April 2020

In our last article, we talked about the importance of building a financial framework or stabilizing your existing one to ensure your nonprofit continues to operate during this time of increasing uncertainty. The COVID-19 pandemic has created an economic upheaval that may make it harder for nonprofits to secure funds. While it’s normal to worry about finances, worrying doesn’t change the situation. Instead, focus that energy on building a financial framework and enacting operational strategies to protect and stabilize your current assets while minimizing expenses. A strong operational core protects the major assets of a nonprofit to enable it to continue its work in the future.

Stabilize the Operational Core

Many nonprofits focus on funding their programs but neglect the operational core. What is the operational core?

Imagine an apple tree. The roots grow deep into the ground while the trunk supports the branches laden with apples. If your programs are the apples, the operational core is the tree trunk. Without a strong trunk or core, the trunk can’t support the branches, the branches can’t support the apples, and the tree dies. A nonprofit’s operational core is the trunk and roots. The branches are its programs, and its work, the apples or the fruit of those programs.

If you cut a tree’s trunk, the whole tree dies or is stunted for many years as it recovers. Cutting back on operating expenses while fully funding programs can slowly starve a nonprofit to death.

What does the operational core include?

1. Strategy development
2. Financial management
3. Human resources management
4. Supervisory practice
5. IT and data management
6. Systems management
7. Administrative support
8. Infrastructure

Nonprofits with a strong core can build programs to serve their constituents. Organizations that focus financial resources exclusively on programs starve the core. Yes, it’s possible for nonprofits to “starve to death.” Programs may be well-funded, but the operating core cannot continue without an influx of capital.

To continue operating during and after the COVID-19 crisis, you’ve got to concentrate on funding the core.

Establish Essential Financial Goals

One of the first steps to building a healthy core is to establish essential financial goals. There are four financial goals every organization should strive towards:

1. Correction of structural deficit
2. An annual operating surplus (2-5% is recommended)
3. Developing a 6-12 month reserve to cover expenses during downturns
4. Diversifying the revenue mix

Correcting structural deficits, ensuring an operating surplus, and maintaining an emergency capital reserve are all positive steps to take to secure the core against uncertain times and economic upheavals.

Diversifying the Revenue Mix

The majority of nonprofits fund activities through a mix of revenues. Revenues may come from membership dues, sales of products or services, grants, donations, or other sources.

Nonprofits run into problems when their revenues depend heavily on one or two sources: the food pantry funded almost solely through community donations; the environment nonprofit funded by government grants. When the economy gets shaky, funds may become uncertain in one area but better in another. Those who put all their funding ‘eggs’ in one basket may find it harder to recover from economic upheavals such as we’re experiencing now.

Diversifying revenues also helps to build a strong financial core. Some organizations find their programs well-funded while their core struggles. This is due in part to restricted funds, which may be applied to specific ‘branches’ of the nonprofit such as programs or activities. A diverse revenue stream that includes unrestricted funds enables you to put income towards infrastructure, for example, an essential aspect of building a strong core or setting aside 6-12 months of operating expenses, another component of building a strong financial foundation.

Embrace the Future – Build a Solid Foundation

The future is uncertain, but when was it ever certain? Nonprofits have gone through rough times before. Now, more than ever is the time to act calmly and logically. Build a solid financial foundation. Manage the resources that you have. Focus on your mission. Make prudent judgments about what you need, what you can delay, and what must go. With the right data, honest discussions among your team, discipline, and resilience, you can survive and thrive in this era of financial uncertainty.

If you’d like some help with nonprofit planning, contact Welter Consulting. Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

As the COVID-19 pandemic continues, nonprofits worldwide are facing an uncertain future. Many, funded by restricted grants, find themselves in the predicament of having programs funded but core infrastructure lacking the funds to continue. Others face high demand and strained resources. Some organizations, which may be paid for services rendered in person, are scrambling to think of new ways to serve their constituents while maintaining social distancing.

It’s exhausting, it’s exhilarating, and it’s forcing us all to draw from our well of creativity and ingenuity to get through these times.

Navigating the Current Crisis

Nonprofits may feel like they’re on a raft paddling down a swift river. The rapids shoot them towards rocks, and they feel they must avoid the rocks at all costs.

COVID-19 is like the rocks in the river. Hitting the rocks is inevitable, but how well your organization works together will affect the outcome. With the right planning and organization, and everyone working together, your nonprofit can minimize the financial impacts of the COVID-19 crisis, move past it, and thrive.

Financial Discipline, Financial Framework

Financial discipline is a critical practice even when times are good, but especially vital when times are challenging. Fiscal discipline begins by building a robust financial framework.

Such a framework consists of:

1. Correction of any deficits, for example, secure unrestricted funds to compensate for restricted funds that leave core administrative functions underfunded while programs are well funded. You need capital for overhead and infrastructure just as much, if not more than you do to keep programs running.
2. An annual operating surplus that can be carried over to smooth “lean times.”
3. Development of healthy operating reserves with 6 to 12 months of expenses covered by the reserve.
4. A diversified revenue mix, so the organization isn’t dependent upon a single revenue stream.

What if you’re far from this ideal? Then it’s time to look at several scenarios and decide on your strategy moving forward.

Gather the data that you have on hand about revenues and expenses. Revenues may include restricted and non-restricted funds, fee for service activities, membership fees, and donations. Expenses should include both overhead and operating expenses as well as salaries, infrastructure, and program-related expenses.

Next, ask everyone to join the conversation about the financial situation. This isn’t time for a subcommittee or a task force. Since everyone in your organization will be impacted by the road you decide to take, get everyone’s input into the decision.

Evaluate the available data based on bad, worse, and different:

• Bad – what if the crisis continues?
• Worse – what if things get worse?
• Different – what if things change?

Ask yourself:

1. What is the big change we drive in this world or our community? This gets to the operating principles of the organization. Why do you do what you do?
2. Next, look at the programs you have. What do you do the best? Which is the only program you do, one that nobody else does or does well?
3. Are there any programs that you cannot provide now because of social distancing?

Some scenarios you might wish to consider include cutting back on all programs, cutting down to a handful of mission-driven programs, or focusing on a single area until things return to normal. The only way to consider each scenario effectively is to utilize all of the data resources available to you, put the facts side by side, and evaluate them against your organization’s mission and unique position in the world.

Resilience and Adaptability

In the book Good to Great, author Jim Collins uses animal metaphors to emphasize how successful companies weather turbulent times. One animal he points to is the hedgehog.

The hedgehog is not the most beautiful, exciting, or exotic animal in the zoo, but it is one that is undoubtedly the most resilient. Hedgehogs fill a unique ecological niche yet can adapt to many different environments. They’re one of the oldest mammal species known to biologists. Their longevity as a species may be attributed to their adaptability.

If your nonprofit is to remain viable for the long term, it must be adaptable during these challenging times. Like the hedgehog, you’ve got to find your unique niche and make the most of it. The only way for nonprofits to find their unique niche is to consider potential scenarios and weigh the impact of their choices against the mission. Which choices will help you achieve your mission with the least possible impact on margin?

It’s neither easy nor pleasant, but frank conversations about programs, funding, and long-term viability are necessary right now. We’re all wishing and hoping that this epidemic will pass quickly and that our healthcare industry finds a vaccine or a cure. Until then, we must deal with the reality of the situation, examine the data at hand, and plan for the future of our organizations as best as we can.

If you’d like some help with nonprofit planning, contact Welter Consulting. Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

Companies worldwide continue to feel the ripple effects of the novel coronavirus (COVID-19) outbreak. For-profits such as retailers closed their doors due to statewide “stay at home” orders that keep shoppers from the malls and stores. Nonprofits such as food banks feel increased demands on their services while others face unprecedented challenges to keep their doors open. Everywhere, everything we once knew as certainty is changing, and changing rapidly, with no end date in sight.

In addition to the legal and insurance impacts of the COVID-19 pandemic are the economic, financial, and accounting ramifications of the stay-at-home order. Several FASB guidelines can be applied to the current situation and used to inform investors, donors, and the public about the impacts upon a nonprofit’s financial reporting statements.

FASB Accounting Standards Codification (FASB ASC) 855: Subsequent Events

FASB Accounting Standards Codification (FASB ASC) 855, Subsequent Events, defines the topic as “events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.” There are two types of Subsequent Events: recognized and nonrecognized. COVID-19 likely falls into the nonrecognized category, which is defined as “events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (that is, nonrecognized subsequent events). If the balance sheet was prepared before March 1, 2020, when COVID-19 first came to attention in the United States, it is likely a nonrecognized event.

FASB ASC 855 provides more details.

Organizations should reassess now when and if they will be able to meet the objectives outlined in their 2019 reports or the previous quarter’s reports. Many nonprofits face unprecedented changes, shifts, and disruptions; plans that sounded reasonable a few weeks ago might be unreasonable now.

How you disclose such changes are up to you, but some are including disclosures in their updated reports. Nonprofits must watch their portfolios, including equity stakes in bonds and other investments, and determine if they should disclose how the pandemic is affecting them.

Accounting Estimates May Be Off

Just as plans that looked reasonable a few weeks ago might be unattainable now, so too accounting estimates may be very far off.  Nonprofit accounts must make prudent judgments now about the accounting estimates. AU-C 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, can be of help when making decisions about estimates.

Loss Contingencies

If information becomes available after the date of financial reporting (but before they are issued) about losses due to COVID-19 that an asset is impaired or is likely to be impaired, you may need to disclose it. If the event occurred before the balance sheet date, an accrual should not be made. Disclosure, however, might be required. See FASB ASC 450-20-50-9 for disclosure details. Most disclosures should include the nature of the contingency and an estimate of the possible losses.

What About Leases?

Many landlords are changing the terms of leases to help their tenants during the COVID-19 crisis. If you’re fortunate to have such a landlord, you may need to determine if the modifications change the lease classification.  In other words, according to FASB ASC 840, Leases, specifically 840-10-35-4, if the substitution of the modified provision changes the lease and pushes it into a new category.

Where the new lease standard (FASB ASC 842, Leases) has been adopted, when a lease modification occurs, the lessee has to determine whether the lease modification will be accounted for as a separate contract or as a change to the existing agreement. There’s no one best way; each organization must choose its path based on its current financial information.

Auditor’s Reports: Emphasis of Matter (EOM)

Some auditors may choose to include an Emphasis of Matter (EOM) statement in their reports if they deem the impact of COVID-19 significant enough to warrant bringing it to the reader’s attention. Each auditor must use prudent professional judgment to determine whether adding an EOM statement is necessary.

COVID-19 is exacting an enormous toll on the world. The loss of life is irreplaceable—the shock to the economy, unforeseen. Nonprofits, like all companies facing this unique situation, must use their best judgment during the preparation and reporting of financial statements to remain compliant with GAAP standards.

If you need any assistance during these times, Welter Consulting is here for you. We can be reached by phone (206-605-3113) or online.