Mar 06
0

Beyond the Hype: Making Sense of AI’s Role in Nonprofit Organizations

By | Nonprofit, Technology | No Comments
person using laptop computer with AI on screen

Since ChatGPT made such a splash in the fall of 2022, companies worldwide have kept a close eye on the development of AI-powered tools. Now, you can’t turn on the news or open a social media app without seeing ads for AI-this or that or promises of AI completely changing the workforce.

Where does AI fit into the nonprofit world? How can organizations reassure their staff that AI isn’t there to replace them but can help make their jobs better?

Reassure Staff That AI Isn’t New to the Workplace

Even though ChatGPT made a big splash in the fall of 2022, AI isn’t new. In fact, you can reassure your team that they have already been using it in some capacity all along! For example, if you use PowerPoint, the popular presentation software, you may have noticed a feature called “Design Ideas.” Click the button, and the program will provide suggested designs to improve the layout and appearance of the slide. This is an example of AI already inside a program you’re already using. Another example is even more common: your cellphone. If you have a feature that fills in frequently used words when you text someone, that’s also AI in action.

So, AI isn’t some new robot that’s replacing human workers. It’s been there all along, and we’ve (mostly) welcomed it within the context of our jobs. When it’s done right, AI simply makes things more efficient. And who doesn’t want to be more efficient at their job?

Provide Staff with Usage Guidelines

Are you currently using ChatGPT and other AI tools? Chances are good that someone on your team is already using them. In that case, it is better to get ahead of the curve and provide helpful usage guidelines than to avoid the topic altogether.

  • Allow staff to use AI to generate outlines and brainstorm topic ideas: AI is great for overcoming writer’s block. Instead of facing a blank page without a place to start, use tools like ChatGPT to develop an idea or brainstorm a list, giving people a good starting point.
  • Never use AI-generated text without clearly stating it is AI-based or without reading through it to ensure it is accurate. Remember that tools like the free version of ChatGPT rely upon millions of documents but do not have up-to-date information. The system can make mistakes, incorrectly cite things as correct, and provide older information. It can also be plagiarized.
  • Include guidelines for what can be fed into AI as source material. Anything ingested into AI becomes part of its database forever—and can be used by anyone else. Any proprietary or confidential information must be kept from the tool, so it does not become part of the repository of information used worldwide.
  • Learn and experiment with prompts and keep a log of useful prompts. There’s a knack for asking GenAI the right question in the right way to obtain useful information. Once you’ve discovered it, keep a record of it. Ask your team to share best practices from their experimentations, too.

Improving Jobs—Not Replacing Them

One hundred years ago, many people worked as telephone switchboard operators. A switchboard operator manually connected cables at the phone company switchboard to make sure that calls went through correctly. Now, such things appear only in museums, replaced by an automatic switch and sophisticated call routing software. We don’t even think about connecting a call anymore—it happens in the blink of an eye, and many people take it for granted that this was always the case.

A few years from now, AI will be the norm rather than the exception. Nonprofits will look at it as just another tool, like their word processing or accounting software. It will be a way to do tasks more efficiently, but it cannot replace skilled workers. Emphasize to your team that skills are always valued and that no artificial intelligence, no matter how smart, will ever replace the creativity, ingenuity, and talent of a human being.

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 us for more information.

Feb 23
0

Can Artificial Intelligence Become an Accounting Expert?

By | Accounting, Nonprofit | No Comments
person using laptop computer with right hand and holding mobile phone in left hand with Artificial Intelligence screen overlay

An interesting debate has arisen among accounting professionals: Can AI become an accounting expert?

AI has been around for several years but exploded into the national consciousness in November of 2023 when Microsoft unveiled ChatGPT. This generative AI platform uses large language models and machine learning to produce natural-sounding text quickly and efficiently.

While many hailed its advent as an exciting time in computer history, others were quick to curb their enthusiasm for GenAI. There are many good uses for it, for example, to summarize transcripts of calls or to create eye-catching headlines. However, AI makes mistakes—plenty of them. We do not believe that it is ready to take the place of an accountant. Here’s why AI makes a terrible accountant.

AI Makes (Sometimes Big) Mistakes

One of the most blatant errors made by ChatGPT was its insistence to a questioner that “no country in Africa begins with the letter K.” When the questioner pointed out that Kenya begins with a K, the response from ChatGPT was a veritable word salad of gibberish. It lacked logic. It lacked discrimination. Worse, the answer was wrong.

