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Finance

Aug 07

Is outsourced accounting right for your NFP?

By Finance, Sponsor Insight

By Chris Mennel, audit manager, Alerding CPA Group

As your nonprofit strives to use its resources as effectively as possible, at some point, you might consider outsourcing the functions that fall under your accounting and financial umbrella.

Nonprofits often outsource areas that require specialized knowledge or a significant number of hours, such as payroll processing and payroll tax preparation. Outsourcing accounting functions also can provide benefits – if it matches up with your organization’s needs and budget.

Before committing to an outsourced accountant or an internal hire, consider the following:

  • Labor costs – Organizations that outsource their bookkeeping often realize an overall reduction in payroll, employee training and the cost of benefits. On-staff accountants are often charged with administrative tasks that could ultimately be accomplished with personnel that can be hired at a lower salary. Additionally, the outsourced provider would offer consistency, even when your organization has turnover. However, it’s important to know that sometimes the cost of outsourcing could be higher depending upon the mix of work required.
  • Depth of knowledge and expertise – Outsourcing with someone that specializes in nonprofit accounting often provides your organization with a higher level of expertise and greater resources than you could find if you hired your own accountant. The outsourced person likely has a number of individuals that they can consult with as issues arise, and these individuals will be knowledgeable in a variety of areas.
  • Efficiency – Bookkeeping is time-consuming, especially when dealing with multiple responsibilities. Moving bookkeeping, payroll and other financial responsibilities to an outsourced service provider allows your staff to focus on your organization’s mission. But, keep in mind that an outsourced accountant won’t be onsite every day.
  • Staying current with regulations and laws – Nonprofit regulations and laws are always changing, and it’s challenging and time-consuming to stay up-to-date on these matters. An outsourced accountant will likely be up-to-date on those matters that affect your organization.

Outsourcing allows you to work with financial professionals of varying levels of experience and expertise tailored to the functions they’ll perform. These responsibilities could include:

  • Processing payables, receivables and cash transactions
  • Reconciling accounts at each month’s-end
  • Preparing financial statements, budgets and forecasts
  • Assisting with tax and grant reporting requirements, and
  • Adequately communicating financial matters to your board.

But you don’t have to outsource all of these functions. Depending on your needs and budget, you can outsource only the ones that make sense for your organization. You also may benefit from occasionally using other firm experts — investment advisors, HR and IT support and valuation specialists, as necessary.

Many nonprofits turn to outsourcing accounting functions at times of significant personnel transition or workload increases. For the nonprofit that can’t afford the day-to-day expertise of a director of finance or CFO, outsourcing certain financial oversight functions, such as review of bank reconciliations, may enhance the system of internal controls.

When considering outsourcing any accounting function, make sure you’re working with a manager or partner who’ll become familiar with your operations. This will help provide continuity of service, as well as a resource for your senior management and board of directors. This manager or partner will also supervise junior firm members, providing an added layer of oversight.

The final word

Even with a provider handling your accounting functions, you won’t be able to absolve yourself of financial decision-making. Remember, while an external firm can assist and advise you on financial matters, those charged with governance (typically the board of directors) must continue to have the last word on making significant financial decisions. Be prepared for some commitment of time during any transition of accounting services. A learning curve is inevitable, whether it be external outsourcing or an internal hire. However, accounting and financial reporting is ever-changing and complex, at times. The wealth of knowledge and support that an experienced outsourced accountant can bring to the table could be invaluable.

Feb 15

Should older CEOs be forced to retire?

By Feature, Finance, Leadership

By Walter Frick, senior associate editor, Harvard Business Review |

In October 2000, Jack Welch announced the biggest deal of his 20-year tenure as head of GE: a $45 billion merger with Honeywell. Shortly thereafter he was forced to retire, due to GE’s mandatory retirement policy for CEOs turning 65.

More than a third of S&P 500 firms have a mandatory retirement policy for their CEO. Their aim is to drive out executives who are past their prime. But are such policies a good idea?

Yes, but with some caveats.

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Jan 19

The future of cities depends on innovative financing

By Feature, Finance

By John D. Macomber, senior lecturer Harvard Business School, HBR |

Today’s mega-cities have a footprint problem. They are developing horizontally, not vertically, with vast areas of low sprawl reaching out for miles from Sao Paolo, Lagos, New Delhi, Guangzhou, Jakarta, and many others. A central question our civilization must address is how we can avoid becoming a planet of informal slums.

