Outsourcing Meets In-house Accounting

When I started NFP Partners three years ago my goal was to help nonprofits become better at managing their finances by providing proven technology tools and nonprofit accounting expertise. I believed that we had a superior software product in Sage MIP Fund Accounting, as well as deep knowledge and hands-on experience with nonprofit accounting and finance. The original business model envisioned selling the software to a nonprofit organization (501c(3) or government unit) and enabling the client through training and support to operate the software in-house.

 Following this traditional model has produced many successful installation experiences for us and a growing reference base; however, I think we can do better and extend our reach. Software is a significant investment and one that can be deferred, especially during lean times. So I went back the drawing board. Is there a better strategy in delivering the means of good financial management and making it more affordable? The idea that seemed to make the most sense is resource sharing. Can several organizations independently and transparently share technology and human resources to achieve superior results and save money? Over the past few months we have been working on a new model called ‘collaborative outsourcing’ that we believe combines the best features of traditional in-house accounting and having accounting done by a outside provider.

 Here’s how it works: The nonprofit organization and our group, NFP Partners, enter into an agreement where we set up the nonprofit client’s accounting on a secure hosted server with easy access over the Internet. For startup and early growth organizations the client may choose to have us provide a turnkey service, but with the client having 24/7 access for inquiry and reports. For organizations in the mid-growth phase the client’s staff with NFP’s training and guidance performs day-to-day accounting operations, while NFP provides support, oversight, and period-end financial reporting. The client gets the benefits of a superior financial management system without having to hire a financial professional and spend time managing that person. Accounting operations are totally within the capabilities of a lower-cost administrative staff person who may have other duties as well. There are minimal upfront costs and the client is charged a predictable fixed monthly fee. The cost of the service is lower or not more than the cost of maintaining a 100 percent in-house operation. At some point in the organization’s growth when it becomes advisable to hire a financial professional as Controller or CFO, the move to an in-house operation is a smooth transition as most of the infrastructure is in place.

 We do not recommend collaborative outsourcing for all nonprofits. We seek clients that appreciate the value of accurate and timely financial information and are open to alternative strategies in getting the best results for administrative dollars spent.

The yin and yang of it — preparing annual audited financial statements

I ran across this excellent article in Bondi & Co’s newsletter and feel it is worth sharing. There is still considerable confusion about the auditor’s role among nonprofit executives and Boards. This article sheds some light.

When it’s time to prepare annual audited financial statements, you may find it difficult to determine where the responsibilities lie. With your auditor on one side of the equation and your management and board on the other, it’s important to clearly define — and understand — each party’s roles and responsibilities. Remember, both sides have a similar goal in mind: an end product that fairly and accurately represents your organization’s financial health.

Auditor VS. management

At the most basic level, your auditor is responsible for expressing an opinion on your financial statements. Beyond that, the auditor is responsible for obtaining reasonable assurance that your financial statements are free of material misstatement — be it from error or fraud.

Management, on the other hand, is responsible for developing estimates, such as the allowance for bad debts, adopting sound accounting policies, and sound accounting policies, and establishing, maintaining and monitoring internal controls, as clearly outlined in the American Institute of Certified Public Accountants’ standards. Although your auditor may make suggestions about these items, it isn’t his or her responsibility to institute them or to ensure they’re working properly.

What your auditor can do is evaluate whether the assumptions that management used to make decisions on internal controls, accounting policies and deterring and detecting fraud are current and applicable — and won’t materially misstate the financial statements. But deciding what to use, and when to use it, is strictly management’s responsibility. If the audit is performed in accordance with Auditing Standards, the restrictions on what an auditor can do to assist are even more stringent.

Leadership team

During these processes your auditor and board of directors can be real resources for your management team. Your auditor, however, can’t help management pick and implement policies. The auditor must maintain independence, in both fact and appearance, in the public eye.

Conversely, your board — often an untapped resource — can assist you. As your organization’s watchdog, it has significant fiduciary responsibilities that dovetail many of your duties. Often, members have related experience and suggestions for completing the job that they’re willing to share. Also see “Get a board that can help” on this page.

Format and comparisons

Annual financial statements are designed to help you manage your organization. Financial statement items — such as debt ratios, rogram vs. administrative expense ratios and restricted vs. unrestricted resources — can indicate how a nonprofit is doing. So when your nonprofit’s leadership team is preparing them, you want to make
sure the statements are as user friendly as possible.

One of the best ways to see the big financial picture is to compare your budget, your year end internally generated financial statements, and the financial statements generated during the annual audit. This comparison can be completed more easily if the format of
your annual audited statements is as close as possible to that of your internal financial statements and budgets.

Through a review of internal vs. audited statements, you can look for any large differences in individual accounts resulting from audit orrecting adjustments — these are often an indication of an internal
accounting deficiency. You’ll also be able to spot any significant discrepancies between what was budgeted for the year and the actual outcome.

These variances will help you to evaluate your organization’s performance and plan for the following year. Also, your financial
statements should make it fairly easy to determine which of your resources are restricted for particular purposes or time periods.