Accountants found out the same thing, as have many other professionals. AI’s answers can be wrong. It can draw erroneous conclusions or even “hallucinate.”

AI models return answers that are heavily dependent on how the input question is worded. Questions that are too complex can return poor answers. Ambiguity can also confuse the models and return incorrect responses.

AI also lacks the ability to distinguish source materials as good or bad. Instead, it may view all documents as equal—documents published by the Journal of Accountancy could be viewed with the same gravitas as documents published by Joe Blogger (no offense if that’s your name), who doesn’t have a CPA. The response might be fine, or it might be trained by Joe Blogger’s lack of in-depth knowledge of corporate finance.

Lastly, the models can hallucinate or return gibberish. No one knows why this occurs or even how often it does, but sometimes, question-and-answer sessions with an AI model devolve into peculiarly odd conversations.

AI Lacks Firsthand Experience

Consider how much knowledge and firsthand experience the average accountant possesses. Each human being is unique, and their background and special area of expertise make them well-suited for certain tasks. A nonprofit accountant has a very different background from someone who works for a large accounting firm; each person brings to their task a unique viewpoint or lens through which they see the problems and solutions at hand.

AI models have no such discrimination. They can produce information based on the inputs of their models and the ability to draw conclusions from their databases with newer GenAI models. But they cannot reach out beyond their databases to seek information, have flashes of inspiration, or remember something that can help with an immediate problem. All of these are human attributes, and an AI model cannot replace a human accountant’s flash of inspiration or memory of a similar problem encountered years ago.

Client Confidentiality

Another area that may be problematic is client confidentiality. AI models ingest and retain whatever data is fed into them. Therefore, if you input proprietary client information—say, asking the AI model to summarize the transcript of a client call—it will retain the information. It may use that information to inform a response to someone else. And, while it probably won’t mention your client by name, you certainly do not want confidential information floating around cyberspace forever. Never share anything confidential with an AI model.

What Can AI Do For You?

It seems like everyone is experimenting with AI, and that’s fine. Treat it like an experiment, but do not rely on it for accurate answers to accounting questions. AI may be evolving, but it has a long way to go before taking your place in the corner office.

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 us for more information.

Feb 14
0

How to Include Overhead in a Grant Request

By | Grant Management, Nonprofit | No Comments
person at laptop computer with dashboard printouts on desk, Grant Request

If you’ve ever completed a grant request, you know that some areas can be confusing. One such example is where to include overhead. Actually, it’s not as confusing as it sounds. It involves accounting for indirect costs that are not directly tied to a specific project but are necessary for the overall operation of an organization. Overhead costs can include administrative expenses, utilities, rent, and other general operational costs.

The Problems with Underestimating Overhead

It’s vital to consider overhead when drafting your grant request. Failing to do so can cut into your margins, making it difficult to run sustainable programs. Everything from rent to utilities must be included in your costs to ensure that the grant funds adequately cover the services rendered. If you don’t include overhead costs in your grant applications, you’ll still end up paying for them, but you’ll have to find the money from other areas of the budget, such as donations.

Using the Indirect Cost or De Minimis Rate Method: Which to Choose?

There are two methods for calculating overhead: the indirect cost method and the “de minimis” rate.

  • The indirect cost method takes a percentage of overhead relative to the direct costs of the program and uses that amount to calculate overhead costs.
  • The de minimis rate is a standard percentage of the modified cost rate. De minimis is easier to calculate but potentially less accurate.

You can choose to use either method, but it is important to choose one and use it consistently for clarity.

Indirect Costs – Overhead

Overhead costs encompass indirect expenses that are not directly allocated to specific programs or projects but are crucial for the overall operations of the organization. These costs play a vital role in maintaining the organization’s infrastructure, supporting its mission, and ensuring efficient day-to-day functioning.

Administrative costs, covering items like salaries for administrative staff, office supplies, utilities, and rent, contribute to the general management and oversight of the organization. Additionally, overhead costs include expenditures associated with technology and information systems, financial management activities like accounting services and auditing, and governance-related expenses such as board meetings, legal services, and compliance activities.

Nonprofits need to strike a balance in managing overhead costs responsibly, aiming to allocate a significant portion of their resources directly toward fulfilling their mission while ensuring the sustainability and effective functioning of the organization.

