By Katie Samick

Rising expenses, staffing shortages, and decreased funding and donations are continual challenges for many nonprofit organizations. But nonprofits can take steps to get ahead of these hurdles, and it begins with analyzing current operations and forming a plan for the future. This blog proposes vital steps to get the analysis and planning right.

Collaboration

In the words of that late 20th Century philosopher Vanilla Ice, “Stop, collaborate, and listen.” CPAs working with nonprofits should be singing this song every day. Too many organizations continue to operate in silos with little to no collaboration or communication between departments. This operational structure should be long in our past. All departments need to work together toward an organization’s mission. Finance departments can lead the charge by meeting monthly or quarterly with support and program departments to help interpret financial results. Don’t spend the entire meeting talking about accrual-based accounting and ASC 842. I’m putting myself to sleep just thinking about it. CPAs must also be active listeners to learn about each department’s operations. This type of collaboration should continue as the finance department prepares the annual budget.

Here are a few examples of how various departments can support the development of the annual budget:

• Facilities – If you are an organization with a large amount of real estate, you know how expensive it is to maintain buildings. Facility departments help budget capital expenditures and operating expenses.
• Information Technology – IT costs are a major component of all organizations, especially post-COVID. IT departments budget capital expenditures like servers and computers but also software subscriptions and future software upgrades. Don’t forget about IT security, including network and end-point security.
• Human Resources – The department that hires all your employees can help with projected salary and wage increases and employee benefit expenses, such as health care and retirement.
• Programs – Each program knows what they need to operate, including staffing requirements and operating expenses.
• Marketing and Strategy – Every nonprofit organization has a mission. This department not only provides a strategic view of the organization and its mission, but can help analyze external factors such as federal or state regulations that might impact operations and funding.

Timely Financial Statements

You can’t prepare financial statements one day after closing, but you can’t wait too long to share financial results either. Organizations can’t make timely decisions when they get financial results for September in January? Depending on the size of your organization, a typical monthly close cycle should be anywhere from 5-10 business days. Your organization needs timely, reliable financial data to help manage expenses, increase revenue, and stay on target for the year.

Detailed Financial Analysis with Statistics

Financial statements may show the economic condition of the nonprofit, but what does all that data mean? How do the results impact the enterprise and its operations?

Accountants and financial analysts should be digging into monthly variances, including actual vs. budget and actual vs. prior year revenue and expenses. Start by analyzing the biggest line items. Most nonprofit organizations are human service organizations, with 70% to 80% of costs being salaries and benefits.

Don’t just look at the dollar variances. Pull statistical data like full-time equivalents (FTEs) and billable units. Analyze things like cost per unit, cost per FTE, and revenue per FTE. These statistics combined with financial results can help paint a detailed picture of the organization and its current operations.

Strategic Planning and Projections

Cher, who sang “If I could turn back time,” clearly did not have a time machine, and neither do you. But you can look beyond the annual budget and prepare for the future. What will the nonprofit look like in three to five years? Below are two examples of how planning can impact future operations.

Agency A is a nonprofit service organization with three types of programs:

• Program 1 is a youth program that’s always profitable. Profits from the program, though, can only be used for the youth program.
• Program 2 is an adult program. It struggles annually to cover its expenses.
• Program 3 is another adult program. It’s very profitable, and funds from that program are currently covering Program 2 losses.

A change at the state level causes Agency A to discontinue operations for Program 3. Without the profits from Program 3, the agency’s remaining adult program begins to incur major losses. Agency A is forced to cut back on its adult program and lay off employees.

Agency B is a nonprofit youth organization operating out of a small building with limited capacity. The agency prepared a three-year financial plan and the results show that the program will continue to grow, but Agency B will max out the capacity of its small location within three years. With an inability to increase volume, revenue increases will only come from rates, which won’t cover the growing expenses the agency will incur. The finance department develops a pro forma with help from various departments, including marketing and strategy, program, human resources, facilities, and IT. The pro forma includes revenue projections, new building construction costs, new staffing, and operating expenses to support the growing program. The model shows positive results and is reviewed, approved, and construction begins on the new addition.

What if Agency A had done some initial analysis or had some insight into program changes that would impact their agency? Will Agency B’s expansion plan have positive results? We don’t have a crystal ball, but developing a financial plan can help organizations prepare for changes that may impact future operations.

Nonprofits are faced with many challenges, but working together, getting reliable timely data, analysis, and planning are key to continuing operations now and in the future.

Katie Samick is the manager of financial operations with Adelphoi USA Inc. in Latrobe, Pa. She can be reached at katie.samick@gmail.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}