Archive | December, 2012

More Money Blues

23 Dec

It may be hard to believe, but getting too much money can sometimes destabilize a nonprofit organization.

In my last blog I outlined one such scenario where a grant or contract lacks sufficient funds for infrastructure support. This may strain an organization’s capacity to support the additional programming paid for by the new funds.

Cost reimbursement contracts are another common challenge to a nonprofit. Many contracts require the organization to spend their funds, and then submit an invoice to be repaid. It is up to the organization to be able to fund the float between the time the funds are spent until the time they receive reimbursement.

The following example illustrates this problem. Assume your organization has a $1.2 million government contract to deliver certain program services. Assume the funds are spent evenly during the year resulting in a monthly run rate of $100k.

Further assume your organization may invoice monthly. Your accounting department is able to generate invoices within two weeks after month-end. The government agency is typically able to reimburse you within eight weeks of receipt of your invoice. (Many city, state, and local agencies take longer.)

How long is your organization without the cash?

Assuming disbursements on average occur mid-month, it takes four weeks from date of disbursement to the date of sending the invoice. It then takes the government agency another eight weeks to pay. That is a total of 12 weeks, or approximately three months!

With a three-month turnaround, your organization is effectively forced to finance $300k at any one time (3 months @ $100k each).

Where will this money come from?

Many contracts provide for an advance that is intended to solve this problem. Hopefully you have this type of contract. Other agencies allow a reimbursement to be requested online with funds wired almost immediately to your bank account.

If neither of these options are available, let’s hope your organization is fortunate enough to have sufficient working capital to cover this. If not, you will need to raise the funds from donors who do not mind having their money go toward general operating support.

A line of credit may also be needed. The downside is that a $300k line of credit may cost your organization $15k per year in interest and fees depending on rates.

Further compounding the problem is that the government agencies themselves may experience their own cash flow problems, thus causing them to delay their reimbursements to you. We have seen many organizations, especially during the height of the recession, that had to waste considerable time begging government agencies to pay their invoices.

Moral of the story: taking on too many cost reimbursement contracts can stretch an organization’s ability to fund the float between the dates of disbursement and reimbursement. Before taking on contracts of this nature, perform a financial analysis to be sure that your organization can sustain the additional funding.

Comments welcome.

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

When Too Much Money Can Disrupt An Organization

16 Dec

It sounds counterintuitive, but many nonprofit organizations face situations where getting too much money in the form of grant and contract revenue can threaten their ongoing viability.

Take for example a foundation grant that is restricted to the direct costs of operating a program.  Assume the grant, as is often the case, fails to provide any funding, or provides insufficient funding, for general infrastructure and overhead support.   It is quite possible that if the organization gets too much restricted funding of this type that the operating needs of the programs will outpace the ability of the organization to support them.  This could destabilize the organization and, if the situation gets too severe, can cause the organization to collapse.

To illustrate, assume a hypothetical organization that provides after school services for children.  It has a building with classrooms, administrative staff, and teachers to run its programs.  The organization has carefully analyzed all its costs and knows that at its current level of programming it costs 30% of every dollar spent just to keep the doors open.   At the end of the year its financial reports show the following (assume all dollar amounts are in thousands):

Table   1

Program expenses

$700

70%
Fundraising, general &   administrative

$300

30%
     Total expenses

$1,000

The next year a very generous foundation offers a new $1 million grant to expand the after school programs.  The grant stipulates, however, that it will only pay for new direct costs.  It will not pay for any existing or new general infrastructure to support the new programs.  Somehow the organization, which is already operating at its optimum capacity, will need to accommodate a more than doubling of its program activities from $700 to $1,700.

The organization’s accountant prepares a preliminary forecast for the next year with this new grant assuming all else continues unchanged:

Table   2

Program expenses

$1,700

85%
Fundraising, general &   administrative

$300

15%
     Total expenses

$2,000

The forecast in Table 2 shows that the organization’s support services at 15% of total costs will be woefully inadequate to support the new programs.  30% is a more appropriate level for this organization.  At 15%, the building facilities will not be adequate, and there will not be sufficient support staff, etc.

