Monthly Archives: October 2020

To find new revenue opportunities, think like an auditor

Want to increase your not-for-profit’s revenue? First try analyzing current income as a professional auditor might. Then, you can apply your conclusions to setting annual goals, preparing your budget and managing other aspects of your organization.

Compare contributions

Compare the donation dollars raised inpast years to pinpoint trends. For example, have individual contributions been increasing over the past five years? What campaigns have you implemented during that period? You might go beyond the totals and determine if the number of major donors has grown.

Also estimate what portion of contributions is restricted. If a large percentage of donations are tied up in restricted funds, you might want to re-evaluate your gift acceptance policy or fundraising materials.

Measure grants

Grants can vary dramatically in size and purpose — from covering operational costs, to launching a program, to funding client services. Pay attention to trends here, too. Did one funder supply 50% of total revenue in 2015, 75% in 2016, and 80% last year?

A growing reliance on a single funding source is a red flag to auditors and it should be to you, too. In this case, if funding stopped, your organization might be forced to close its doors.

Assess fees

Fees from clients, joint venture partners or other third parties can be similar to fees that for-profit organizations earn. They’re generally considered exchange transactions because the client receives a product or service of value in exchange for its payment.

Sometimes fees are charged on a sliding scale based on income or ability to pay. In other cases, fees are subject to legal limitations set by government agencies. You’ll need to assess whether these services are paying for themselves.

Membership dues

If your nonprofit is a membership organization and charges dues, determine whether membership has grown or declined in recent years. How does this compare with your peers? Do you suspect that dues income will decline? You might consider dropping dues altogether and restructuring. If so, examine other income sources for growth potential.

By performing these exercises, you should be able to gain a basic understanding of where funds are coming from and where greater potential lies. For specific tips and help applying revenue data strategically, contact us.

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What to do when the audit ends

Financial audits conducted by outside experts are among the most effective tools for revealing risks in not-for-profits. They help assure donors and other stakeholders about your stability — so long as you respond to the results appropriately. In fact, failing to act on issues identified in an audit could threaten your organization’s long-term viability.

Working with the draft

Once outside auditors complete their work, they typically present a draft report to an organization’s audit committee, executive director and senior financial staffers. Those individuals should take the time to review the draft before it’s presented to the board of directors.

Your organization’s audit committee and management also should meet with the auditors prior to the board presentation. Often auditors will provide a management letter (also called “communication with those charged with governance”), highlighting operational areas and controls that need improvement. Your nonprofit’s team can respond to these comments, indicating ways they plan to improve the organization’s operations and controls, to be included in the final letter. The audit committee also can use the meeting to ensure the audit is properly comprehensive.

Executive director’s role

One important audit committee task is to obtain your executive director’s impression of the auditors and audit process. Were the auditors efficient, or did they perform or require redundant work? Did they demonstrate the requisite expertise, skills and understanding? Were they disruptive to operations? Consider this input when deciding whether to retain the same firm for the next audit.

The committee also might want to seek feedback from employees who worked most closely with auditors. In addition to feedback on the auditors, they may have suggestions on how to streamline the process for the next audit.

No material misrepresentation

The final audit report will state whether your organization’s financial statements present its financial position in accordance with U.S. accounting principles. The statements must be presented without any inaccuracies or “material” — meaning significant — misrepresentation.

The auditors also will identify, in a separate letter, specific concerns about material internal control issues. Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements. The auditors’ other suggestions, presented in the management letter, should include your organization’s responses.

If the auditors find your internal controls weak, promptly shore them up. You could, for example, implement new controls or new accounting practices.

Contact us if you have questions about audits and post-audit procedures.

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Should your nonprofit accept that new grant?

Current financial pressures mean that your not-for-profit probably can’t afford to pass up offers of support. Yet you need to be careful about blindly accepting grants. Smaller nonprofits that don’t have formal grant evaluation processes are at risk of accepting grants with unmanageable burdens and costs. But large organizations also need to be careful because they have significantly more grant opportunities — including for grants that are outside their current expertise and experience.

Here’s how accepting the wrong grant may backfire in costly and time-consuming ways.

Administrative burdens

Some grants could result in excessive administrative burdens. For example, you could be caught off guard by the reporting requirements that come with a grant as small as $5,000. You might not have staff with the requisite reporting experience, or you may lack the processes and controls to collect the necessary data. Often government funds passed through to your nonprofit still carry the requirements that are associated with the original funding, which can be quite extensive.

Grants that go outside your organization’s original mission can pose problems, too. Managing the grant may involve a steep learning curve. You could even face an IRS challenge to your exempt status.

Cost inefficiencies

Another risk is cost inefficiencies. A grant can create unforeseen expenses that undermine its face value. For example, new grants from either federal or foundation sources may have explicit administrative requirements your organization must satisfy.

Additionally, your nonprofit might run up expenses to complete the program that aren’t allowable or reimbursable under the grant. Before saying “yes” to a grant, net all these costs against the original grant amount to determine its true benefit.

Lost opportunities

For any unreimbursed costs associated with new grants, consider other ways your organization might spend that money (and staff resources). Could you get more mission-related bang for your buck if you spend it on existing programs?

Quantifying the benefit of a new grant or program can be equally or more challenging than identifying its costs. Evaluate every program to quantify its impact on your mission. This will allow you to answer the critical question when evaluating a potential grant: Are there existing programs that can be expanded using the same funds to yield a greater benefit to your mission?

Do your homework

Grants from the government or a foundation can help your nonprofit expand its reach and improve its effectiveness in both the short and long term. But they also can hamstring your organizations in unexpected ways. Contact us for help or more information.

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