounts payable and payroll, typically), daily or weekly management oversight of data entry, user passwords, and control over system access. Setting up controls is not necessarily intuitive, so it’s usually a good idea to get your accounting firm involved in helping you with this portion of the transition. Then, you’ll need to train your managers on the new controls and how to implement them. And lastly, make sure your backup procedures have been tested and are working well – another very important control that is often overlooked.