Best and Worst Practices in Nonprofit Finance
During AAFCPAs’ recent Nonprofit Educational Seminar (April 2023), leaders in our Managed Accounting & Advisory Solutions practice provided more than 400 attendees with a behind the scenes glimpse into some of the best and worst practices in nonprofit financial operations. The session included insight, thoughts, and recommendations from Joyce Ripianzi, CPA, Lauren M. Duplin, CPA, and Amy Staunton, CPA on process improvements and the ways in which budgeting has evolved since the pandemic, in our inflationary environment, and after the sunsetting of PPP loans, ERCs, SVOGs, and PRFs.
The full session was recorded and may be viewed as a webcast at your convenience. >>
Improving Cash Flow Management
Cash flow management is a significant area of risk for any business but even more for a nonprofit with unforgiving margins. Nonprofits should be conducting ongoing risk assessments on their cash balance on a regular basis. This should include assessing banking relationships, FDIC coverage, and risk mitigation options such as sweep and other accounts.
If you have yet to conduct a risk assessment to see where your liquidity lies, now is the time to do so. AAFCPAs advises that clients first determine their cash objectives, both short term and long term. Next identify how much risk is tied to each fund, evaluating policies and procedures to ensure they align with objectives. For instance, if you’re looking to hold additional funds in short-term vehicles, look at ways to potentially diversify your banking relationships. Look, too, into monitoring and reviewing ongoing changes. You may need to revisit a policy after a bank merger or after a significant cash balance increase. Oftentimes, an organization will create a policy but fail to revisit as circumstances change.
Averting Debit and Credit Card Risk
We continue to see instances with the use of debit cards as opposed to credit cards. The issue with debit cards is that they offer direct access to your bank account. Should that information be compromised, your entire cash balance is at risk. Laws will vary, as well, between credit and debit card or ATM use. Debit cards also lack the same protections as you would have with credit. In addition, debit users are not allowed adequate time to review transactions or report fraud. AAFCPAs advises that clients use credit as opposed to debit cards to put a buffer between cash and expenditures.
We also recommend the implementation of an internal credit card policy to inform those in your organization how and when cards should be used. From an accounting standpoint, transactions should be captured quickly in the general ledger and tagged and accounted for appropriately. Software solutions can help in connecting to general ledger and in easily managing multiple credit cards.
AAFCPAs does not recommend sharing credit cards. Instead, each individual should be issued their own. This fosters accountability and makes it easier to address credit card policies with the individual should something go wrong.
Budgeting in a Post-Pandemic Environment
Traditionally budgets are built by duplicating, assessing, refining, and adding a slight premium to the past three years’ activity. But if you use this methodology now, each year will include some effect from the pandemic, whether on funding or spending. We recommend that clients look at each line item individually to evaluate where they stand and which items remain relevant. Has rent continued at pre-pandemic levels or is a portion of your workforce now remote? Has travel returned to pre-pandemic levels or have meetings and events shifted to a hybrid model? Look too at top line revenue.
Additionally, while clients may look at expenses to determine funding needs, this doesn’t always provide a realistic fundraising goal. Ensure your revenue goals are attainable. Consider revenue you might have received through the Paycheck Protection Program (PPP), Employee Retention Credit (ERC), or American Rescue Plan Act (ARPA). Have results over the past few years provided net positive income due to grant funding? How does that change if grant funding is removed? Are standard fundraising levels where they need to be to sustain expenses?
Additionally, look to invest your time on the right areas of the budget without getting too granular. For example, a thorough benefit analysis by employee can take a lot of time, whereas a focus on a flat fringe rate might prove more efficient. Leave granularity to areas that offer the greatest budgetary benefit.
Keep an eye on your long-term two- to five-year plan, e.g., upcoming capital campaigns, major repairs, or technology needs on the horizon to ensure current spending and fundraising moves you closer toward your goal. You may opt to use a software solution to make the budget preparation process faster and easier. If software feels cost-prohibitive, Microsoft Excel is another great option. However, make sure your Excel template is set up to support making changes easily to avoid formula errors.
Finally, think about budget frequency and the ways in which you break down each period. For instance, a school might budget based on a 12-month period or, instead, based on the school year. Expenses, such as rent, could span 12 months while you might earn tuition across a nine-month period. To the contrary, one-time galas might bring in one lump sum in a particular month.
