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Cash Crunch! Nonprofit Edition

 

The best paths out of a cash crunch depend on the cause of the problem. Some examples are below; I hope one or more is helpful.

We’re going to skip the obvious “Get more grants! Do more fundraising!”

Cause: Solution

Embezzlement: Plug the leak, make them give it back, get a line of credit if necessary to see you through until you do.

Unreimbursed grant expenses: Speed up your processes so you can invoice faster. Engage in faster communications with grantors so they don’t forget about you. Set up electronic inbound payments for the grant funds.

High monthly burn not covered by grants: Take a look at any expenses that aren’t providing the organization with value and cut them. Start with the largest ones, not your deluxe paper clips.

Typical seasonal flux: Consider a line of credit. This financing tool is what a lot of seasonal organizations use to get them through the predictable, seasonal tough times if they haven’t saved up from the abundant times. And next season when the organization has plenty of cash, squirrel more of it into a savings account and then you’ll be your OWN line of credit!

Disallowed grant expenses: Use technology to collect backup documentation so you can submit all of those documents to grantors. For example, use Expensify or Entryless so authorized employees can snap a photo of their receipts or scan them, and send them ultimately to the accounting system. And review grants/authorizations with everyone empowered to spend so no one spends on something not covered by a grant.

Overspending grants: Quickly realign your authorization policies for spending as well as the clarity of your accounting on a grant-by-grant basis. Even basic accounting systems such as QuickBooks and Xero are able to produce an income statement by grant if you set them up to do so.

Should We Change Our Accounting System?

accounting systems
Regarding the decision to change or not change accounting program, consider the following as part of your guidance system:
[1] how easily can the system (with the right people and processes) give you the insights that you require in order to make decisions WHEN you need those insights?
[2] how easy is it to find qualified accounting professionals at an affordable cost to use the system to the level that you require in order to get those insights? Remember that you might have people now who can do it, but how many more are out there and accessible? People change jobs for one reason or another.
[3] how much time does system troubleshooting take away from value-added time / how much do system issues slow down your ability to get those insights?
[4] how easy is it for independent auditors to access the data as well as any transaction backup (that’s jargon for “documentation”) and workpapers? This can impact audit price and on-time delivery of the audited F/S to the board, as well as whether you have to go on extension for the 990 each year.
[5] to what extent is downtime an issue? what are the risks of losing data or not being able to access it when you need it?
[6] does the system include other capabilities or integrate with non-accounting systems such as donor management?

How Should We Structure Our Profit & Loss Accounts?

Profit and Loss Structure
The Account:Subaccount structure is incredibly powerful because it facilitates both high-level strategic planning and more frequent tactical decision-making.
One issue is how to group accounts. For example, in the construction industry, does it make more sense to have Labor be a parent account and Drywall and other types of labor be subaccounts? Or does it make sense to have Drywall be the parent account and Labor and other drywall expenses be subaccounts?
It depends how you think, how you make decisions
You can have the best of both worlds if you set up your file cleverly.
More about that second point: In general, I believe that it makes more sense to group items differently than the COA o you can have 2 different ways of looking at the data.
In systems like QuickBooks Desktop, QuickBooks Online, and Xero, you can create an account structure for Profit & Loss (a.k.a. Income Statement) one way, and create items mapped to those accounts with the opposite hierarchical structure.
A few pointers:
[1] Anytime you use a parent:substructure, never EVER use the parent. And in the case of items, make the “Description on sales transactions” and the “Description on purchase transactions” to pop up by default as “DO NOT USE; SELECT SUBITEM”
[2] If you’re going to allocate labor to drywall and other services, remember to also allocate payroll taxes, union costs, workers’ comp, and the like. It’s extra work, but this is a policy that can and will impact profitability. See my next point.
[3] One of the great ways to use this information is to roll it up and see the major areas in which a project is most and least profitable and make changes accordingly. The owner could adjust pricing, have better leverage in negotiations, decide where to subcontract and where to have in-house people handle it, even decide to specialize in areas that are most profitable and not deal with other areas but partner up with another company for those…or learn techniques that other companies are doing to be more profitable in certain areas.
[4] it’s still useful to group other items such as meals, permits, & travel. If everything is grouped, then you get extra insights upon rollup.