Every year, hundreds of millions of people across the globe move from rural to urban environments in search of opportunity.  In a perfect world, governments would have the cash and the consensus to fund and coordinate the construction of the infrastructure required to sustainably accommodate a rapidly urbanizing world. But few governments appear to have the money or the political will to foot the up-front costs to prevent or fight fragmentation.

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Aug 17

Significant nonprofit financial reporting changes

By Finance, Sponsor Insight

By Jim Simpson, CPA and director, Financial Technologies & Management

The way nonprofits prepare and present financial reports is about to change. It is the first significant changes in over 20 years. In 2011, the Nonprofit Advisory Committee recommended modification of the 1993 financial reporting mode to the Financial Accounting Standards Board (FASB). In April, the FASB issued an exposure draft that proposed updated accounting standards. The released draft has a comment period that ends on Aug. 20.

So what does this mean for your nonprofit organization?

Before the change is official, you may want to consider formal training for board and staff members. It may be good idea to adopt some of the proposed changes before they are mandatory because they will create more relevant financials and comparable measurements.

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Jul 20

When best-laid plans go awry: Prepare with reserves

By Finance, Leadership, Sponsor Insight, Sustainability

By Lauren Kreutzinger, supervisor, VonLehman

In any business, in any organization, even the best-laid plans can go awry.

In the nonprofit sector, this can lead to disaster.

But that doesn’t have to be the case — if you’re prepared. For example, a major grant your organization counted on could fall through. Or your facilities might require emergency repairs. And, as many nonprofits have learned in recent years, even slightly lower-than-anticipated donations can make meeting obligations difficult.

Cash reserves can help cushion the blow of unbudgeted expenses. They may also enable your nonprofit to seize growth opportunities.

Your target number

The ideal reserve depends on an organization’s unique qualities, including its operating structure, sources of funding and types of expenses. But most experts agree that a minimum of three months’ cash can help mitigate the risk of budget shortfalls and unexpected events. But some nonprofits need greater reserves and some may be safe with less.

Generally speaking, the more predictable and steady your nonprofit’s cash flow, the less you need to stash in reserves. To determine the optimal amount, however, talk to your financial advisor.

Unrestricted is best

Reserves must be easily accessible and unrestricted, if they’re to be effective in emergencies. Program-specific donations and grants aren’t much help when you need to pay your office rent or make payroll. To increase unrestricted revenue, educate donors about the inflexibility of such gifts. Although some will insist on targeting their dollars, many are likely to respond when you explain that unrestricted donations can be more valuable to your nonprofit than those with strings attached.

For their part, foundation and government grantmakers traditionally have been reluctant to give unrestricted funds to charities. But according to several recent studies, many are increasing the proportion of grant money available for general operating support. So consider asking grant providers if they can relax restrictions on funds they’re currently providing, and start looking for grants with looser restrictions.

Accessibility is just as important when you’re deciding where to store operating reserves. Avoid investments that might restrict or penalize withdrawal of funds on short notice, such as equity investments or certificates of deposit. Instead, look for the highest interest-earning checking, savings or money-market account, or possibly Treasury bills or short-term bond funds.

Justifying withdrawals

One difficult aspect of managing reserves is to know when to tap them. Using cash to address operational shortfalls or when expenses exceed income is usually justified.

Even if your nonprofit runs efficiently and typically sticks to its budget, unplanned events, such as natural disasters or economic crises, can throw a wrench in the plan. But be careful that such withdrawals don’t become routine. If you’re dipping into reserve funds every month to pay ordinary expenses, it’s time to reevaluate your budget.

Reserves aren’t just a rainy-day fund, though. Many organizations use them to seize opportunities, expand programs and services, and even improve access to credit. Prudence is essential when using reserves proactively. Your board should draw up a policy that defines reasonable uses of reserves and outlines the evaluation and approval process for specific proposals.

Too much is risky

While keeping an adequate amount of operating reserves is critical, it’s also important not to retain too much cash. Money market and other easily accessible accounts typically earn minimal interest. You can almost certainly better “invest” reserves elsewhere — for example, earning returns for your long-term endowment or helping to expand services.

What’s more, charity watchdog groups take a dim view of what they consider excessive reserves, which can negatively affect how they rate your nonprofit, and in turn, how the public perceives its effectiveness. Of course, what constitutes “excessive” depends on the organization. But several years’ worth of expenses certainly merits scrutiny.

A priority

If your nonprofit has been running lean for several years, it’s time to start fattening up your cash cushion. As the economy improves and donors increase their support, make building your operating reserves a priority.

