Although the term interdepartmental sales may be reminiscent of the for-profit world, nonprofit organizations must be careful to account for transactions among departments or entities within their organization and account for them properly. When the output of one division in your organization becomes the input of another, you have an interdepartmental transfer on your hands – and a transaction that must be recorded in the accounts.
For a nonprofit organization, interdepartmental sales may be less common than in the for-profit world, but it still occurs. Let’s say that your nonprofit has a publishing division that publishes guidebooks for the industry that you serve. These books cost $20 each, wholesale price, and earn a substantial amount of margin for your nonprofit when sold through bookstores, online outlets, and at membership events. If a department orders 20 books, these books must be taken out of inventory and charged back to the department. Failing to charge back to the department ordering the books means a loss in the publishing division without accounting for the transfer. Interdepartmental transfers account for the movement of goods from one group’s budget to another in the organization.
Nonprofits that offer consulting services to members may also find that they need to account for interdepartmental transfers. If similar services offered internally generate revenue when offered externally, they should be priced and charged as interdepartmental transfers.
Conflicting Goals
There are certain problems inherent in any interdepartmental transfer. Interdepartmental transfers may be charged at a lower rate than selling the same goods or services to an entity outside of the organization. Too many interdepartmental transfers can keep a department from achieving financial goals. The department has more incentive to sell to outside entities than internal ones if they can make a higher margin on the same item sold elsewhere.
It can also be tricky to account for every service or item moving between departments. Should the creative services department charge for their graphic designer’s time when they also provide services to members?
Developing a rubric for interdepartmental transfers can pre-empty these and other questions that arise as you consider accounting for interdepartmental transfers. Not every situation is black and white, and a balance must be struck between common sense and good accounting practices. Each nonprofit will handle the situation differently depending on how they work with external and internal groups.
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Lastly, it is important to involve your organization’s managers in decisions regarding interdepartmental transfer pricing. Establishing pricing policies impacts their budgets. If their performance reviews are based on how well they achieve their goals, including managing budgets, then ensuring that this information is calculated fairly and with input is important.
Another method to assess interdepartmental transfer pricing is to review the going rate for similar goods and services. If a published average is available for your industry, item, or service, then using a published, commonly accepted rate may be a good way to begin. With input and review, this information may be enough to provide a fair range of interdepartmental pricing.
Although uncommon in the nonprofit world, transfer pricing or interdepartmental pricing is an important part of accounting for nonprofits. Having an established policy that can guide managers and staff is a great step forward.
Did you know that Welter Consulting offers the Nonprofit Enrichment Series, a free learning resource for nonprofit organizations? Check out our next free webinar.
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