Online Resource
Of the various nonprofit blogs I monitor, the Nonprofit Law Prof Blog is one of the best. When nonprofits are too small to employ general counsel, the finance department is often expected to help fill that absence. Unfortunately, the few business law courses we take in undergrad and graduate school don't leave us entirely prepared for this. Luckily, this frequently updated site helps keep the casual reader up to date on any current legal issues affecting the nonprofit industry.
Unemployment Tax Savings
Unemployment tax can be a significant cost for employers. Normally a tax is paid based on employee wages and unemployment claim history. Some nonprofits are unaware they can opt out of paying this tax. Instead, nonprofits can become reimbursing employers and only pay claims that are paid out.
In this economic environment, there is some risk associated with this option. When paying the unemployment tax, there is often budget certainty for the current year. (Future years are uncertain as the tax rate changes based upon claim history.) Opting out of the tax and reimbursing the state for claims can end up costing more if the organization has a large number of claims in the first year as a reimbursing employer.
To mitigate this risk, a stop gap insurance policy can be obtained to payout any claims over the set limit. Of course, if that threshold is reached in any year, the insurance policy will become much more expensive to obtain in future years.
Is this right for your nonprofit? Evaluate your organization's past unemployment claims and the likelihood of future claims. If future claims are likely due to the recession or funding difficulty, this may not be the right time to make this change. However, if your organization was forced to recently undergo layoffs and more staffing cuts are unlikely, this might be the perfect time to become a reimbursing employer.
Potential savings vary based on the size of the organization, but it is possible to reduce the total cost of unemployment insurance and tax expense by more than 65%.
In this economic environment, there is some risk associated with this option. When paying the unemployment tax, there is often budget certainty for the current year. (Future years are uncertain as the tax rate changes based upon claim history.) Opting out of the tax and reimbursing the state for claims can end up costing more if the organization has a large number of claims in the first year as a reimbursing employer.
To mitigate this risk, a stop gap insurance policy can be obtained to payout any claims over the set limit. Of course, if that threshold is reached in any year, the insurance policy will become much more expensive to obtain in future years.
Is this right for your nonprofit? Evaluate your organization's past unemployment claims and the likelihood of future claims. If future claims are likely due to the recession or funding difficulty, this may not be the right time to make this change. However, if your organization was forced to recently undergo layoffs and more staffing cuts are unlikely, this might be the perfect time to become a reimbursing employer.
Potential savings vary based on the size of the organization, but it is possible to reduce the total cost of unemployment insurance and tax expense by more than 65%.
Summer Camp Inspiration
Does your organization make a conscious effort to keep support staff connected to the mission? This past week I went out for a few hours to the summer camp that clients of my organization were attending. Accountants and indeed most staff in supporting functions don't work with clients, but seeing them having success and enjoying themselves can really remind us of the purpose of our work.
We all know that nonprofits can't compete with the corporate world when it comes to salaries, bonus's and perks, but nonprofits can offer a greater sense of purpose to our work. That sense of purpose needs to be continuously communicated to all staff, but especially to support staff.
I often hear how nonprofits need to tell their success stories to potential volunteers and donors, but how about telling those stories to staff too. The mission can get lost in the day to day routine if we let it. Let's also get out of our offices once in awhile and see what's being accomplished.
Making this a priority could very well strengthen the corporate culture, reduce staff turnover, increase efficiencies and even improve the bottom line.
We all know that nonprofits can't compete with the corporate world when it comes to salaries, bonus's and perks, but nonprofits can offer a greater sense of purpose to our work. That sense of purpose needs to be continuously communicated to all staff, but especially to support staff.
I often hear how nonprofits need to tell their success stories to potential volunteers and donors, but how about telling those stories to staff too. The mission can get lost in the day to day routine if we let it. Let's also get out of our offices once in awhile and see what's being accomplished.
Making this a priority could very well strengthen the corporate culture, reduce staff turnover, increase efficiencies and even improve the bottom line.
Online Resource
Occasionally, I also want to highlight websites that can be a resource for nonprofit professionals. I won't review the entire website, but will point out the areas I find most interesting.
The first such website is the National Center for Charitable Statistics. There is a wealth of information on the site that can be used for benchmarking. NFP accountants might be especially interested to review their Unified Chart of Accounts project. The DataWeb (registration required) allows users to query their database and to create custom reports. Much, much more can be found on the site, and I encourage you to share the site within your organization too.
