Top 3 Challenges Faced by Nonprofit CFOs

By | Accounting, Accounting Software, Nonprofit | No Comments
woman standing at desk looking down at laptop computer

Nonprofit CFOs face many challenges, but the following three may not be ones that immediately come to mind. We often assume that our own challenges are unique—that no one else suffers from spreadsheet overuse, for example—or other organizations are more efficient than we are. But we can tell you from experience that nonprofit CFOs all face similar challenges. And the solutions to these challenges are similar, too.

Challenge 1: Over Reliance on Spreadsheets

Spreadsheets are everywhere. They are easy to use and come with most office productivity suites. Most accounting and financial professionals know how to use them and are very comfortable with them. They enable nonprofits to get their accounting up and running quickly. We’re not knocking spreadsheets, but if your organization is past the startup phase, it’s time to think beyond spreadsheets and look for a more robust accounting solution.

They are myriad problems with using spreadsheets for complex accounting functions. Problems include:

  • Unless cloud hosted, spreadsheets are single user, meaning that only one person at a time can work with a spreadsheet. They must be emailed after updates.
  • Working with complex financial analysis across multiple spreadsheets can be extremely time-consuming and difficult.
  • Formulas are notoriously finicky—one mistaken input and suddenly the whole sheet is off. Worse, mistakes multiply if copied and pasted, making it very hard to find and fix them.
  • They aren’t secure. You can password protect a spreadsheet in some programs, but they can be shared and accessed easily. A compromised password can make them accessible. A computer virus can make them completely inaccessible. They are very risky.

Solution: Transition Your Team to an Accounting Program

It is vital to transition your team away from spreadsheets as soon as possible. Cloud accounting software made specifically for nonprofit organizations provides the structure and resources needed to handle the complex needs of nonprofit finances.

Sage Intacct is an excellent cloud-based accounting program for nonprofits. It offers a cloud-based solution that requires no special hardware to run. The chart of accounts can handle the often-complex reporting needs of nonprofits, and it includes multiple nonprofit-specific accounting functions, such as grant management, FASB accounting accommodations, and more.

Challenge 2: Reports Take Too Long to Produce

Another challenge many nonprofit CFOs face is producing accurate and timely reports. This challenge often goes together with reliance on spreadsheets which produce only limited reports.

Accurate and timely financial reports enable nonprofit managers to make smart decisions about using organizational resources. Without insight into the finances, managers lack an important piece of information.

The solution is to find a good nonprofit accounting program that enables on demand reports. Flexible, customized reporting would be ideal, since managers can then run the reports they need. Automating your accounting will shift the burden of producing reports from the CFO and enable more self-service reporting.

Challenge 3: Billing mistakes.

Nonprofits using spreadsheets often fail to account for their employees’ time properly. They may under- or over-count billable hours, miss expense reports, and generally struggle to adequately track billable time and projects. This can result in a significant shortfall over time and a huge, missed opportunity.

Using Sage Intacct and/or a time tracking software can help you more accurately track such expenses. And, by aligning staff time with specific programs, you can judge how effective specific programs are and whether such time is being used wisely.

Financial Software for Nonprofits

Although spreadsheets can adequately handle basic accounting, they quickly become inefficient as a nonprofit grows. The recent trend towards cloud accounting software has added additional value to software licenses, making them more affordable than ever. If the challenges outlined in this article resonate with you, we invite you to explore Sage Intacct or other cloud accounting solutions through Welter Consulting.

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.

2022 Updates to GAAP Standards

By | Accounting, FASB, Nonprofit, Uncategorized | No Comments

person using calculator at desk with spreadsheetsWe typically report on changes to GAAP standards as they arise. This year has been a particularly active one with numerous changes impacting leases, gifts in kind, reference rate reform, and costs associated with cloud computing. Below are the highlights; for specifics, see the linked information.

