Winter 2014

Katz, Sapper & MillerCertified Public Accountants

profitable solutions for nonprofits

The Financial Side of the Nonprofit Industry

IN THIS ISSUE

2 Tips for Communicating Financial Information to the Board

3 Is it Time for Software as a Service?

4 Managing Staff: How to Treat the Real Gems of an Organization

7 Newsbits

2 Winter 2014

profitable solutions for nonprofits

Tips for Communicating Financial Information to the Board

By Pete Buck, CPADirectorpbuck@ksmcpa.com

While board members typically bring a variety of talents and expertise to an organization, they do not always have extensive experience with financial and accounting matters. So what is the best way to communicate the essential financial information they need to effectively serve the organization?

The Need to KnowThere is no denying it – board members cannot properly perform their functions if they do not obtain and understand information about the organization’s financial position. Without timely financial information, they can neither make informed decisions about goals and planning nor monitor the organization’s progress toward those goals. They also cannot fulfill their fiduciary responsibilities.

Members of boards that have finance or audit committees might be under the false impression that only the committee members need to concern themselves with the financial details. That could not be further from the truth – every board member must possess at least a basic understanding of the financial statements to make decisions that satisfy his or her duty of care.

Crucial ItemsAt a minimum, the board needs to receive the following financial information. They should receive this information in an accurate and timely manner on a monthly or quarterly basis:

• Statement of financial position (balance sheet),

• Statement of activities (income statement),

• Cash flow forecast, • Actual results compared to budget,

and• Operational figures (for example, cost

per unit of service).

The Internal Revenue Service’s Form 990 should be presented to the board annually. And the board should remain up-to-date on the nonprofit’s current goals and programs. Benchmarks make the data more meaningful.

This information will help board members evaluate decisions and direction of the organization effectively. When engaged in planning, board members also need trend analyses, information about the external environment and its impact on the organization, financial projections and multiple budget scenarios. Capital projects or new programs under consideration may require specialized budgets of their own.

Setting the StageSeveral steps can help management present financial information to their boards more effectively. For starters, every board member should receive training on how to read and use financial reports.

Continued on page 6.See “Tips for Communicating”

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THE FINANCIAL SIDE OF THE NONPROFIT INDUSTRY

Nonprofits increasingly are following the path of for-profits and shunning traditional software arrangements for “software as a service” (SaaS) provided over the Internet for a monthly fee. The potential benefits make SaaS worth considering for nonprofits of all sizes, but some caveats are in order.

SaaS in a NutshellThe definitions of SaaS are plentiful. Generally, it is best described as software that is delivered via the Internet to subscribers. A nonprofit essentially leases the software, which is housed on the provider’s servers, and pays a subscription fee. This contrasts with the historical approach of purchasing or licensing an application or suite of applications and having it installed on the organization’s own server. This traditional approach leaves the organization responsible for the maintenance and overhead needed to operate the software.

The Benefits Perhaps the primary benefit of SaaS for a nonprofit is that, applied properly, it can free up resources, including time and money, which the organization can use to further its mission. For example, an organization’s IT staff could use the time it would otherwise allocate to updating software, a service that is included in the subscription fee with SaaS, for purposes directly related to the organization’s mission. The SaaS provider typically handles system updates and maintenance automatically with minimized disruption.

Cost is another major reason more nonprofits are turning to SaaS. The option requires little upfront investment and provides a cost-efficient way to “test drive” software – if organizations do not like the software after a month Continued on page 5.See “Software as a Service”

Is It Time for Software as a Service?

By Matt Snively, CPA, CIASecurity & Compliance Practice DirectorKSM Consulting, LLCmsnively@ksmconsulting.com

4 Winter 2014

profitable solutions for nonprofits

Managing Staff: How to Treat the Real Gems of an Organization

By Mark Barnhart, CPC, CERSDirectorTouchPoint Recruiting Group, LLCmbarnhart@touchpointrecruiting.com

The lagging economy of the past few years has caused many companies to make certain cuts and sacrifices, and nonprofit organizations are feeling these same pressures as well. Organizations have had to freeze wages or award minimum pay increases all while asking employees to take on new responsibilities.

While some changes or cuts are necessary for the overall wellbeing of the company, organizations should not lose sight of the importance of their staff, from hiring and training them to rewarding them for their performance, and ultimately providing motivation to stay.

Recognize the Greatest WealthWhen asked to list their organization’s assets, nonprofit leaders are likely to name investments, facilities, real estate, cash and other tangible assets. Too often the actual most important asset (the people) is left off the list.

But without a knowledgeable and committed staff, organizations stand little chance of delivering program services or raising enough money to fund them. And when the cost of hiring, training and mentoring staff is considered, not to mention the losses an organization incurs when an experienced employee leaves, it is easy to see why organizations should assign a higher value to their people.

Add to Staff WiselyFinding and keeping good staff starts with smart hiring. Just as one would not

buy a mutual fund without researching its performance and strategy, nonprofits should not hire staffers without thoroughly vetting them for potential rewards and risks.