The accountant does a second forecast in Table 3 of what will be needed to support the new programs and restore the 30% ratio of support service costs to total expenses:

Table   3

Program expenses

$1,700

70%
Fundraising, general &   administrative

$730

30%
     Total expenses

$2,430

The forecast in Table 3 shows that $730 is needed instead of the $300 already being spent.  That is in an increase of $430.  Where will this money come from?  Not from the foundation providing the additional funding because they specified that their money is only to be spent on new direct costs and not on infrastructure.  One way or another this organization will have to raise an additional $430 in general operating support to allow it to properly run these programs, or risk destabilizing the entire operation.

The situation is somewhat similar to a lifeboat, filled to capacity, adrift in the ocean.  Imagine that the physical boat itself and the crew member operating it represent the support services.  Now along comes a swimmer.  The boat can probably accommodate an additional person without much of a problem.  Now two more swimmers come by.  The boat picks them up but things are starting to get cramped.  Three more swimmers come by.  They scramble aboard.  Now the boat is very unsteady.  If any more swimmers come by and try to get on board, the boat may tip and sink.  Clearly additional support services in the form of a second lifeboat and an additional crew member to operate it is needed.

Moral of the story:  enlightened funders understand the need to provide funds for infrastructure support.  Yet even they may not provide enough.  To combat this, nonprofit organizations need to do their homework by thoroughly understanding their cost structures.  In addition to their program costs, they need to know what their general, administrative, fundraising, and all other infrastructure costs are.  They need to know their fixed and variable costs, and their direct and indirect costs.  This is the starting point of being able to properly manage their finances and to allow them to engage in educated conversations with their funders.

In a future blog I will give another example of a different situation nonprofit organizations commonly face where getting too much of the wrong type of funding can threaten their viability.

Comments welcome.

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

The Perfect Financial Report Format

9 Dec

What is the perfect financial report format for a nonprofit organization?

This is a reasonable question for a nonprofit to ask, and one that would appear to be easy to answer.

Some years ago we were retained by a small theater company.  They wanted us to show them the ideal “template” to use when budgeting and reporting their revenue and expenses.  They knew our firm worked with other theater companies, as well as nonprofits of all types, so they assumed we had this template, or format, and that we could simply share it with them, which we would have been happy to do.

The truth is, however, that there is no one format that serves all needs and all users of a financial report.

First consider that there are different types of reports.  Basic reports show actual performance while others show actual to budget comparisons.  Some financials compare this year to last year, while others just show the current year.  Reports can be prepared in great detail, or they can be prepared in various summary formats.  Reports can contain numbers, or they can include charts, graphs, explanatory text, and other dashboard information.

Financial reports must also serve the needs of multiple constituencies.

The executive director typically needs to see everything while program managers and department heads require financial reports for their areas of responsibility only.

The board of directors may desire to limit their financial report review to big-picture high-level recaps while the finance committee may need more detailed information.  Other board committees, for example the development committee, typically need more narrow financial information relevant to their area of oversight.

Funders need financial information too.  This can get complicated as foundations and government agencies can have different fiscal year-ends.  They may also have different budgets and different line items that they want to see tracked.

The organization may have one or more lenders that may require financial reports, possibly with some unique data that must be disclosed.

Then there is the annual financial audit, which many nonprofits have, where the presentation and format is largely determined by accounting and auditing rules.  In addition, if an organization expends federal funds above a certain threshold ($500,000 as of the date of this writing), OMB A-133 and other Office of Management and Budget rules dictate what additional financial information needs to be presented.

Most nonprofits, depending on their size and type, are required to file an annual Federal Form 990.  This has its own rules, formats, and disclosure requirements.

Government regulatory agencies may also require financial information using unique formats and budget line items.

So far, all of the above examples have been referring to historical financial reports, i.e. those looking at the past such as last month, last quarter, year-to-date performance, etc.  Reports that attempt to look at the future, such as forecasts, cash flow plans, budgets, and other pro-formas, can have widely different formats from one organization to the next.  In fact, we commonly find that a format preferred by one organization is rejected by another organization.

It should be clear by now that there is no single perfect financial report format.

The moral of this story: Nonprofit organizations of all sizes must have a financial department that is capable of meeting all needs.  The accounting system (and by accounting system I do not mean just the accounting software, but that is the subject of another blog) must be set up in such a way that these varying and sometimes inconsistent requirements can be met with a minimum of fuss.

Comments welcome.

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

<span>%d</span> bloggers like this: