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Grant Management

Jul 17
0

Challenges and Solutions for Allocating Indirect Costs

By | Abila, Accounting, Audit, Grant Management, MIP Fund Accounting, Nonprofit | No Comments

Accurate nonprofit financial reporting relies upon proper allocation of indirect costs. Indirect costs can be challenging to place properly, but once they are, they can make a significant impact on your overall budget. More importantly, they add an extra dimension to all reports reviewed by your Board and executive team and can help with budgeting, staffing, and other critical decisions.

Classifying Expenses

Although nonprofits may have multiple expense categories, many expenses actually fall into one of three simple classifications. These include:

  1. Administration: Management and General Administration
  2. Programs: Any programs that support the organization’s mission
  3. Fundraising: The cost of raising funds

Your organization may call them by different names, but upon closer examination, the major expense categories should fit into these areas. Those expenses which can be identified as belonging to one of these three categories can be quickly allocated. Others, however, fall into more of a gray area which cannot be identified with a specific program or budgeting category.

Indirect Cost Allocation and Its Effects

Indirect cost allocation impacts many areas of your organization. It impacts how donors view your organization, for example, by changing the way in which expenses are laid out in your financials. High administrative fees may be unacceptable to some donors.

Indirect costs also impact the budget for programs. If costs seem to be weighing heavily towards one area, that area may get more or less budget for upcoming years.

The allocation also impacts the final percentages that appear on Form 990 for each tax year. These are the numbers that are listed publicly and can impact the public’s view of your organization. Think carefully about how you apportion indirect costs as their ramifications can be long-lasting.

Coming Up with an Indirect Cost Allocation Method

Determining a fair and equitable indirect cost allocation method is a good solution to the problem of items that do not have an easy ‘home’ in your budget line. By examining the methods you have on file to share expenses, you can plan and allocate accordingly.

One method by which you can allocate indirect costs is to estimate what percentage belongs in each major budget line. Let’s assume that an administrative assistant works for both the donor relations and the program area. Which budget should contain his salary? If the assistant supports three people in donor relations and one in programs, then 75% of his salary budget can be allocated to donor relations and 25% to program areas.

Obviously, not every allocation will be this clean and easy. Square footage is one area that can get tricky. For instance, if you rent office space shared by multiple program and departmental areas, determining the percent of costs to be borne by each department can get complicated if many departments share the space. Sometimes, you just have to give it your best guess.

Consistency Is Key

The big thing to remember about allocation is that consistency is the key to successful indirect allocation. Whatever method you choose, put it in writing and file it in accounting and financial documents, plans, and budgets so that it is common knowledge. Then, apply the rules fairly and consistently to the budgeting process. It is this consistency of application that auditors look for to determine if an indirect allocation method is acceptable.

Indirect allocation is a common challenge in the world of nonprofit financial management. Fortunately, it’s one with a solution that makes sense and that can be rolled out fairly easily throughout your organization.

 

 

Jun 26
0

Financial Transparency

By | Accounting, Audit, Budget, FASB, Grant Management, MIP Fund Accounting, Nonprofit, Uncategorized | No Comments

According to the Merriam-Webster Dictionary, one of the definitions of “transparency” is “characterized by visibility or accessibility of information especially concerning business practices”.  Transparency in your financial statement means it should be user friendly, clear, easily understandable and everything should be properly disclosed.

Importance of transparent financial statements

  • Proactive transparency and communication are essential to organizational success. Stakeholder understanding and support  is a direct result of transparency and open communication.
  • A practice of continuous, transparent communication enables an organization to better respond to crises – such as physical disaster, fraud, or the sudden loss of a leader – and execute more robust crisis communication strategies.
  • Establishing a culture of transparency is critical for effective governance, constituent engagement, and responsive management.
  • Opening communication channels can help to establish meaningful and productive relationships with constituents. These relationships can have a significant impact on long-term performance.

Start with the Stakeholders

Know both internal stakeholders (board, committees, senior management, management team, staff, volunteer workers) and external stakeholders (customers, donors, funders, grantors, creditors, partners, government, public). It is imperative that you understand their needs and expectations. Information needs, communication methods, and information consumption patterns vary substantially from segment to segment. Meeting and exceeding the information needs for each of these groups is critical to delivering satisfaction. 

If that’s too overwhelming, start by identifying your top two to three stakeholders. Determine what they need/want and go from there.

Strategic messages with financial statements

Make the data you have today more understandable and relatable; enhance the story and improve disclosure. When we think about financial statements we think revenue inputs and expense outputs but we need to be thinking more about outcomes.

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.

Jun 19
0

Mentoring for Accounting Executives

By | Accounting, Audit, Budget, Grant Management, MIP Fund Accounting, Nonprofit | No Comments

Mentoring conjures up images of students clutching diplomas so new the ink isn’t dry yet, but mentoring has a long and venerable history. Centuries before formal higher education became the norm, craftspeople learned their trade by the side of a mentor. Today, mentoring programs help new managers, junior executives, and others improve their leadership, communications, and management skills.

But mentoring isn’t just for junior executives. It’s also for senior-level executives and corporate leaders. Let’s face it: smart people never stop learning. Mentoring programs formalize that concept by pairing strong leaders together so that they can learn, grow, share, and profit from each other’s expertise.

Hallmarks of a Successful Mentoring Program

Successful mentoring programs follow specific guidelines that have proven to be successful. These guidelines include:

  • Meet with your mentor in person: Although it’s tempting for busy executives to revert to telephone meetings, face-to-face meetings seem to be more effective for developing a relationship of trust and mutual support that’s essential for a good mentoring relationship. If you are time pressed (and who isn’t?), schedule coffee, breakfast, or lunch meetings with your mentor once a month. Block out the time on your calendar so that it’s as important as meetings with clients, auditors, and consultants.
  • Determine areas of improvement: During your first meeting, determine several areas you’d like to work on together with your mentor. Limit your objectives to three; anything more than that can be difficult to accomplish, and anything less may be so easy you won’t take it as seriously as you should.
  • Write an action plan: There’s something about writing out your goals, objectives, plans and commitments that make them seem more important than merely discussing them with your mentor. Write out a formal action plan and share it with your mentor for feedback. Establish both benchmarks and methods of measurement; how will you determine if you’ve successfully achieved your goals?
  • Ask for homework: “Homework” in the terms of a mentoring agreement is a list of specific tasks to accomplish before your next meeting. As you meet, share, and reflect on your mentor’s feedback, he or she will provide you with things to do and consider in order to change your approach to problems. This is your homework. Write it down and commit to following through with it.
  • Remain open to feedback: It can be tough for a strong leader or executive to receive feedback. Many leaders are successful people precisely because they are quite good at what they do. But, everyone has room for improvement. It can be difficult not to get defensive when you hear critical comments or suggestions to change how you approach a problem. This is precisely why you’ve agreed to a mentoring relationship with another executive, and it would serve you well to remain open to constructive feedback. A good mentor will sprinkle both praise and criticism in their feedback, but don’t tune out the criticism to bask in the praise!
  • Be honest: Along with remaining open to criticism and feedback, it’s vital to cultivate an open, honest relationship with your mentor. If you are holding back on problems or stumbling blocks, your mentor can’t help you become more successful. Give and receive with an honest, open mind.
  • Follow up: After the initial mentoring period is complete and you have achieved the milestones established in your action plan, set dates for follow-up sessions. You may wish to continue the mentoring relationship or conclude it, but either way, be sure to follow up with your mentor to share progress and achievements.

Finding a Mentor

Mentors are those with equal or greater experience than their mentees. For executives, it can be difficult to find a mentor within their own companies since they are usually at the top of the org chart and the problems they need to discuss may be those they share with other leaders in their organization. An outside perspective cannot be gained by constantly rehashing problems inside your organization. It becomes essential to find a mentor outside of your organization.

Many professional organizations provide mentoring programs. Ask within your own professional groups about mentorship. If they do not have such a group, consider starting one. You may also find mentors within your professional networks online or within civic organizations.

Mentoring isn’t limited to junior staff members. Executives can also benefit from  a mentoring relationship. Learning never stops, and leaders never stop learning.

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.

May 01
0

No Margin, No Mission: Building a Surplus to Serve More Constituents

By | Accounting, Budget, CPA, Grant Management, Nonprofit | No Comments

An administrative assistant for the finance director at a nonprofit organization had a sign hanging over his desk: “No margin, no mission.”

For nonprofit organizations, having a surplus or margin is an important part of budgeting. Without budgeting for a surplus, you’ll end up scrambling to cover the inevitable times when donations do not meet goals or the roof starts leaking, necessitating an emergency repair.

Budgeting for a surplus builds up that cushion against a rainy day so that you can continue with your activities undaunted by unexpected expenses.

Budgeting for Surplus

Many nonprofits respond to shortfalls by cutting spending. There’s nothing wrong with such an approach and it can be a healthy way to keep expenses from going up. However, you can’t always cut expenses. There comes a time when expenses are cut to the quick and there’s nothing else to cut.

That’s when budgeting for a surplus comes in handy.

Budgeting for a surplus means establishing an annual surplus goal and setting aside an amount to put into the surplus fund just as you would set aside money for your operating budget, marketing budget, salaries and wages and so forth.

Mandating a surplus is the first step towards achieving a comfortable reserve. Nonprofits mandating towards surplus typically begin during the budgeting cycle by starting a budget from scratch, keeping a set figure in the baseline budget for a surplus amount. By counting the surplus from the start as a line item on the budget, it’s already built into the budget and part of the goals to achieve. It becomes an integral part of the budget rather than an item to add later.

Exceeding Goals

A happy circumstance for any nonprofit is exceeding its financial goals for the year. If your organization finds itself ahead financially, the Finance Committee can negotiate with the managers to lower the surplus over a period of one to several years. This spreads the benefit of a boom year across multiple years and maintains a surplus without keeping too much in reserve.

Potential Obstacles

To budget for a surplus, you must marry a reasonable approach to budgeting with an encouraging nod towards cutting expenses. You can’t control income, only influence it through activities. Expenses, however, can, for the most part, be controlled. Yet there are some fixed expenses that must be maintained for the good of the organization, such as rent, health insurance, and so on.

Balancing the need to cut expenses with the need for a surplus can be challenging. Including representatives from all departments in the budgeting process helps accounting and finance see the big picture view and understand potential conflicts in the budgeting cycle.

Final Thoughts on Surplus Budgeting

Obtaining surplus margin ensures that your nonprofit organization can weather the storms of recession, unexpected expenses, or boom years when donations and other revenue sources flow into the organization.

Additional tips for surplus budget include:

* Analyze the organization’s current budget and balance sheet to understand all potential sources of revenues and expenses.

* Communicate and educate all departments on how to read the budgets and financial statements. Help team leaders understand how their contributions to each budget line impact the whole.

* Develop consensus on the surplus budget amount.

* Align organization-wide goals to achieving the surplus.

* Develop strategic plans, marketing, and operational plans that support goals.

With the right planning, you too can have enough margin to achieve your mission – and a surplus, too. Budgeting towards surplus is an achievable goal.

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your budgeting processes along with many other accounting needs. We offer hands-on training as well as online webinars to take you to the next level with your fund accounting system. Check out the full schedule of our training events here.