Experience, education, skills and employer recommendations are merely a starting place. Good hiring requires employers and job candidates to honestly assess their respective objectives. It is not advised to hire someone simply because the organization is desperate to fill an empty position. Shaky starts rarely lead to long-term success.

Instill “Buy-in”When a new employee comes aboard, ensure he or she receives comprehensive training – not only related to job responsibilities, but also about the organization’s culture and ethics. Staffers need to buy in to the mission and support the established programs.

Also ensure that employees understand the evaluation and compensation system – and feel like full participants. Often, they leave a job claiming their employment expectations were not met and the employers are left scratching their heads about what went wrong. Staffers must be able to voice perceived obstacles to their successful long-term employment without fear of reprisal. If organizations want to keep good employees they must listen and try to find ways to help them succeed.

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THE FINANCIAL SIDE OF THE NONPROFIT INDUSTRY

Be Creative with Nonmonetary RewardsAlthough financial compensation is generally the best way to reward and retain people, there are other ways to let employees know they are valued – without busting the budget. For example, consider tangible rewards other than money. Write a personal “thank you” note and enclose a small gift card when a staff member achieves something special. Or reward that person with an extra vacation or personal day. Another

idea: Offer the employee more flexible hours, such as earlier starting and leaving times or the option to telecommute.

And do not forget the value of praise and recognition. Acknowledge employees for a job well done at staff meetings or in the organization’s newsletter. Or invite “star” employees to be introduced at a board meeting, or to represent the organization at an industry conference. All of these actions reflect confidence in

those individuals and indicate their importance to the organization.

Value Them AnywayNonprofit organizations may be unable to compensate employees quite as well as their for-profit counterparts. But, if the focus is on valuing and growing assets – that is, the employees – all that is needed is a little creativity in order to reward them in many other ways. Remember to value and protect your most important assets.

Software as a Service(Continued from page 3)

or two, they can usually cancel their subscription and retrieve their data back. Organizations also do not pay for functions they do not need. Moreover, they will not be responsible for costs associated with building infrastructure, upgrades, maintenance and support. And the monthly subscription model facilitates more accurate budgeting for IT.

Additionally, software provided online means employees can reliably access it from anywhere with an Internet connection, giving them greater flexibility and boosting productivity. Most SaaS providers claim to provide 99.9 percent uptime.

Potential RisksAs with data stored on individual computers, security is paramount when using SaaS. For instance, how can organizations ensure protection of donor and credit card information?

The good news is that the right provider can probably offer better security on its closely monitored servers than organizations could on their own. When it comes to credit card information, the “right provider” is one that complies with the Payment Card Industry Data Security Standard (PCI DSS). PCI DSS was promulgated by the credit card industry’s PCI Security Standards Council and applies to all entities that store, process or transmit cardholder payment data. It outlines technical and operational system requirements to protect cardholder data.

Availability of data is another concern. Before selecting a SaaS vendor, make sure to research the financial stability and ability of the company to follow through on its promises. Not having access to the

accounting system when payroll is due can quickly override any benefits.

Also ask to see a copy of the provider’s Service Organization Control 2 or 3 Report. They test and report on the design and operating effectiveness of the controls at the SaaS provider that may affect its customers’ data security, availability, processing integrity, confidentiality and privacy.

Finally, evaluate the total costs over the long term. Even though the up-front investment is limited, over time the monthly fees may surpass the cost for an organization to purchase and maintain its own system. Looking at the big picture will facilitate a more informed decision.

Perhaps the primary benefit of SaaS for a nonprofit is that, applied properly, it can free up resources, including time and money, which the organization can use to further its mission.

6 Winter 2014

profitable solutions for nonprofits

Tips for Communicating(Continued from page 2)

The board orientation process should allocate time for new members to meet with the chief financial officer or similar staff person to go over the financial report format, and to understand the organization’s critical financial factors. The board members can meet with the chief executive officer or executive director, too, for a review of the organization’s financial results and the goals for upcoming programs and new strategic directions.

Periodic refresher sessions for veteran board members also are advisable.

How to Deliver the NumbersBefore reaching the point of training the board, a user-friendly format

for the financial reports should be developed. Bear in mind that graphs are often easier to understand than columns of numbers, and can provide a useful vehicle for sharing trending information.

Similarly, board members may find it easier to process ratios, which combine two or more pieces of financial data to provide a more comprehensive view. For example, fundraising efficiency can be expressed as a ratio that divides contributed income by fundraising expense.

Use summarized information for income and expenses, rather than providing detailed line items. This makes it easier for board members to focus on the big picture and steers them away from day-to-day micromanaging.

A narrative section should also be provided along with the numbers. Use the narrative to highlight significant items and explain notable variances between budgeted and actual figures.

Make sure the necessary financial statements are prepared well in advance of board meetings and distributed to board members at least one week before the meeting to give them time for review.

