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The Truth About Nonprofit Outcomes Measurement: Trying to run when you cannot yet walk

28 Dec

Outcomes measurement at nonprofit organizations will never gain widespread traction until at least one fundamental problem is solved.

Much has been written about the potential benefits of outcomes measurement.  Who can argue that knowing the effectiveness of a nonprofit’s programs is anything but a good thing?  Donors and nonprofits alike should want to know the effectiveness of their grantmaking so that they can fix what is broken or redirect funds to what works.

I’ve written separately about the futility of attempting to find a single measure of effectiveness (see “In Search of the Holy Grail of the Nonprofit World” ).  Yet, though often difficult and expensive, measuring effectiveness can be very beneficial.

But there is an underlying problem, typically overlooked in the outcomes measurement debate, which prevents most* nonprofits from being able to measure their outcomes: most organizations cannot effectively measure, report on, and analyze their basic finances.  How can these organizations, who cannot adequately and timely report on their financial operations, be expected to move to the next level of measuring, reporting, and analyzing their outcomes?

* My assertion that “most” nonprofits cannot do a proper job of reporting the basics of their financial operations is based on my experience over the last 20 years working with and visiting hundreds of nonprofits.  (I exempt our accounting clients from this troubled group: our clients have strong financial reporting systems!)

The uncomfortable truth is that asking a nonprofit organization to perform relatively sophisticated outcomes measurement when they cannot properly perform basic accounting and financial reporting functions is like asking a child to run who cannot yet walk.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC
The NONPROFIT accounting specialists

BILL CLINTON FEELS YOUR PAIN

1 Sep

If you’ve ever had a complaint about nonprofit accounting rules, you have a friend in former President Bill Clinton.

In a recent article from the New York Times, the Bill, Hillary and Chelsea Clinton Foundation has come under criticism for mismanaging the foundation’s finances.

According to the New York Times article, “The foundation piled up a $40 million deficit during those two years [2007 and 2008], according to tax returns [IRS Form 990].”

In an open letter on the Clinton Foundation website, Bill Clinton indicates his frustration with accounting rules. He says:

“The New York Times recently reported that the Foundation ran a deficit of $40 million in 2007 and 2008 and $8 million in 2012. The reporting requirements on our tax forms, called 990s, can be misleading as to what is actually going on. Here’s why. When someone makes a multi-year commitment to the Foundation, we have to report it all in the year it was made. In 2005 and 2006 as a result of multi-year commitments, the Foundation reported a surplus of $102,800,000 though we collected nowhere near that. In later years, as the money came in to cover our budgets, we were required to report the spending but not the cash inflow… In other words, for any foundation with a substantial number of multi-year commitments, the 990s will often indicate that we have more or less money than is actually in our accounts.”

In other words, according to President Clinton, it’s not me, it’s the accountants.

There is a great deal of merit in President Clinton’s claim.

In a previous blog I wrote about The Single Biggest Problem With Nonprofit Accounting Rules. (See https://ericyptc.com/2013/01/20/the-single-biggest-problem-with-nonprofit-accounting-rules/)

The trouble making accounting rule in question is commonly known as FASB 116.

(FASB stands for Financial Accounting Standards Board. Several years ago the accounting rules were “codified” to make them easier to follow. Send me an email if you’d like the reference to the new rule number.)

This troublesome rule obscures, rather than illuminates, nonprofit performance. In our accounting practice we spend a lot of time helping nonprofit managements explain to their boards and to funders this quirk in their financial reporting.

Bill, if you are listening, call us. We have a New York City office!

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC
The NONPROFIT accounting specialists

Washington, DC – New York, NY – Philadelphia, PA

40,000 lives saved. And that was just last year.

14 Aug

Sometimes a seemingly simple observation, combined with the passion of a nonprofit entrepreneur, can lead to incredible results.

Consider the story of Eli Beer, a Jerusalem EMT.

As a teenager Eli drove an ambulance for two years.  He witnessed people dying while waiting for an ambulance to arrive, people who might have been saved if medical help could have arrived within 3 minutes instead of the usual 20 minutes that it took for a Jerusalem ambulance to navigate through the city’s notorious traffic delays.

What if, Eli reasoned, a network of trained volunteers could arrive on foot, or by bike, in just a few minutes, and stabilize the victim until the ambulance arrived?

This insight resulted in the development of the “ambucycle” and the formation of the nonprofit United Hatzalah.

Ambucycle

Eli is not a client of ours, but I wish he was.  Though I’ve never met him, he is just one more example of why I, and the rest of our team at YPTC, work with nonprofit organizations.

Listen to this inspiring story, as told by Eli himself, at TEDMED 2013.

Link to Eli’s TEDMED talk: http://www.tedmed.com/talks/show?id=47048

Comments welcome.

