Unless you’ve been living under a rock, or you have no interest in accounting, you’re sure to have heard of Xero. If you had asked us a few years ago if it was suitable for not-for-profits, our answer would have been a hesitant, “maybe for very small ones”. So, here is how to use Xero for a Not-for-Profit.
Xero can now be a workable, efficient accounting system for many NGOs. There are still some limitations, which we will discuss, but Xero can manage the complexities of a broad range of charities and non-profit organisations.
Xero’s Strengths for Not-for-Profits
Being cloud-based, Xero can be accessed anywhere, including on a phone. That means that:
- Collaboration is easy. Not everyone needs to be onsite.
- Audits can be paperless.
- Tracking Categories can be used to manage programs, funding or departments. This is similar (but different!) to the use of Jobs in MYOB or Classes in QuickBooks.
- There is a range of apps available to make reporting, approvals and expense management easier.
- Xero is popular enough now that it is easy to find staff with experience in using it.
- It includes Fixed Asset management.
Why Does Xero Work for NFPs?
Xero works for not-for-profit organisations primarily because it it easy to use. Essentially, if you have used another accounting system before, you won’t sweat when you learn how to use Xero.
A few years ago, after migrating to Xero, one of our creative suppliers told us:
“Xero makes me love accounting. “
Sometimes you will find accountants and bookkeepers with years of experience in other systems resistant at first. Xero does do some things differently and not always quite so well. But, give them a couple of weeks and they recognise the efficiency of using Xero. How much quicker it is to work with and get things done. While there are many charities with finance teams run by CPAs, there are others who rely on less-qualified people. They, in particular, tend to find Xero easier than other systems and learn how to use Xero quickly.
Not-for-profits often have people in the organisation who need, or benefit from, remote access to the accounting system. And this isn’t true just in a pandemic.
- Treasurers appreciate the benefits of not needing to access the office to review the accounts.
- Relevant Board Members can exercise a greater degree of governance with easy access to the accounts.
- Auditors find their role simplified when everything is online.
How to Use Xero Accounting for Your Not-for-Profit
If you are considering changing from your existing accounting system to Xero, notwithstanding all we’ve said about ease of use, we still recommend expert advice on the initial setup.
Migration from other Accounting Systems
JetConvert will do a good job of transferring historical data from systems like MYOB and QuickBooks. As a result, you can then access previous years’ transactions and figures.
Planning out How to Use Xero
As with any accounting system setup, it pays to plan well and think about the output you want. Get a good understanding of how Xero’s reporting works but also what more you can do with an app like Calxa. While the chart of accounts is a flat list in Xero, you can customise reports to group and summarise accounts and Calxa gives you the ultimate flexibility with Account Trees.
Using Tracking Categories
Where you might have used QuickBooks Classes or MYOB Jobs, in Xero you will use Tracking Categories. The good news is that you can have 2 lists of these and apply one of each to every transaction. Our article Unleash the Power of Xero Tracking Categories will give you an appreciation.
So, you could have one for programs, one for funders, for example. The bad news is that Xero imposes a soft limit of 100 to each list. Now, while that’s plenty for many organisations, some charities have many more. We will discuss this more in the Limitations section below.
While the list of tracking categories in Xero is a flat one without any hierarchy, you can group and summarise them in Calxa with our Business Unit Trees. Our Cost Centre Reporting Guide explains this in more detail.
Useful Xero Apps for Not-for-Profits
We have mentioned Calxa as the reporting app that’s been designed with charities and non-profits in mind, but there are other apps that will streamline your processes:
- ApprovalMax is the number one choice for purchasing approval management
- DiviPay is growing in popularity for expense reporting and virtual corporate cards.
- Dext Prepare is the most popular app for automating the process of getting invoices and receipts into Xero.
One of the good things about any of these apps, including Calxa, is that you can sign up through the Xero marketplace and add them to your Xero billing. This gives you a single invoice every month, simplifying your bookkeeping.
Limitations when You Use Xero for Not-for-Profits
No system is perfect for everyone, and you should do your homework. Analyse your initial requirements to make sure that Xero will meet them.
Program Budgeting and Reporting
The main stumbling block we come across with Not-for-Profits is the limit on the number of tracking categories in each list. The restriction is actually what Xero call a ‘soft limit’. They won’t stop you adding 101, 102 or more. We know of plenty of organisations using 200-300 without any problems. However, in one case, we have one customer with 1200 but that’s stretching the limit of what Xero can handle without crashing. Calxa can help up to that 1200 but not beyond that.
Reporting at the Intersection of Two Tracking Categories
Calxa can also help with reporting on the intersection of the 2 tracking categories.
For example, Funder A’s contribution to Program X.
Just be aware that this can increase the complexity of your budgeting and reporting. It’s not too bad if you limit it and set it up carefully but, theoretically, if you have 100 programs and 100 funders there are potentially 10,000 combinations. So be careful!
The payroll limit of 200 employees is, however, a hard limit. Unless they have a very simple setup, most of the Not-for-Profits we know with higher numbers than this tend to use a dedicated payroll app or service anyway. So this isn’t a common problem, just one to be aware of!
There are limits on the number of invoices Xero supports. This is currently 1000 a month but, again, this one is a soft limit. Growthpath did some testing and suggested it will comfortably work with 60,000 or more.
Should you Use Xero for Your Not-for-Profit?
The answer to that, as always, is, “it depends”. It’s not going to give you the functionality of an ERP system but, with the right add-ons, it can come pretty close these days. We recommend a methodical approach before you jump:
- Do a good assessment of what you really need, now and in the foreseeable future.
- Talk to other organisations. Start gathering ideas on how to use Xero for your organisation.
- Get some expert advice. Xero has a great pool of Xero Advisors that can consult with you.
If nothing else, Xero should be on your shortlist when you evaluate a new accounting system.
And finally, Xero do offer a 25% discount to not-for-profits.