Using Audit Techniques Can Help You Shape Your Future
Kelly Buchheit, CPA
Whether or not a not-for-profit organization engages an independent auditor, an organization can employ moves from an auditor’s playbook to gain a better understanding of its overall revenue picture. Techniques, such as analyzing year-over-year trends and benchmarking to other not-for-profit organizations, can be extremely useful in planning both your short-term and long-term future.
Review Donor Trends
Most not-for-profit organizations rely on donor contributions to balance their budgets. An easy way to utilize trend analyses is to compare the dollars raised in the current fiscal year to the past 3-5 years to see if you can pinpoint any trends. For example, have individual contributions reached a plateau in recent years? Have there been any targeted fundraising campaigns launched during that period?
Go beyond the dollar totals and analyze the volume and mix of donors. For example, did the number of major donors — say, those who give $1,000 or more annually — fluctuate compared to past years? Have you offset major donor losses with a new sponsorship or grant? If you have been experiencing losses of major donors, do you need to adjust your fundraising approach?
In addition, an analysis of the type of contributions, restricted or unrestricted, received from donors can be a useful fundraising tool. If you discover that your organization has a large percentage of donations tied up in restricted funds, you might want to re-evaluate your gift acceptance policy. You also might want to review your fundraising materials to ensure that the organization is pursuing contributions that give the organization the most flexibility, such as, contributions for general operations.
Size Up Grant Funding
Grant revenue includes funding from corporate, foundation and governmental sources. Grants can vary dramatically in size and purpose, from grants that cover operational costs, to funding for a new program, to payment for providing specific services to clients.
Pay attention to trends here, as well. For instance, did a particular funder supply 50% of total revenue in 2014, 75% in 2015 and 80% in 2016? A growing reliance on a single funding source is an example of a revenue “concentration,” which acts as a red flag to auditors, and it should be to you, too. When an organization is heavily concentrated with one or two funding sources, there will be always be the risk that your organization might be forced to find new founding sources, end a program or even shut down operations entirely, should that funding source experience severe losses on its end.
Consider Service Fees, Membership Dues
Fees earned from clients or other third parties can be similar to fees that for-profit organizations earn. Fees are generally viewed as exchange transactions, because the client receives something of value in exchange for its payment. Some not-for-profit organizations charge fees on a sliding scale based on income or ability to pay. In other cases, fees, such as rent paid by low-income individuals, are subject to legal limitations set by government funding agencies.
On an ongoing basis, the organization should be assessing the sustainability of its services. In other words, are the fees generated from the services enough to cover the costs of providing those services? For instance, a fee scale for medical services established several years ago may no longer be sufficient to cover costs. A decision must then be made to either raise the fees charged or discontinue the services altogether. This same example can be applied to membership organizations that charge membership dues. Has membership grown or declined in recent years, and how do your dues compare with similar groups? Is the organization charging enough dues to support its program expenses and general operations?
Apply the Knowledge
Remember: analytics should not be thought of as simply a financial tool. Once you have honed your analytical skills on the financial side, apply those tools to other aspects of your organization, such as developing metrics for patients serviced or employee performance. Applying this knowledge across the organization can help management and the board of directors make more informed business decisions throughout the year and for the future.
Newsbits: Spring 2017
Jim Quaid, CPA
High Net Worth Donors: Generous with Their Money and Time
Donors from households with net assets of $1 million or more — or those that bring home at least $200,000 annually — on average made donations totaling $25,509 in 2015 compared to an average of $2,124 from the general population, according to the 2016 U.S. Trust® Study of High Net Worth Philanthropy. And, on average, these high net worth households gave to eight different not-for-profit organizations. Also, wealthy donors who volunteered gave 56% more, on average, than those who did not volunteer. And, 83% of wealthy donors plan to give as much or more in the next three years.
IRS Releases FY 2016 Compliance Results
In its Tax Exempt and Government Entities FY 2017 Work Plan, the IRS reported on the nearly 5,000 examinations of exempt organizations it conducted in the 2016 fiscal year. The exams focused on five issues: Exemption (including nonexempt purpose activity and private inurement); protection of assets (including self-dealing and excess benefit transactions); the tax gap related to areas where a nonprofit is subject to a tax (including employment taxes and unrelated business income taxes); international transactions (including oversight of funds spent outside the United States); and emerging issues (including nonexempt charitable trusts). In FY 2016, the IRS revoked the status of 43 organizations — almost two-thirds of these were revoked for not operating for an exempt purpose.
Board Service Boosts Careers
Do you need an enticement for attracting high-quality board members? As a recent Wall Street Journal article points out: “Executives are doing good for others — and good for their careers — by joining boards of nonprofit organizations.” The article says that more executives are looking to serve on boards of not-for-profit organizations because “they operate in an increasingly competitive and networked world … and the experience builds their networking further.” Not-for-profit board experience also can help executives strengthen their leadership skills and give them opportunities to demonstrate abilities they are not able to show at work, such as strategic planning or fundraising.
Do Most Not-For-Profit Organizations Benefit from Mergers?
In a recent study, 88% of not-for-profit organizations involved in a merger felt that their organization was better off post-merger in terms of achieving organizational goals and increasing impact. So discovered a team of Northwestern University researchers who studied 25 not-for-profit mergers in the Chicago area (and four cases that ultimately did not result in mergers). Interviews with participants found that the most successful mergers were mission-driven and motivated by the desire to provide higher-quality services or to expand into new areas.