Topic 842: Lease Standards

FASB 842

Although the standard was presented six years ago, it must now be fully implemented for all entities reporting on a GAAP basis for calendar year 2022 and fiscal years ending in 2023. The accounting standards for lessors has not changed. However, there are several changes for lessees which must be included on the balance sheet.

Lessees’ commitments and rights can now be recognized on the balance sheet as a liability for the total payments made throughout the term of the lease. The “right to use” the asset can also be recognized as a liability on the balance sheet.

Lease classifications have also changed. Instead of operating and capital leases, they are now to be classified as operating or financing.

Topic 958: Gifts-In-Kind

Update 2020-07

Effective for all entities for calendar year 2022, reporting after June 15, 2021, there are changes to reporting gifts-in-kind (GIK). The standard to determine whether something is a gift hasn’t changed, but the reporting requirements have been updated.

You will need to disclose specific information for each category:

  • Your organization’s policy for gifts-in-kind.
  • Potential donor-imposed restrictions on GIK.
  • How you arrived at the value determination and fair market value.
  • Whether GIK was monetized or utilized.

For more information, please read: An Overview of Gifts—In-Kind

Reference Rate Reform

Topic 848

ASU 2020-04

LIBOR, or the London Inter-Bank Offer Rate, has been the norm since the 1980s as a reference rate for interest. Now, however, it is being retired as a point of reference. This change is effective March 2022 through December 2022 and impacts many loans, leases, and derivatives.

The current GAAP requirement is that entities analyze whether a change in interest rate for a loan is a debt modification or debt extinguishment. This is time-consuming and can be quite complicated. Refer to ASU 2020-04 for helpful tips to make the transition easier and smoother.

Cost Associated with Cloud Computing

ASU 2018-15 Subtopic 350-40

This change is effective for nonpublic entities for the calendar year 2021 and fiscal years ending in 2022. Entities may choose to apply it either prospectively or retrospectively.

Cloud computing software is used on a licensing arrangement. Either the license is a subscription or a license. Licenses are usually recorded as an intangible asset for the software license and a liability for remaining payments due. For subscription-based cloud software, it is expensed as incurred.

For more information on this topic, read: New FASB Cloud Computing Standard Reduces Complexity.

Need Help Navigating GAAP Changes?

If you’d like some assistance navigating these GAAP changes, we’re here to help. We can also assist you with choosing the right nonprofit software to make accounting, including following accepted best practices, and implementing changes to your general ledger and overall accounting software.

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.

What Nonprofits Can Learn from For-Profit Companies

By | Nonprofit | No Comments

No margin, no mission. It sounds like common sense, but many nonprofits seem to think that if they make a profit—a margin—and if they have a healthy balance sheet, they’re doing something wrong.

Being a nonprofit organization does not mean making zero profit. It does mean that all profit is made with an eye toward fulfilling the mission of the organization. The more margin that is made, the more the organization can invest in their programs and the staff and infrastructure that supports them.

Take your cues from the for-profit world and adopt these tips to improve your nonprofits’ profits—money that can be used to support the very mission for which your organization exists.

Five Lessons for Nonprofits from the For-Profit World

  1. Know your “why” and share it consistently and clearly.

In the for-profit world, marketers speak about knowing the why: why the company exists and why the world needs its products. Nonprofits know their why but often fail to share it consistently and clearly with constituents and donors. Make sure you follow the basics of brand marketing in all your organization’s communications by consistently and clearly articulating your organization’s mission and how it fulfills its mission.

  1. Embrace marketing concepts.

Marketing simply means raising awareness, and all organizations need to raise awareness of their services. Learning the basics of digital marketing (websites, search engine optimization, email marketing, social media marketing) and using them to your organization’s advantage is integral to its success. Embrace marketing techniques such as segmentation and others as proven and effective means of raising awareness, generating interest, and inspiring action.

