Encumbrance is an accounting technique that protects budgets from being overspent. The Microsoft Dynamics GP Encumbrance Management module is designed primarily for not-for-profit and governmental organizations. It is easy to set up and well-suited to control budgets in situations where there are distributed spending entities.
Encumbrances are essentially a commitment to spend money. Governmental organizations usually have legal requirements to keep budgets in line, and not-for-profit organizations have similar types of restrictions involving their grants. The idea is that once a purchase order is created, an encumbrance or allocation of funds is set aside.
To enable Encumbrance Management in Dynamics GP you’ll need to have an existing budget. Turn this feature on for Purchasing by clicking on the Setup entry, and then selecting Encumbrance Management.
You should see your Dynamics GP open budgets in the list-box. Simply check the enable box. And that’s it. Technically, you can also add a “variance” but that’s not necessary to get started.
Now when you create a Purchase Order for a vendor, MS Dynamics GP will encumber the funds – telling GP that the money has not yet been spent but is potentially committed, pending approvals.
Budget administrators can then look at a report – by navigating to Inquiry and selecting Encumbrance Management – showing the differences between the budgeted amount for an accounting category and the committed spending.
At a glance, analysts can see whether they’ll be able to stay in budget. If a variance had been set, then committed spending can go over the budget by that amount.
For nonprofit organizations that have several fields’ offices, Encumbrance Management in Dynamics GP is a good way to centralize control over Purchase Order spending.
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