I was recently featured on the front page of the Philadelphia Business Journal, along with a full-page inside-the-back cover Q&A.
The profile was under the category of “social capital.” While it is ostensibly about me, it is really about the work that our firm does for the nonprofit sector.
The link to a PDF of the two pages follows:
Eric Fraint Profile in Philadelphia Business Journal 1-22-2016
Comments welcome.
Eric Fraint, President
Your Part-Time Controller, LLC
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
A vision was recently realized. What was the vision and who was behind it? Read on.
The first nonprofit supermarket, named “Fare & Square,” opened in a “food desert” in Chester Pennsylvania on Saturday, September 28, 2013. Chester, a city of 34,000 where one in three people live in poverty, had been without a supermarket for twelve years.
If you’ve not heard about this, I refer you to various news articles and videos. See the citations below.
In this blog, though, I am interested in the vision that made this possible, and the man behind the vision.
The man is Bill Clark, executive director of Philabundance. Philabundance is the largest hunger relief organization in the greater Philadelphia metropolitan area. It was founded in 1984 by Pam Lawler as a food rescue organization and later taken over by Scott Schaffer who expanded the organization’s operations. Bill came in as executive director in 2001.
I can’t say for sure when the idea that has become Fare & Square first germinated, but various press stories have given credit to Bill for working on this for seven years. I can say this, however: it has not been an easy seven years.
Along the way Bill had to overcome every imaginable obstacle.
To secure funding Bill had to cobble together a hesitant coalition of government, foundation, and private support. He had to persuade his board that the plan was viable. He had to win the hearts and minds of his staff that worried that the organization was straying too far from its food rescue origins. The business model had to be developed. Consultants and experts of all types had to be consulted. A skeptical local community in Chester, who had seen too many promises in the past go bad, had to be wooed. And ultimately, an executive director willing to risk his job, career, and reputation was required.
Team efforts are needed for grand visions to succeed. In this case the team consisted of a strong board which gave the go-ahead, a highly motivated staff that did the work, funders who understood the potential, and a local community who appreciates the results.
At the center of all this was a man with a vision. Bill Clark.
Fare & Square is still brand new. The final chapters on this story have yet to be written. But two things are eminently clear:
(1) thousands of people in the city of Chester will benefit greatly, and;
(2) none of this would have happened without a man of vision, Bill Clark.
Comments welcome.
Eric Fraint, President and Founder
Your Part-Time Controller, LLC
For additional information about Fare & Square, I refer the reader to the following links:
The Philadelphia Inquirer – http://articles.philly.com/2013-09-30/news/42505117_1_ninth-and-trainer-streets-west-end-food-center-grocery-store
The New York Times – http://www.nytimes.com/2013/11/24/opinion/sunday/an-oasis-of-groceries.html?_r=0
A video on Billmoyers.com – http://billmoyers.com/content/an-oasis-in-a-food-desert/
Philabundance website – www.philabundance.org
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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
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.
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
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.
[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
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.
EricYPTC 