A nonprofit’s statement of activity and statement of financial position could show a strong financial status overall. But if the financial resources giving rise to the positive results are restricted to a particular purpose beyond regular operating activities, your management and board could come away with a mistaken impression of the organization’s financial health.

For example, donations — either investments or cash — given strictly to keep a maintenance fund for your building could show assets at a higher value even though your organization was barely able to break
even on its basic programs. So, statements should clearly identify restricted resources when they are received and while they are held by the organization at any point held by the organization at any point in
time.

A takeaway point

In the end, auditors and management have the same goal: a correct and user-friendly set of financial statements. Although most of the responsibility rests on management’s shoulders, only by working together can the two sides be successful.

Get a board that can help

Sometimes the board of directors’ role is overlooked in annual financial statement preparation — and that’s a mistake. Management must make sure that the board meets its fiduciary duties in overseeing this function.

The best time to start is when you’re assembling your board. Make sure your prime candidates possess these qualities:

Knowledge — and possibly professional skills — of use to the organization,

• Passion about the mission,
• Commitment to the organization’s success, and
• A willingness to devote adequate amounts of time.

Once the best board members are in place, encourage them to ask questions, come up with new ideas to implement and keep an open dialogue, especially on new topics. All of this will help board members contribute to your questions, come up with new ideas to implement
and keep an open dialogue, especially on new topics. All of this will help board members contribute to your organization. And having a board that is able to help guide the organization through significant financial and accounting policy decisions will pay off.

Nonprofit accounting software review

WebCPA has published a recent article that reviews several nonprofit accounting software products including Sage MIP Fund Accounting. This review is fairly informative as it reports the result of actually installing the software and doing some testing. 

The problems I have with most published software reviews — and this one is no exception — are several:

• There is an aversion to saying anything really negative,  probably not to put off vendor ad purchases.
• The author seems not to understand that some nonprofit accounting products are built specifically for nonprofits with native supporting features, while others are basically general commercial packages that require add-ons and third-party tools to perform adequately in a nonprofit environment.
• There isn’t a strong distinction made between entry-level products such as QuickBooks and more robust, scalable products as to their applicability and usefulness as nonprofits grow and mature.

Some changes coming on NFP Partners’ training

Over the past year we have presented two basic webcast training sessions, ‘How to Get the Most Out of QuickBooks’ and ‘Alternative Strategies for Managing Your Nonprofit’s Finances’.  Both are designed to convey some useful information to executives and managers, and to expose our products and services as potential solutions. The webcasts are free, but we make a significant time investment in doing them and incur some direct costs. Both sessions that are scheduled on alternate months have been well attended, and I have received some meaningful feedback as well as forming pretty good feel as to whether we receiving any marketing value from them. I’ve concluded that we can do better, so am in the process of making some changes. Both sessions try to cover too much ground and people who attend have widely varying expectations depending on their organization’s growth stage, so end up feeling their needs were not fully addressed.

Starting in August the QuickBooks webinar will be broken down into three sessions. One will focus on getting started correctly with QuickBooks for startup stage organizations, the second will address maximizing its value for growth stage organizations that are not ready for or may never require more robust mid-level software. The third session will focus on when to know your nonprofit is ready to leave QuickBooks, specifically aimed at mid-growth to mature nonprofits.  Along with the QuickBooks’ webinars we are better prepared as well to have some ‘boots on the ground’ consulting and training help. We will have special announcement by the end of July.

Improve cash management to control budget deficits

Bondi & Co. published an article in their June/July 2009 newsletter that should be useful to nonprofit executives on a practical approach to budgeting and managing cash, even more critical during these hard times.

I recommend reading the entire article, but want to comment further on the Excel spreadsheet model illustrated in the article.  The model assumes that the revenue and expenditure account summaries are stated on a cash basis. Per generally accepted accounting principals most organizations keep their books including budgets on an accrual basis, recognizing revenue when it is earned and expenses when the service or product is received. How do you get from an accrual- to a cash-based presentation? Here is a simple checklist that will render satisfactory results without putting in the extra work to achieve total accuracy.

• Start with the regular accrual-based operating budget and modify it to create a companion cash budget, renaming the revenue portion, receipts, and the expense section, disbursements.
• In the receipts section:
  • Identify those accounts or account groups where the timing of cash receipts differs significantly from when income is recognized, for example a grant that may be funded on a quarterly basis while recognized as income in even monthly increments. Make adjustments to reflect when cash is actually received.
  • Adjust revenue that flows through accounts or pledges receivable only if there are seasonal peaks in billing and pledging that pushes collections into the next monthly period. Otherwise, if billing and pledging patterns are fairly smooth throughout the year and collections vary little from month to month, make no adjustments.
  • Eliminate non-cash revenue items –volunteer time, in-kind and barter items. 
• In the disbursements section:
  • Eliminate non-cash expenses – depreciation, amortization, vacation accruals, and non-cash revenue offsets (volunteer time, in-kind, barter).
  • Identify expense accounts or account groups where the timing of cash disbursements differs significantly from when the expense is recognized, for example pre-payments to vendors that bill annually or less frequently than monthly. Make adjustment to more accurately reflect when cash is expended.
  • Adjust expense accounts that flow through accounts payable and follow a monthly billed-paid pattern only if there are significant seasonal fluctuations that create an out-of-pattern cash obligation into a following period from when billed.
  • If not in the operating budget, add a line and enter expected payments for acquisition of fixed assets. 
• As in the article’s spreadsheet illustration, show a running bottom line of expected cash balances by month, which will highlight potential deficiencies for management actions, such as those mentioned in the article. 
• As the year progresses, update the previous periods with actual results and revise the remaining periods to reflect main budget revisions and other cash impacting changes.