Support an Auditor in Supporting You

Support an auditor in supporting you
Someone asked recently if it is reasonable for an independent auditor to request year-to-date (YTD) financial statements when putting together a bid for a financial statement audit.
Yes!
YTD financials are incredibly useful in determining scope/price. If there have been any significant changes since last year’s audited financials, they’ll see it. They’ll (hopefully) act accordingly – the fewer the changes, the lower the risk, the more reasonable the price, for example. More changes might be more areas for them to audit, more things for them to propose fixes on, they will need to price accordingly.
Don’t be afraid of a higher price, though. If an auditor is facing a tough situation and they have to continually have to write off too much time each year, they’ll fire the client and you’ll have to start over in your search, and THAT’S so much fun.
Also, if the YTD financials show a serious cash crunch, it could be problematic. Auditors aren’t allowed to be owed any money, so if they’re still owed this year’s audit fees when it’s time for next year’s audit, they won’t be able to do the work.
And if the YTD financials show a serious contraction and they think it’s not in your best interest to pay their fees but need someone who charges a lot less, they won’t waste their time or yours with a proposal.

How should we set – and justify – donation levels?

justify donation levels
Should the dollar amounts be your cost for the service that the donation covers, your cost plus some overhead, or the market value of the service?
I’ve worked with clients in the for-profit world as well as nonprofit, and for this one, I recommend that you take a golden nugget from the for-profit world:
  • There is no “true” value of anything.
  • ┬áThe fair market value of any product or service is only determined at the moment after a purchase occurs between a willing buyer and a willing seller.
Nobody cares about how you came up with the number. They care about whether what they receive is fair for what they pay.
What they receive is the satisfaction that one or more people will be helped in a specific way, and your specific story (i.e. “one therapeutic massage”) plants that satisfaction in the mind and heart of the donor.
You’ll simply have to test it and see if people go for it.
Then you’ll know whether it’s fair or not.

Accounting for PayPal Sales

Accounting for PayPal Sales
For an organization who uses PayPal exclusively for sales, it’s possible to import the transactions into the accounting system every month, for example via the Batch Enter feature available in QuickBooks Premier Accountant Edition.
First curate the data in Excel to remove line items that never actually happened (invoices, for example), separate disbursements from deposits, import, gross up for merchant service fees, adjust for sales tax if any, and reconcile.
When a transfer happens between PayPal and the company’s bank account, and it’s sent from PayPal in one month and clears the operating account in the next month, record it as of the date it was actually executed. Clear it in the PayPal reconciliation and it’s outstanding in the operating account reconciliation.

The Development Conundrum

Development Conundrum
I recently heard from a nonprofit leader who wished to hire a Development professional but was held back by a struggling financial status. However, the leader didn’t have enough time to devote to development activities personally.
It is worth exploring your organization’s financial status…exploring whether you can free up the capital to bring in a development manager or director.
From the perspective of the accounting department, common reasons why nonprofit organizations suffer financially include:
GRANTS/EXPENSES
  • overspending of grants >>> arises from no one giving you real-time financial clarity to manage grant spending
  • grant expenditures being denied by the grantor >>> arises from you not receiving receipts and other expense documentation in real time
  • portions of salaries being denied by the grantor >>> arises from no one knowing how to (or having the time to) allocate salaries and document the rationale for that
  • salaries unreimbursed by the grantor >>> arises from no one knowing how to efficiently create a clear, formal method for allocating salaries to grants
GRANTS/INCOME
  • grant money coming in too many days after grant funds were spent >>> arises from no one with the time to place follow-up calls to grantors
  • invoices to grantors sent out too many days after the grant funds were spent >>> arises from not having the information that you need in real-time, such as expenses incurred during the month
DAILY SPENDING
  • unauthorized spending >>> arises from lack of policies and/or not keeping the conversation of fiscal responsibility alive and vibrant with employees with organizational credit/debit cards, and/or lack of real-time monitoring of spending
  • overspending >>> arises from lack of real-time clarity regarding how much is available
PLEDGES
  • not materializing >>> arises from no technology being used to automate payments, pledges receivable not being tracked anywhere, and/or no one tasked with following up on pledges receivable
RISK
  • don’t feel like you’re getting an ROI from each team member >>> arises from misaligning salary structure and salary level with job duties/job performance/job level
  • theft >>> arises from weak internal controls, which are policies and procedures designed
TIME
  • Good people are not fulfilling their roles >>> arises from higher-paid employees spending time on tasks that could be delegated to a team member who costs less…or delegated to technology…or avoided altogether if steps hadn’t been skipped or done incorrectly in a process
  • Overpaying hourly employees >>> arises from weak internal controls over documentation of the number of hours actually worked