The first such website is the National Center for Charitable Statistics. There is a wealth of information on the site that can be used for benchmarking. NFP accountants might be especially interested to review their Unified Chart of Accounts project. The DataWeb (registration required) allows users to query their database and to create custom reports. Much, much more can be found on the site, and I encourage you to share the site within your organization too.
Investing in the Mission vs. Growing the Balance Sheet
This may not be the most timely of issues with the recession and corresponding funding difficulties that many nonprofits are going through, but I've recently been wondering about the role that profit plays in nonprofit finance. As we know, nonprofits have no owners who benefit when (if) profit is earned through operations, development and investments. Instead of enriching owners, nonprofits must choose between expanding services and retaining those earnings to ensure the future security of the organization.
The case for expanding services seems convincing. If there is a need for the services that are being provided, how can we justify withholding funding to provide those services if the agency has the financial means? Shouldn't a mission driven organization do all it can to advance it's cause?
Alternatively, an organization can save or invest any profit that is generated and grow their balance sheet. The best example of this may be those universities with endowments valued in the tens of billions. They have, to a certain extent, insulated themselves against short-term financial pressures. But could some of these funds be better used for research or tuition assistance?
While it doesn't have to be the either/or choice I've presented here, the underlying question is real. A balance needs to be struck between current support of the mission and the organizations ability to maintain that support long term. My impression is that many nonprofits could use more attention paid to growing the balance sheet during good times so they can withstand the lean times more easily.
The case for expanding services seems convincing. If there is a need for the services that are being provided, how can we justify withholding funding to provide those services if the agency has the financial means? Shouldn't a mission driven organization do all it can to advance it's cause?
Alternatively, an organization can save or invest any profit that is generated and grow their balance sheet. The best example of this may be those universities with endowments valued in the tens of billions. They have, to a certain extent, insulated themselves against short-term financial pressures. But could some of these funds be better used for research or tuition assistance?
While it doesn't have to be the either/or choice I've presented here, the underlying question is real. A balance needs to be struck between current support of the mission and the organizations ability to maintain that support long term. My impression is that many nonprofits could use more attention paid to growing the balance sheet during good times so they can withstand the lean times more easily.
Administrative Expense Ratios: Informative or Misleading?
All nonprofits need administrative staff to support the mission of the organization. Someone has to process the payroll, keep the computer network running and tend to the seemingly endless number of tasks that enable the program personnel to keep their focus on the mission. Even small nonprofits with only a few employees have someone who is managing how that work gets accomplished. (Through outsourcing, volunteers, etc.) Administrative expense ratios highlight the percent of revenue that is spend on the administrative functions.
These expenses are commonly referred to as Management and General (M&G) and are allocated to the program(s). To calculate the administrative expense ratio, one simply divides M&G expense into revenue. This ratio is frequently held up as a tool that can be used to measure efficiency between organizations.
Well, you ask, what's the problem with all of this? If Social Service Agency A has a ratio of 12%, while Community Theater B has a ratio of 19%, the leaders of the community theater must not be running their organization as well. Right?
I contend that the information presented above doesn't give near enough information to make such an assertion, but too often that is exactly what is inferred from such data.
Here are the two major problems with relying solely upon an organization's administrative expense ratio when evaluating efficiency.
These expenses are commonly referred to as Management and General (M&G) and are allocated to the program(s). To calculate the administrative expense ratio, one simply divides M&G expense into revenue. This ratio is frequently held up as a tool that can be used to measure efficiency between organizations.
Well, you ask, what's the problem with all of this? If Social Service Agency A has a ratio of 12%, while Community Theater B has a ratio of 19%, the leaders of the community theater must not be running their organization as well. Right?
I contend that the information presented above doesn't give near enough information to make such an assertion, but too often that is exactly what is inferred from such data.
Here are the two major problems with relying solely upon an organization's administrative expense ratio when evaluating efficiency.
- The size and type of an organization aren't taken into consideration. Cost structures vary between types of nonprofits. In our example above, perhaps the average community theater has a ratio of 20% while social services average 10%. Does that change anything? Larger nonprofits should also be able to achieve economies of scale and reduce costs in areas where smaller nonprofits might not.
- Not all nonprofits record M&G expense the same. Although some variation can be attributed to differences in the knowledge of finance staff or how reporting guidelines are interpreted, the possibility of organizations 'managing' that ratio also exists. Managing the administrative expense ratio to coincide with donor expectations is no different or less harmful than when public companies were managing earnings to expectations from Wall Street.
Introduction
Over the coming months, I plan to use this blog to share my thoughts on topics that relate to nonprofit finance. Not every post will talk debits and credits though, and my hope is that nonprofit staff of all disciplines find it beneficial to follow along.