Comply with Funding Policies

One important tip: When accounting for indirect costs in grant applications, be sure to comply with the funder’s policies. Some funders list a rate not to exceed, while others specify a percentage. When the allowable overhead costs aren’t specified, you have more leeway to request the needed funds and negotiate them as part of the grant process.

Provide Supporting Documents

Along with your indirect cost assumptions and requests, funders typically ask for financial information to back up the request. These may be copies of the organization’s cash flow statement, balance sheet, or similar materials. Some funders may be more stringent, and request only audited financial statements. You may also be asked to sign a form certifying that the information presented is accurate and truthful.

If the organization has some leeway to negotiate indirect costs, providing financial statements offers proof points that back up your request for funds as part of the grant process. It will demonstrate the basis upon which you have calculated the indirect costs.

Supporting Mission with Margin

Lastly, be ready to demonstrate how the grant funds, and especially the portion requested as indirect funds for overhead, support your organization’s mission. Demonstrate how your organization pays careful attention to costs. The narrative around indirect costs and overhead should be about how you will use the funds wisely, not an apology for asking for them. After all, every organization needs a place from which to work and funds to pay rent, utilities, IT support, and so on. To fulfill your mission, you need the margin—and the funding—to run programs and services. Requesting funds for overhead is a necessary step in the grant application process.

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 us for more information.

Jan 23
0

Best Practices and Tips to Prepare the Statement of Functional Expenses

By | Accounting | No Comments

In nonprofit accounting, the Statement of Functional Expenses is a financial statement that provides detailed information about how an organization’s expenses are allocated to different functional categories. This statement is a key component of the financial reporting for nonprofit organizations, offering transparency and accountability regarding the use of resources. It typically categorizes expenses into three main functional areas including program services, management and general expenses, and fundraising.

The purpose of the Statement of Functional Expenses is to provide stakeholders, such as donors, grantors, and the public, with a detailed breakdown of how the organization is utilizing its resources to achieve its mission. This level of detail helps in assessing the efficiency of the organization’s operations and its commitment to fulfilling its nonprofit purposes.

Nonprofit organizations are often required to include this statement in their financial reports, particularly for compliance with accounting standards and regulations. It contributes to the overall transparency and accountability of the organization’s financial activities.

We’ve put together a list of simple steps to help you prepare an effective, clear, and easily understandable Statement of Functional Expenses.

Step 1: Gather Relevant Data

Your first step is to gather the necessary data for the statement. Understand what you are trying to express, and what data you may need to gather. Identify the sources of data available both internally in your organization and possibly from third party sources. This may include reports available from your own systems as well as surveys, data reports from industry experts, constituent interviews, and more.

Step 2: Organize and Validate

Your next step is to organize the data and validate it. Organizing the data electronically into files and folders on a cloud-based system ensures that everyone working on the statement has access to the same information. Depending on how much information you have, consider various organization aids: a hyperlinked table of contents or spreadsheet to find documents can come in handy when working with a large number of files.

Additionally, you’ll need to validate the data. Check all the facts. Cross-reference data. And be sure that any third-party sources you cite are recent. A good rule of thumb is to use data that’s no older than two years, if possible.

Step 3: Analyze and Interpret

Next, analyze and interpret the data. This step may take the longest, and it should be conducted thoughtfully and carefully to ensure that no erroneous conclusions are drawn from the existing data. You may need to conduct statistical analysis, trend analysis, or draw conclusions from the findings.

Classifying Functional Expenses

Every business must classify expenses. Nonprofits face an added challenge because the classification of functional expenses assigns a “why” to every dollar spent. Consider how you classify expenses. A great way to begin is to reference your organization’s mission statement. By identifying the value of each expense as it pertains to your mission, you’ll naturally create direct links between expenditures and mission in an honest and accountable way.

If you organization is undergoing a nonprofit audit, you must present expenses by functional area as part of your accounting. A CPA must include a statement saying that the financial documents were prepared according to generally accepted accounting principles (GAAP).

Tracking functional expenses by category and preparing the statement of functional expenses is both a necessary compliance step and a further step for organizational transparency. By working with your CPA and helping prepare these statements, you’ll help ensure accuracy, transparency, and value for your constituents.

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 us for more information.