  1. Treat donors like customers.

Customers expect service from the companies they patronize, and if they fail to receive the expected service, they go elsewhere. The same holds true for donors. If they do not receive an expected response from the nonprofits they patronize—awareness, recognition, thanks—they give elsewhere. Keep in touch with donors the way you would customers of a store, sending thank you notes, updates, and more to stay in touch. Don’t take them for granted!

  1. Invest in technology.

For-profits know that investing in state-of-the-art technology gives them a competitive edge. The same can be said for nonprofits. The wise use of technology can improve program and service delivery, save time and effort in operations and accounting, and increase efficiency. The initial investment in modern technology can improve all areas of your organization.

  1. Focus on attracting the best employees.

Some very talented people work at nonprofits, but many talented individuals avoid working at nonprofits because they fear giving up perks or benefits associated with the for-profit world. Conduct a benefits survey across comparable for-profit and nonprofit organizations in your area to ensure your benefits package is on par with for-profits vying for the same talent. And, like the for-profit world, be sure to invest in your people. Offer training, educational programs, and more to aid in their professional development. While it may seem like a small thing, it means a lot, especially to those who wish to advance in their careers.

A nonprofit that fails to make margin each year cannot achieve its mission. Learn how to increase revenue from the for-profit world so your organization doesn’t just survive but thrives.

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.

Making Functional Expense Classifications for Nonprofits Useful for Public Trust

By | Accounting, FASB, Nonprofit | No Comments

Under FASB ASC 958, nonprofits are required to classify functional expenses by category. Most nonprofits choose to do this in one of three ways:

  1. As a separate statement of functional expenses
  2. As a schedule in the notes of their financial statement
  3. Within the statement of activities itself

All nonprofit organizations should classify functional expenses according to their nature and category. Doing so, and sharing the information publicly in the annual report, helps build public trust by making all expenses transparent and easy to understand.

The following tips will help you make your nonprofit’s functional expenses classifications useful for both your organization and for building trust with the public.

Four Tips for Functional Expense Classifications

  1. Use common sense when determining the number of natural categories.

Some nonprofits seem to believe that the more natural categories they include, the better. The opposite is true: less is more. Too many categories can confuse the public and give the appearance of wastefulness.

U.S. GAAP does not specify a particular quantity of expense categories that must be included in the report of functional expenses, so it’s truly up to your organization on how many you’d like to include. Given that the expenses are often depicted in a table or on one page, too many expense categories will be hard to read and understand. Choose a level of detail that paints an accurate picture of your organization’s activities.

  1. Let your program activities tell the story.

Carefully consider which programs to disclose separately. Best practices for nonprofit financial accounting and reporting suggest disaggregating the major classes of program services to meet functional expense reporting requirements. In this way, your program’s finances can tell the story of how and why expenses are incurred.

  1. Review how employee services are classified.

Some expenses such as human resources, accounting, and other internal employee-related services should be reported as general administration and management because these activities benefited the organization as a whole. However, some nonprofits dislike linking all service-related internal positions to this category; it tends to “bloat” the amount, increasing the percent of funds allocated to overhead, which the public may perceive as inefficiencies or “too much money” spent on management needs. Review your allocations and consider how much of a given employee’s time is truly spent working for the good of the whole organization or for a particular program. If it can be clearly argued that an accountant is fully dedicated to a program line funded by a grant, for example, then their salary may be apportioned to that fund rather than general admin. There are many gray areas, so take this as a general guideline, and be thorough in your review of all your expense categories.

  1. Examine your allocation methodology.

One of the reporting requirements is that the allocation methodology is disclosed in your financial statements. Ask yourself, “Would someone looking at this expense understand our rational? Does it sound reasonable?” Because all the information and the methodology are disclosed to the public, it must meet the litmus test of both “is it reasonable” and is it “understandable.”

Clear Communication Improves Public Trust

Functional expense allocation is often tricky, and organizations tend to err on either side—too much disclosure or too little. A review of your current expense allocation and methodology and updating it to match current needs may help the public better understand how funds are spent and how your nonprofit handles its finances.

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.