Dimensional Accounting Guide: Benefits, Software, and Setup

Nonprofit financial accounting and management can be complicated, especially when using traditional accounting structures. These typically present challenges, including a rigid chart of accounts, complex reporting, and a lack of flexibility. 

One of the best ways to escape these problems is to use dimensional accounting.

As a streamlined, modern approach that supports flexible transaction tagging, accounting dimensions enable collaborative and impact-focused financial management.

In today's guide, we explore how you can set up and use multiple dimensions to label and analyze transactions for better budgeting, reporting, and decision-making. Whether you are forming a new nonprofit or looking to improve your financial ecosystem, this guide is for you. 

What Is Dimensional Accounting?

Dimensional accounting is a method that allows businesses to categorize, label, tag, and track financial transactions using preset values called accounting dimensions or accounting categories.

In the case of a nonprofit, your organization can track financial data across accounting categories such as department, donor, grant, location, fund, or project. 

Accounting dimensions are flexible, which supports transparency and stewardship. You can use them to provide detailed and transparent financial reports to donors, the board, grantors, and regulatory authorities. 

How Dimensional Accounting Differs from Traditional Chart of Accounts

Unlike a traditional chart of accounts, where every account or segment requires a unique code, accounting dimensions are adaptable and flexible. 

Your finance team can create and delete categories depending on your needs and the complexity or simplicity of your financial data. 

Here's how dimensional accounting works, making it different from traditional accounting:

Using dimensions reduces complexity and errors while supporting faster reporting. 

When you tag transactions using these dimensions, you can analyze financial data from multiple angles for deeper insights into how different dimensions or categories perform. 

The practice empowers your finance team to focus less on data entry and more on mission-driven insights and collaborative financial management.

Key Benefits of Dimensional Accounting

Given these differences from traditional accounting, proper dimensional accounting offers the following key benefits:

• Improved Efficiency: Dimensions accounting streamlines reporting and analysis by simplifying the charts of accounts (COA). Financial analysis and reporting can now happen faster and in real-time, with customizable on-demand reports rather than exporting to spreadsheets or waiting for periodic reports. 
• Increased Transparency: With dimensional accounting, you enjoy better visibility into financial data. The increased visibility means you can showcase your transparency to stakeholders like the board, donors, and executive leaders.
• Enhanced Collaboration: Multiple teams can tag transactions with relevant dimensions, making it easier to collaborate than when using disconnected spreadsheets. This collaboration promotes accuracy, transparency, accountability, and inclusivity in nonprofit financial management. 
• Strategic Decision-Making: Accounting dimensions support scenario planning and budget-to-actual comparisons across various dimensions, such as grants or programs. Greater visibility into financial performance allows for faster, more accurate, and better-informed decisions. For example, your organization can assess program spending against the budget and reallocate resources if necessary to meet strategic goals. 

Core Components of Dimensional Accounting

As a modern accounting method, dimensional accounting includes various key elements to help you streamline operations and increase accuracy. 

These include:

• Ledger Dimensions: Instead of traditional general ledgers, you can tag transactions with dimensions such as department, project, or funding source without complex segmented account codes. 
• Core Financial Categories: Nonprofit budget categories are the basic elements of any chart of accounts and are also essential to dimensional accounting, with specific nuances. They include assets, liabilities, net assets, revenue, and expenses. For example, net assets are unique to nonprofits and represent the difference between assets and liabilities. 
• Reporting and Dashboards: Dimensional data powers real-time, visual insights that different stakeholders can act on. Your dimensions can reveal performance trends and details that are often missed with traditional accounting, helping you see where funds are most effective. 
• Budgeting and Forecasting Functionalities: Dimensional accounting involves creating accurate budget scenarios with multiple tags to anticipate and proactively adapt to changes. 

Complete Dimensional Accounting Setup Guide

Now that we know the benefits of dimensional accounting, here's how to set it up to optimize your desired outcomes:

1. Identify Various Dimensions: Define the key dimensions relevant to your organization. These can be programs/projects, funds, locations, donors, grants, and more.
2. Incorporate the Dimensions into Your Tech Stack: Map the dimensions to your existing bookkeeping tool, nonprofit accounting software, and financial management software for accurate data capture.
3. Establish Cross-Functional Consistency: Set rules and processes to ensure consistent use of dimensions across teams.
4. Test and Validate Functionality: Produce sample reports to validate that the dimensions provide actionable insights and make your processes easier. 

With the right tools and setup, even non-financial staff can engage effectively with dimension accounting.

Best Dimensional Accounting Software

Speaking of the right tools, you can choose from several popular accounting solutions that support dimensional tagging. 