The AudienceNo single financial reporting approach or format works for every organization. Take the time to consider the audience and their level of financial expertise when determining how to convey the information they need to fulfill their responsibilities.

In recent years, some nonprofits have turned to so-called dashboards to convey financial information to their boards. A dashboard, a one- or two-page snapshot of key metrics, may be especially appropriate for the members of a board that also has an audit or finance committee.

Which indicators should be included on a dashboard? Management should work with the board to select the optimal indicators. Ideally, the handful of indicators most likely to communicate the organization’s performance in critical areas should be presented – information the board can use to determine whether the organization is on track or if corrective action should be taken. Examples include cost per primary outcome, cash reserves and working capital. As with standard financial reports, benchmarks should be included for context.

Remember, too, that numbers do not tell the whole story. Dashboards also can include brief narratives, such as a representative beneficiary story, that demonstrate the nonprofit’s work.

Let the Dashboard Deliver

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THE FINANCIAL SIDE OF THE NONPROFIT INDUSTRY

NewsbitsCourt Says Donor Is Entitled to Return of Restricted GiftA New Jersey court of appeals held that a charity that solicited and accepted a gift from a donor – knowing the donor’s expressed purpose for the gift was to fund a particular aspect of the charity’s mission – must return the gift, after it had unilaterally decided not to honor the purpose.

From 2002 to 2004, Bernard and Jeanne Adler donated $50,000 to SAVE, a New Jersey no-kill animal shelter, for a planned expansion. In 2006, the shelter informed the donors that it was merging with another organization and would instead use their contributions to build a smaller facility in another location. The Adlers sued after the charity refused to return their donation, and they won.

The court of appeals ruled that, absent the donor’s consent, a nonprofit cannot ignore or significantly modify the expressed purpose for a gift – even if the conditions that existed at the time of the gift changed significantly, making fulfillment of the donor’s purpose either impossible or highly impractical.

The case is a reminder of the importance of clearly establishing donor stipulations at the outset and adhering to them. If a nonprofit is unwilling to accept those terms, the wise choice is to decline the gift.

Community Foundation Wealth RecoversSince the recession, asset, gift and grant amounts for community foundations have reached new heights, according to a study conducted by the Council on Foundations, a nonprofit association of grant-making foundations and corporations, and CF Insights, a division of the nonprofit consulting firm FSG. The community foundation field represents $58 billion in assets, $6.9 billion in gifts and $4.5 billion in grants.

Average growth rates for those categories ranged from 6 percent to 15 percent between 2011 and 2012. Almost 80 percent of community foundations had 2012 asset levels that exceeded their 2007 levels. The data was collected from 276 community foundations, including those representing more than 90 percent of total estimated community foundation assets.

EITF Issues Rule on Affiliate Personnel Services The Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) has issued a new rule that addresses the proper accounting for services received from personnel of an affiliate for which the affiliate does not seek compensation (EITF Issue 12-B).

Currently, the recipient organization only recognizes contributed services from an affiliate if the services either create or enhance nonfinancial assets, or require specialized skills and would typically need to be purchased if they had not been donated. Such contributed services are recognized at fair value.

Under the new standard, a nonprofit generally should recognize personnel services that are performed by an affiliate’s employees at the affiliate’s cost of such services, rather than at fair value. The cost components would depend on the nature and type of service provided, but, at a minimum, costs should include all direct personnel costs (for example, compensation and payroll-related fringe benefits) incurred by the affiliate. The guidance will be effective for fiscal years beginning after June 15, 2014.

Who Gives Big Gifts?A new study sponsored by international consultants CCS, through its William B. Hanrahan Fellowship at the Lilly Family School of Philanthropy at Indiana University, has found that the majority of charitable contributions of $1 million or more come from local donors. About 60 percent come from donors from the same state or geographic region as the recipient’s and about half of all publicly announced gifts of this size (47 percent of the total number of gifts and 52 percent of the total dollar amount) come from donors living in the same state.

Health nonprofits; arts, culture and humanities organizations; higher education institutions; foundations; and government agencies received more than half of their million-dollar-plus gifts from donors in the same state.

Nonprofits may want to focus their efforts on cultivating relationships with donors invested in their local communities – and who have the financial capacity to make significant gifts.

Our People: Your Success

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KSM’s Commitment to the Not-for-Profit Industry: Katz, Sapper & Miller has committed top talent and substantial resources to providing the best, most extensive services to our not-for-profit clients. Our commitment to the industry, however, goes beyond the clients we serve. Our professionals actively participate on boards and committees for numerous local and regional not-for-profits, allowing us to better understand the unique challenges our clients face.

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Profitable Solutions for Nonprofits is a quarterly publication distributed to our clients and friends. Any tax advice or opinion herein contained is not intended to be used, and cannot be used, by anyone to avoid the imposition of any federal tax penalties. For more information on the articles featured in this edition of Profitable Solutions for Nonprofits, please contact the authors at 317.580.2000.

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