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

In Search of the Holy Grail of the Nonprofit World

31 Jul

The single metric that will tell us how effectively a nonprofit delivers on its mission does not now and likely never will exist.

Despite our desire to measure impact, there are many things that simply cannot be measured, or are too costly or impractical to measure.

Quite frankly, even when outcomes can be measured, reasonable people can disagree about the interpretation of the data.

Take for example Peter Singer.

Mr. Singer’s Wikipedia entry describes him as “an Australian moral philosopher. He is currently the Ira W. DeCamp Professor of Bioethics at Princeton University and a Laureate Professor at the Centre for Applied Philosophy and Public Ethics at the University of Melbourne.”

In a recent TED Talk recorded in March 2013, Mr. Singer said that some charities are hundreds or thousands of times more effective than others.

To illustrate his point, he posed the following facts about blindness.

He says that it costs about $40,000 to train a guide dog and to train the recipient in how to work together.  However, it only costs somewhere between $20 and $50 to cure a blind person of blindness in a developing country if he has trachoma.

In other words, Mr. Singer says that you can “provide one guide dog for one blind American [emphasis added] or you can cure between 400 and 2,000 people of blindness.”

He adds “Providing a guide dog for a blind person is a good thing to do, but you have to think what else you could do with the resources…I think it is clear what the better thing is to do.”

If I were a blind person in America, I might have a serious disagreement about Mr. Singer’s interpretation of the data and his resulting conclusion.

His comparison itself is flawed as it poses a binary set of options: choose one, which is wasteful, or choose the other, which is hundreds of times more effective.

The comparison is further flawed as it compares apples to oranges: assisting a blind person by giving her a guide dog is not the same issue as curing blindness.

The several hundred blind people who receive guide dogs every year, as well as the hundreds, if not thousands, of people who donate to the nonprofits that make this happen, will have a sharply different opinion from Mr. Singer about the effectiveness of their philanthropy.

photo

[This graphic, taken from a TED Talk given by Mr. Peter Singer in March 2013, attempts to equate the relative effectiveness of providing guide dogs to blind people versus curing blindness caused by trachoma.]

The point is this: If a distinguished moral ethicist like Mr. Singer can make this mistake, what does this portend for the ability of the rest of us to come up with an objective metric, or series of objective metrics, to measure the effectiveness of a nonprofit, even when we have the data?

Like the Holy Grail, we are unlikely to find it.

PS  Make no mistake, I am not a nihilist.  As an accountant who makes a living helping nonprofit organizations, I believe in the power of timely, accurate financial and non-financial information, once analyzed and interpreted, to help power an organization toward superior results.  I just do not believe there is any single metric, or set of metrics, that will somehow make it possible to rate or compare nonprofits to each other in terms of their effectiveness.

Comments welcome.

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

The Overhead Myth and the Bridge to Nowhere

26 Jun

The AICPA (American Institute of Certified Public Accountants) held its annual National Not-for-Profit Industry Conference last week in Washington, DC.  About 2,000 accountants from around the country selected from among approximately 60 sessions during the two-day conference.

In the afternoon of the second day there was a 75 minute session titled “What the Watchdogs are Watching.”  The featured speakers were Ken Berger from Charity Navigator and Art Taylor from BBB Wise Giving.

The timing of this session and the appearance of Berger and Taylor was fortuitous as it came just days after the release of their already infamous joint letter, written with Guidestar, entitled “The Overhead Myth.”  This letter is the latest salvo in the war against so-called overhead ratios to determine the effectiveness of nonprofit organizations.

There is much wrong with overhead ratios that I am not going to get into here.  Readers of my blog already know where I stand on this issue.  By chance, I posted my blog entitled “WHEN COMMON SENSE IS NOT SO COMMON: How misusing accounting data can lead one astray” just one day before The Overhead Myth letter was released.

In terms of full disclosure I should say that Dan Pallotta’s book, “Uncharitable,” is required reading for our staff and a copy is given to every new hire.  The book is also required reading for a class I teach at the Fels Institute of Government at the University of Pennsylvania.

What I found particularly interesting at the AICPA conference was not anything that Berger and Taylor had to say in their session (I don’t think they said anything that was not already in the public domain).  What was striking to me was the dearth of discussion during the rest of the two-day AICPA conference about what the overhead myth implies for the accounting community and the relevance of accounting standards for the nonprofit world.

To be clear, several of the conference sessions I attended during the conference mentioned The Overhead Myth letter.  I would say that the accounting community, or at least the session presenters, was by and large very familiar with the letter’s release.

But while the letter was mentioned and briefly discussed at several sessions, what was missing was any recognition (at least in the sessions I attended) of what the letter implies for the accounting world.