Let's check out a few:

1. Martus

Martus is a nonprofit-focused financial management software solution that connects with more than 25 accounting software and ERP solutions.

As a specialized budgeting, forecasting, and reporting tool, our tool complements your financial accounting systems through collaborative budgeting, advanced reporting, and mission alignment. 

With Martus, you can enjoy the following:

• Dimension-Based Fund Tracking: You can link your accounting software with Martus to track your funds based on predefined dimensional tags.

• Advanced Data Security: Martus uses Role-Based access, SOC Type 2 compliance, and lock controls to secure sensitive data. For example, lock controls protect your worksheets from accidental changes, meaning the accounts and dimensions you create remain intact once approved. 

• Freedom from Spreadsheets: Even as a small organization, you have probably outgrown spreadsheets. They are time-consuming and error-prone, while Martus streamlines and scales financial processes without errors.

Book a personalized demo today to see Martus in action. 

2. Sage Intacct 

Sage Intacct is a cloud-based accounting tool ideal for mid-sized to global nonprofit organizations looking for deep, multi-dimensional reporting and GAAP compliance. 

Here's what you get with Sage Intacct:

• Priority integration with Martus for seamless financial management.
• Dimension-based fund tracking for donations and grants.
• Class or program-based tags for revenue and expenses.
• Multi-entity support for large organizations.
• Automatic generation of reports.

3. NetSuite

NetSuite is an all-in-one ERP solution that offers versatile multi-entity functionalities, supporting global operations and making it ideal for large organizations with global locations and operations. 

You can get the following when you use NetSuite:

• Automatic report generation.
• API-based integration with Martus.
• Increased scalability to support organizational growth.
• Fund accounting through segments that designate funds by donor or grantor intent.
• NetSuite custom GL segments that allow you to create tags based on class, location, and departments.

Common Challenges and How to Overcome Them

Even with the best software, you may encounter the following challenges before or after implementing dimensional accounting:

• Data Inconsistency: Your tools, including the bookkeeping system and accounting tool, might have inconsistent data if you don't sync them appropriately. Besides proper syncing and setting of dimensions, set clear rules for dimension usage to avoid misclassification.
• Change Management: Not every staff member will be comfortable with transitioning from the financial processes they are accustomed to. Train both financial and non-financial staff members on how to use the organization-wide dimensions. Highlight critical benefits, such as time savings and freedom from spreadsheets, to encourage adoption across departments.
• Integration Hurdles: You may have issues integrating your accounting software with a dedicated financial management platform. Martus helps you avoid this because it's a cloud-based solution that integrates with mainstream accounting tools for smooth implementation.

The right setup can make these challenges easier. They can become stepping stones toward transparency, accountability, and efficiency once you overcome them. 

Frequently Asked Questions (FAQs)

Have further questions about dimensional accounting? Let's answer some commonly asked ones on the topic:

How Do Dimensions Differ from Account Segments?

In nonprofit accounting, dimensions are flexible tags applied to transactions, while account segments are fixed components in the COA structure. These segments require rigid account coding. 

Dimensions promote scalability and reporting simplicity. They make reporting versatile by adding tags or attributes to transactions, such as tracking expenses from a specific program without creating numerous individual accounts. 

Can Dimensional Accounting Work with Existing ERP Systems?

Yes. Most modern ERP systems support dimensional accounting. They usually include it as a fundamental feature. 

Older systems may require upgrading or replacing to support dimensions. 

Martus uses APIs to integrate with ERP systems, like Sage Intacct, Xero, Intuit QuickBooks, NetSuite, and Microsoft Dynamics 365 Business Central.

What Are the Typical Implementation Timeframes?

Implementing dimensional accounting can take a few weeks to a few months, depending on the size of your organization and the complexity of your financial ecosystem. 

What Is the Role of AI in Dimensional Accounting?

AI makes dimensional accounting easier by automating transaction tagging, flagging inconsistencies, and generating predictive insights.

Using software solutions with AI capabilities is part of the broader trend toward more innovative and efficient nonprofit financial management practices. 

Conclusion

From the foregoing, we've seen that dimensional accounting is a modern, flexible approach that promotes transparency, collaboration, and more intelligent decisions.

You must use the right tools to enjoy these benefits. A dedicated nonprofit financial management tool that integrates with your bookkeeping and accounting tools comes in handy. 

Our tool, Martus, connects with your existing financial tools through API or file-based integrations to ensure better budgeting, forecasting, and reporting. 

Schedule a consultation today to see how Martus can streamline your financial management practices through dimensional accounting.