Accounting Geek Alert! How to create a consolidation template

How to Create a Consolidation Template
[1] As a one-time exercise, create the financial statements the way you want to see them as a final product. Formatting, line items, headers.
[2] Export the trial balances of each company to Excel. In one separate tab but in the same workbook as your financial statements, paste them one above the next on the same tab.
[3] Create a column called DR (CR) with a formula that takes whatever is in the Debit columns and subtracts whatever is in the Credit column.
[4] Create a column called B/S Account and link to the desired line item on the Balance Sheet. I recommend using absolute references to save time. Remember that unless you have a Net Income line item on your B/S, you’ll want to map all revenue, COGS, and Expenses accounts to Retained Earnings in this column.
[5] Create a column called P&L Account and link to the desired line item on the Profit & Loss statement (appropriate accounts only)
[6] Don’t map the intercompany accounts or other accounts that need to be eliminated.
[7] On the face of the financial statements, where the numbers should show up, use the SUMIF function to pull the figures from the Trial Balance tab. Reference the entire column (i.e. ‘Trial Balance’!D:D) rather than a limited range of cells.
[8] Create an Error Trapping tab and enter formulas to confirm the obvious, such as Total Assets per B/S, Total Liabilities + Equity per B/S, Variance = 0.
Special note: If you want to present financials that are rounded to the nearest whole number, then in step [3] above, use the ROUND function to do so, and add a line item to each Trial Balance called Rounding, add a formula to balance the Trial Balance for that entity, and map it to an account of your choice. I have learned to choose A/P.
When it’s time to run financials again, just export a fresh Trial Balance. Make sure the T/B structure hasn’t changed (or insert/delete the occasional row) and then simply copy and paste the new amounts over the old ones.

Getting ‘Wow!’ insights in organizations with construction activities

organization with construction activities
Tracking categories. One of the glorious features of Xero is the ability to easily choose a batch of tracking categories. For example:
Tracking Category 1 = Property
Set up the names in the Property tracking category with a Site: Unit structure
Site A: Unit 01
Site A: Unit 02
Site A: Unit 03
etc.
and then
Site B: Unit 10
and so on.
When you run an income statement, you can show all of the apartments sides by side for a given site, or you can select Edit Layout, Column, Property, and then type Site A in the filter box. All of the tracking categories that begin with Site A will come up, and you can quickly combine them into a single column by checking them all off.
All this, and you still have Tracking Category 2 for some other way to slice and dice the organization. Perhaps by city or region, or General Contractor used, to see how profitability differs across cities, regions, or General Contractors.

Do members of a team want a guided approach to complete a project, or be left to their own creativity?

Do team members want a guided approach?

Be absolutely, crystal clear on the problem to be solved by the project.

Be absolutely, crystal clear on what sorts of things matter and don’t matter on the project and what is flexible/not flexible, for example:

  • timeline
  • method for solving the problem
  • technologies used
  • processes used
  • people involved
  • team-level communication channel & schedule
  • what, specifically, constitutes success

Be absolutely, crystal clear on your level of commitment and your “why.”

Then let each team member know that you are (or whoever is) available for whatever degree of support they require to get the job done and enhance their own value.

If a team member wants checklists, provide checklists.

If a team member wants to be left alone to do the work with latitude and independence, provide a deadline and a problem to solve.

If a team member wants daily meetings, provide daily meetings.

If a team member wants to you to be available via IM, be available via IM.

If a team member wants you to review completed milestones, set up a system to be notified of those milestones.

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