 Most accounting software packages do not have the inherent capability to generate a cash budget, including Sage MIP Fund Accounting. QuickBooks has a limited capability to generate ‘cash-based’ financial statements, which can be misleading. The only portion of revenues and expenses that are restated to their cash impact timing are those that flow through accounts receivable and payable. These usually are only part of the picture and may not show much month-to-month variation.

 Following the approach described using Excel will serve the cash management needs of most small- to mid-size nonprofit and government organizations. The main value resides in creating a emphasis on cash and a framework for anticipating problems before they happen. One hundred percent precision is not worth the extra time and effort.

Accountability and transparency — the reality

I ran across a recent Guidestar report about the state of transparency among nonprofits in 2008. The report portrays a fairly dismal state of voluntary disclosure of financial information. For example, only 13 percent post their audited financial statements on their Web site.

Where does your nonprofit stand? Test your organization’s accountability by downloading a simple checklist that will give you an idea of where you are and what you have to do. While at the site you can also download our free accountablity kit that include key governance and compliance sample documents for your adaptation and use, including: whistle blower policy, document retention and destruction policy, audit committee charter, and more.

The revised form 990 has further implications for organizational transparency. Read an informative whitepaper on the subject.

What to do now? – or making it through the downturn

Peter Brinkerhoff, a national nonprofit consultant, has a terrific blog called Mission-Based Management. He has posted a series of articles with straight-forward and practical advice to nonprofits finding themselves challenged by the economic downturn. Take a look starting with What You Lose in the Downturn and  Part I, and follow with Part II, III and IV. Peter has some tremendous insights and offers constructive advice applicable to all nonprofits.

Webcast – Achieve Financial Management Success with Sage MIP Fund Accounting – July 23

NFP Partners and Sage NPS  will present an important and timely webcast on July 23, 2009, designed for nonprofit health organizations interested in improving their financial management capacity through technology. The program is aimed at small- to mid-size community health and health-related nonprofits with $2 – $50 million annual operating budgets.

Candidates for this program include executive directors, chief financial officers, and financial managers of growing organizations, whose current software and processes are becoming inadequate as their financial tracking and reporting requirements become increasingly complex. Some may already have plans to acquire a new software system, while others may be thinking about it, or discussing it internally.

The presentation will address some of the major challenges that financial managers of growing health organizations are facing, including knowing when entry-level and general-purpose accounting software ceases to be an effective solution. Sage MIP Fund Accounting offers tools to help organizations deal with many of these challenges, including:

• Grant management and reporting (varying types and rules, multi-year and cross fiscal year periods)
• Internal control and audit (including OMB Circular A-133 provisions)
• Budgeting flexibility and control
• System and application access security
• Financial reporting and analysis for various stakeholders
• Cost allocation
• Integration of other operational applications (e.g., practice management, billing, fund raising)

The presentation will consist of a panel anchored and moderated by Lee Bengston, CPA and Managing Principal of NFP Partners. Other participants include: Donald Gardner, CPA, Senior Systems Consultant, NFP Partners; Mark Sandvik, CFO, Northwest Colorado Visiting Nurses Association and Jim Molter, Director of Finance, Nurse Family Partnership. Sandvik and Molter, who are financial executives using Sage MIP Fund Accounting in their organizations, will lend their expertise and perspectives. Bonnie McLain, Product Specialist at Sage NPS, will also participate in the discussions and demonstrate the software.

The one-hour webcast begins at 2:00pm MDT on July 23rd. There is limited space available, so please register early. If you have comments and ideas that you would like to see included in the program, please provide your comments below.

Click here to register.

Hosted vs. In-house Applications

I would like to get some opinions of nonprofit executives and managers about hosted vs. in-house software applications. What do you see as the advantages of continuing to run most of your core applications on your desktops (client-server model) vs. going to the hosted model? Conversely, for those who have already adopted the ‘hosted’ or SaaS (software-as-a-service) model, have your expectations been fulfilled?

Accounting Software & Performance Measurement for Nonprofits

This article was excerpted from Sage’s whitepaper “ Harnessing Technology to Budget for Outcome Measures (252 KB PDF) ” authored by Heather Burton. Sage’s Act!, PeachTree Premium Accounting for Nonprofits, and Timberline Office are available to eligible nonprofits through TechSoup Stock. An integrated fund accounting and outcome measures system enables a nonprofit to identify program challenges and make mid-course corrections to produce meaningful results.