Lauren_Graham_revLauren Kreutzinger is a supervisor at VonLehman CPA and advisory firm in Indianapolis.  Lauren focuses on audit and accounting services for nonprofit and manufacturing and distribution organizations.

 

For more information on this topic or many other tax, business and investment topics, contact your CPA, Business Advisor, or Lauren Graham of VonLehman at lgraham@vlcpa.com.

About VonLehman

Founded in 1946 and with offices in Kentucky, Ohio and Indiana, VonLehman is a leading full-service CPA and business advisory firm. VonLehman provides forward-thinking accounting, tax and strategic business advice to closely-held businesses, nonprofits and governmental entities throughout the Kentucky, Ohio and Indiana region. VonLehman provides clients with the depth of services and resources expected from larger national firms, but with an unmatched measure of personal care and attention. See http://www.vlcpa.com for more information.

DISCLAIMER: The technical information in this article is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.

Jun 09

Proposed changes to nonprofit financial reporting

By Finance, Governance, Sponsor Insight

By Chris Mennel, audit manager, Alerding CPA Group | 

A new proposed accounting standard could dramatically impact the current financial reporting methods for the more than 1.5 million nonprofits in the United States. Financial reporting in nonprofits was largely affected in 1993 by the issuance of Financial Accounting Standard No. 116 and Standard No. 117 – two standards that accountants and bookkeepers have come to know very well.

These standards created the three classes of net assets that are used today (unrestricted, temporarily restricted and permanently restricted) as well as many other financial statement components that small to large nonprofit organizations deal with on a regular basis.

Although these changes have been in place for over 20 years, many non-accountant board members and others continue to struggle with the concepts behind nonprofit financial statements. In an effort to improve the usability of these documents, the newly proposed accounting standard would:

  • Create two classes of net assets (unrestricted and restricted) instead of the current three;
  • Require the Statement of Cash Flows to be prepared under the direct method of cash flows instead of the indirect method;
  • Require all nonprofits to report expenses by nature and function. Currently, only voluntary health and welfare organizations are required to present a statement of functional expenses;
  • Require certain reclassifications within the Statement of Activities in order to present new operating measures; and
  • Provide additional changes to the current presentation of financial statements.
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May 07

Nonprofits lose an average of $15,000 a year due to spam filters, study says

By Feature, Finance

Nonprofits annually lose an average of nearly $15,000 because of fundraising solicitations intercepted by spam filters, according to a new study.

Donations made in response to emails accounted for about a third of online fundraising revenue in 2013, but one in eight emails never reaches an inbox — a percentage almost as high as the share of emails that are opened, the report says. Nonprofits could boost email fundraising revenue by around 14 percent by reducing their spam rate.

An organization’s emails may be sent directly to the junk mailbox — or not delivered at all — when an Internet Service Provider notices that many of its users are marking emails from a certain IP address as spam. Other triggers are emails from a sender that frequently are deleted without being read or are never opened.

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Apr 28

A guide to nonprofit overhead

By Feature, Finance

By Jan Masaoka & Steve Zimmerman, Blue Avocado

Calculating overhead rates and managing overhead expense are important staff roles. Board members are not required to know how do staff accounting work, but we do need to bring an informed perspective to oversight: Harvard’s indirect cost rate is 68% while Iowa State’s is 48%. Should the board members of either institution be concerned? As an alumnus of one or the other, should these numbers affect our donations? As a parent of a high school senior, do these numbers influence where we want our child to go? Should they?

Amid the crosstalk about nonprofit overhead, board members and staff do need to understand what the conversation is really about, and how to interpret “what is overhead” for our own organizations. Here are eight key ideas to know about overhead:

  1. Apples, oranges, and alligators: One of the more surprising facts about overhead is that while it seems that everyone is talking about it, everyone is actually talking about the different things. The word “overhead” isn’t an accounting term, so different people define it differently.
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Apr 28

The Overhead Myth

By Finance

By Art Taylor, president, BBB Wise Giving Alliance, Jacob Harold, president/CEO, GuideStar USA,Ken Berger, president/CEO, Charity Navigator |

To the Nonprofits of America:

We write to ask for your help to end the Overhead Myth — the false conception that financial ratios are a proxy for overall nonprofit performance. Last year we wrote a letter to the donors of America asking them to consider the results (especially outcomes and impact) created by nonprofits, and to not judge you solely on percent of charity expenses that go to administrative and fundraising costs. While overhead can help us identify cases of fraud or gross mismanagement and serve as a part of an organization’s dashboard of financial management metrics, it tells us nothing about the results of your work (i.e., how you meet your mission). … To that end, we ask three things of nonprofits.

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