Specifically:  if overhead percentages are, in the words of the overhead myth letter, “a poor measure of a charity’s performance,” what does this imply about the countless hours of work spent by accountants at nonprofits everywhere, every day, developing the functional expense numbers that the ratios are based on?

If the information is a poor measure of a charity’s performance, are we all wasting our time developing poor information?

Are GAAP and IRS rules that require the reporting of functional expense information (i.e. program, fundraising, and management expenses)  irrelevant at best, and, at worst, not only a waste of time, but a misleading means by which to allocate scarce public resources among nonprofit organizations?

To put it another way, if accountants are building a bridge to nowhere, what does this imply about the time, money, and effort spent to build the bridge, and what does it portend for the travelers forced onto the bridge only to find it is leading them astray?

Comments welcome.

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

WHEN COMMON SENSE IS NOT SO COMMON: How misusing accounting data can lead one astray

16 Jun

I’m an accountant. Yet, I would be among the first to admit that standard accounting tools for measuring the performance of nonprofit organizations don’t always make sense.

Here is an example.

Suppose I told you that I have an investment with a 20% rate of return. Would you be interested?

As I write this, with interest rates in the very low single digit zone, I would be happy just to find a solid dividend paying stock yielding 5%, so 20% would certainly get my attention.

A 20% rate of return means that for every $1 that I spend, I get back $1.20 (my original $1 plus an additional $.20). Not a bad return, right?

Suppose I now tell you that I have an investment with a 100% rate of return? I spend $1 and I get back $2 (my original dollar plus an additional dollar). You would probably think this is too good to be true and that I was either lying or simply nuts.

Let’s stretch this point one more time. Imagine that I now tell you that I have an investment that returns 1,000%!!! I spend $1 and I get back $10. This would be so incredibly good that it must be outside the realm of all possibility. Certainly if we could find a person or organization that could achieve this big a return on a large scale we would reward this person or organization with the highest accolades. Such a person or organization would appear on the front page of Time Magazine, Forbes, and, hopefully, the Chronicle of Philanthropy. The CEO would be lauded for their outstanding success.

Yet, in the nonprofit world, this organization would be downgraded.

Consider the rating of organizations done by Charity Navigator, one of the larger charity “watchdogs.”

Charity Navigator attempts to rate the effectiveness of nonprofit organizations using a variety of different metrics. To do this they rely primarily on publicly available information on the Form 990.

I don’t fault Charity Navigator for attempting to rate nonprofits, or for using the 990. However, one needs to apply some common sense to whatever analysis one attempts to do.

One of the measures Charity Navigator uses is a statistic they call “Fundraising Efficiency.” They define this on their website as:

“The amount spent to raise $1 in charitable contributions. To calculate a charity’s fundraising efficiency, we divide its fundraising expenses by the total contributions it receives.”

Once an organization hits a 10% “fundraising efficiency” (they spend $1 to raise $10), Charity Navigator starts deducting points from the organization’s score. Once they hit 20%, more points are deducted, and so on.

So how could a 1,000% rate of return (spend $1 and get back $10) in the for-profit world be so outstanding, while in the nonprofit world an organization has points deducted from their evaluation score?

Has common sense been suspended?

Comments welcome.

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

Accounting uses one software system, development uses another, and the information never agrees! What should you do about this?

5 May

Has this ever happened to you?

Your finance committee meets. The committee members are presented with a packet of information that includes financial reports prepared by your accounting department and reports prepared by your development department. As your committee reviews these reports they notice that the donor grants and contributions from your accounting department do not agree with the revenue numbers from your development department. Questions are asked, the staff tries to explain, and everyone is bewildered.

Shouldn’t the two sets of reports contain the same information? Is one set of reports right and the other wrong? The differences between the two can be confusing and, if inadequately explained, embarrassing.

You may also be wondering: are we wasting time by entering the same information twice, once by accounting and once by development?

All nonprofit organizations have an accounting system. Many, if not most, nonprofits also have a donor database. Can and should these parallel systems talk to each other? This article will discuss the basic issues.

Nonprofits typically receive grants, contributions, donations, pledges, gifts in-kind, sponsorships, etc. These sources of revenue may come from foundations, corporations, individuals, and governments.

Your accounting department will record this revenue in its accounting system. If your organization has a separate donor database, someone in your organization, perhaps in your development department, will also record this revenue information in the donor database. If the same information is being recorded in two different places, why, unless someone makes a data entry mistake, might the two systems report different revenue numbers?

The answer is that accounting rules (called Generally Accepted Accounting Principles or GAAP) require accounting information to be entered one way, but the development department may need the information to be entered in a different way. Therefore when reports generated by the accounting and development departments vary, it is quite possible that neither one is wrong.