Tightening Grant and Contract Language
We often see gaps or issues in communication between development and finance when working with nonprofit clients, whether communication is inaccurate or delayed. This may occur at the beginning of a gift or once a gift has already been accepted. When possible, we advise that clients develop a policy to proactively clarify terms around gift acceptance.
For instance, you might implement a minimum dollar threshold for a specific endowment account, a policy on multi-year commitments, or requirements on what you need in writing. Here you can outline how to count gifts, e.g., based on the year you fundraised the gift or spread out across multiple years. This is because the method you choose affects financial records from a cash perspective. Meanwhile, from a GAAP accrual base, this would have all been recognized in the first year. A good gift acceptance policy can help to navigate this complex area and make sure you are able to fully reconcile between your two sets of records.
Preventing Data Collection Duplication
Another issue we come across is when a client might list the same expense multiple times in their general ledger. You might see the same expense accounts listed under G&A, fundraising, and multiple programs. Salaries, for example, may be listed under multiple sections. This makes it difficult to determine total salaries during, for instance, an audit review, when preparing for a close, or when conducting analysis.
An alternative process would be to add a dimension in your accounting software. In QuickBooks, for example, you can set up a class for G&A, a class for fundraising, and a class for each program. Once those are established, you can record salaries to your general ledger in one account and add the class to tag and include them in each respective column. When you need to run a funding or grant report, you can then run a P&L based solely on that class. You can also add yet another dimension in software by tagging the funder or customer and running a P&L directly on that funder. This lets you see expenses at the organization level while still breaking it down into dimensions as needed.
Finally, we often see expenses captured into an account called “program expense”, “grant expense”, or the like; but this is too generic. Instead, we recommend clients list expenses under their natural classification and tag the appropriate program as needed. This keeps everything in the right area of your general ledger.
Expanding Financial Reporting Capabilities
Some organizations query data from their software, enter it into Excel, and manipulate it to create the financial reports necessary for their closing period as opposed to using their financial reporting module. When we look at survey data from nonprofit clients, we see that people want to perform more financial reporting. They also want better data. But they’re having difficulty doing so. Part of this is because they are not using the system as intended or have not set it up to facilitate financial reporting within the software.
We discourage clients from creating supplemental reports separately, as this often introduces errors. It can also make it difficult to transition if you need coverage and adds another layer of complexity in training if you are hoping to garner consistent and accurate results. Clients often say they don’t want to spend time working with their financial reporting module or that a supplemental module is too expensive. In reality, though, the expense involved in creating supplemental reports and manually updating them frequently is likely higher than investing in a financial reporting module.
As opposed to manual reports, we advise that clients set up their system to work with the data they need or reset the dimensions they track to create the necessary reports. AAFCPAs advises clients to use a supplemental report module or Robotic Process Automation (RPA) to generate your reports faster and more efficiently.
Meeting Compliance Requirements
Many new clients come to us initially with compliance-related issues. Perhaps a deadline or requirement was missed on the federal, state, or local level. We also see state and local tax issues arise for clients doing business in multiple states. This includes not only payroll-related issues but also regulatory reporting matters and 401(k) or 403(b) compliance requirements.
AAFCPAs advises clients to develop a compliance checklist or calendar that lists all compliance requirements and their associated tasks, whether that is for your tax return, your annual reports with the Secretaries of State, or workers’ comp audit requests including the number of states you are in and final requirements. When you lack a comprehensive checklist detailing what needs to be done and when, mandates may easily fall through the cracks.
The number one challenge AAFCPAs sees when onboarding new clients is excessive paper processing. A great deal of time and space is required to file and store paper, to receive paper invoices, to process manual checks, and to deliver and process mail. If you shift to more paperless processes, you enable remote work when needed, streamline the annual audit, free time to analyze KPIs, assess aged receivables and new funding sources, and win additional grants. Eliminating paper processing, in our experience, has notably elevated one’s role within the organization.
If you have questions or need assistance or advice with your finance function, please contact Joyce Ripianzi, CPA, Partner at 774.512.9042 or firstname.lastname@example.org, Lauren M. Duplin, CPA, Director & Consulting CFO at 774.512.4095 or email@example.com, Amy Staunton, CPA, Consulting CFO at 774.512.9025 or firstname.lastname@example.org—or your AAFCPAs partner.