The Good, the Bad, and the Ugly

August 12, 2012

We’ve all heard of the 80/20 rule where 80% of some population accounts for 20% of the results.

But have you ever heard of the 10/80/10 rule?

Call it Eric’s Rule of Nonprofit Finance.  (Eric’s rule is not to be confused with Eric rules, which is seldom the case.)

The 10/80/10 rule states that out in the nonprofit world, approximately 10% of organizations have well-functioning, efficient, and effective accounting departments that are able to produce accurate timely financial reports that management, staff, and the board can use to effectively run the organization and report their results to funders and the public.

This first 10% are the “good” organizations.

The next 80% are the “bad.”

Approximately 80% of all nonprofit organizations, regardless of type or size, have accounting departments that range anywhere from being mildly underperforming to severely dysfunctional.  Examples: In the underperforming category are organizations that cannot produce accurate financial reports or other analyses on a timely basis.  More examples: In the dysfunctional category are organizations that cannot properly account for their donor restricted funds or are unable to properly prepare for their year-end audit.

The silver lining for these organizations is that their managements and boards are usually thoughtful well-meaning people trying to do their best.

This leaves the last 10% whom I charitably refer to as “ugly.”  In this category are organizations whose boards and managements are behaving badly.  They knowingly misappropriate restricted funds for purposes other than for what the funds were intended for.  They run personal expenses through the organization or use assets of the organization for their personal use.  They put girlfriends on the payroll so that they can get health benefits.  They ignore implementation of effective internal controls.  They manipulate financial reports and other financial documents to obtain the results they desire.  They forget that as a public charity they have a fiduciary responsibility for the funds they collect.  Read the Chronicle of Philanthropy.  Hardly a month goes by without a report of some bad behavior.

I have no statistical data to back up the 10/80/10 rule.  Think of it in the category of “Moore’s Law” which is based on Gordon Moore’s observation that computer processing power doubles every two years or so.  Eric’s 10/80/10 Rule is based on my 20 years of observations working with nonprofit organizations.

In coming blogs I will describe examples from our work of the good, the bad, and the ugly with the hope that there may be something that you might be able to apply at your organization to improve your financial department.

(Naturally, because of client confidentiality, the identities of our clients will not be disclosed.)

Stay tuned.  Comments welcome.

Eric YPTC

Eric Fraint, President and Founder
Your Part-Time Controller, LLC