Let’s look at some examples to see how this might happen. Suppose a donor sends a check for $10,000 to pay a pledge the donor made in a previous period (such as last month, or two months ago, last year, etc.). The development department enters this $10,000 in the donor database and at the end of the month will produce a report including this $10,000 in their list of contributions.

The accounting department, on the other hand, will apply this $10,000 against a pledge receivable that was recorded in the previous period. If your accounting system is on an accrual basis, it counts revenue when the pledge was made, as opposed to the development department, which might be on a cash basis and logs its donations when the checks actually arrive. Since the revenue from this pledge was already recorded in the accounting system in a previous period, no new revenue results from the receipt of this check. So when the accounting department produces its Statement of Activities, they show no revenue while the development department report shows $10,000. The reports seem to be off by $10,000, yet no one actually made a “mistake.”

Another common example of different treatments of the same transaction can occur with grants.

A grant letter typically spells out the terms, restrictions, and conditions, if any, of the grant. For example, say that a foundation awards your organization a grant for $100,000. The development department will want to carefully track this grant through its donor database and they will print reports showing the receipt of this grant.

The accounting department, however, has to follow GAAP. For example, this $100,000 grant may have a condition attached, such as the need for some uncertain event to occur in the future. This condition may preclude this grant from being recorded in the accounting system until the condition is resolved. This creates the potentially bizarre situation of the development department reports showing $100,000 of revenue while the accounting reports show zero!

So how do we solve this problem? The finance committee must be given information that is clear and unambiguous. Presenting them with reports showing seemingly conflicting information is not satisfactory. What can be done about this?

The answer lies in three parts: Part one is the need for better communication between the accounting and development departments. Specifically, there needs to be a clear set of policies and procedures such that both departments understand how to treat various types of contributions and grants. Furthermore, the donor database and the accounting general ledger, the place where accounting information is stored, should be set up so they are in alignment with each other. For example, if the donor database uses account number 4500 to designate corporate contributions, then the accounting system must also use account number 4500 to designate corporate contributions.

Part two of the answer is that both the accounting system and the donor database must be reconciled to each other at least once per month. With a willing accounting department, and with a willing development department, along with support from the organization’s management and executive director, this communication and alignment is very doable and can be accomplished relatively easily.

Part three is the need to modify report formats, both from the accounting and development systems, to display the information in ways that make clear what is happening to the reader.

Once the issue of conflicting data is addressed, the next issue to address is the potential inefficiency of entering contributions twice; once in the accounting system and once in the donor database. If, for example, your organization receives 100 donor checks per month, is there a way to avoid having two people enter each check in both systems? Can this duplicate entry be avoided?

Of course yes.

The solution involves establishing a disciplined process in which all the contribution details are entered into the donor database, with only summary information posted to the accounting general ledger. For example, assume an organization receives 10 donations on a given day. Each of these donations must be entered in the donor database so that the development department has all the information they need to track the donors, send them thank you letters, follow up with them, etc. Once these contributions are all entered, a summary report can be printed from the donor database showing the total dollars by account distribution. Seven of the checks might have been individual contributions, so they can all be summed into one number. The other three might have been foundation grants, and they can be summed into one total as well. Your accounting department can take this summary report and enter a single journal entry to record the day’s contributions. The double entry problem is effectively eliminated. Note again, though, that a monthly reconciliation must be done to insure the integrity of the information in both systems.

It is clear that an organization can perform quite nicely with two separate systems: one for accounting and one for donor data. However, would an integrated system be more efficient?

By an integrated system I mean a single piece of software that will handle both your organization’s accounting and donor data needs. The theory is that you enter a contribution once and you are done.

The answer is generally yes, an integrated system would be preferable. However, it depends on the system as some are marketed as being integrated when they are really not. It also depends on price and sophistication, as some integrated systems might be unnecessarily expensive and complicated to use.

Integrated systems still require communication between the development and accounting departments. There still needs to be a disciplined set of policies and procedures governing how contributions are recorded. There still needs to be a single chart, or list, of accounts that both departments use. And there needs to be consistency around the use and understanding of financial terms such as knowing when a cash receipt is revenue for the period versus payment on a pledge from a previous period. There still needs to be an accepted understanding of how and when to recognize revenue on conditional grants.

For these reasons, our advice to our clients who have separate accounting and donor systems is to put the brakes on spending more money on an integrated system until they better understand the pros and cons. The essential first step is to get the development and accounting department to communicate about the issues described above. Once all the necessary policies and procedures are in place and things are running smoothly, that is the time when a proper cost-benefit analysis can be done on whether or not to move up to an integrated system.

Comments welcome.

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

NOTE: This article originally appeared in Don Kramer’s “Nonprofit Issues.” I highly recommend Don’s newsletter to anyone in a position of authority and responsibility in the nonprofit world. For more information, visit: http://www.nonprofitissues.com.

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