KLR Mission Matters Blog - Providence, Rhode Island, Newport, Boston, Massachusetts

By Frank A. Monti, CPA

Almost everyone in the not-for-profit industry uses the term nonprofit.  What is the difference?  The preferred term, not-for-profit, emphasizes that the organization has been formed for a purpose that is other than making a profit for its owners or shareholders.  As a matter of fact, not-for-profit organizations do not have owners or shareholders – they exist to serve the communities in which they operate.  The way they serve these communities is known as their charitable mission and that is the reason they were formed, not for profit purposes.

The term nonprofit has the connotation that these organizations should operate without having a surplus of revenue over expenses at the end of the year.  They should finish with no-profit.  Unfortunately, many believe this is true and this is harmful to the not-for-profit world and the communities they serve.

Being financially successful is essential to just about every nonprofit just as it is to any business.  Building an operational surplus allows you to do even more for the community you serve with less stress and enables your organization to undertake new activities to accomplish your mission.

Many believe that a not-for-profit organization would be considered financially strong if it held unrestricted, liquid reserves equal to approximately 35% to 40% of a normal year’s operational expenses.  Thus, an organization with a $1 million budget should strive to accumulate reserves of approximately $350,000 to $400,000.

The Better Business Bureau Wise Giving Alliance, a charity watchdog group, in their standards for charitable accountability indicate that organizations should avoid accumulating funds that are more than three times the size of the past year’s expenses.  This would mean that the organization with the $1 million budget should not accumulate more than $3 million in reserves.  As you can see, there is a wide range between what many consider to be a financially comfortable level of accumulated “profits” and what the watchdog group considers excessive.

Each time I speak to boards, I encourage them to realize that they are a business with a purpose that is not-for-profit but that they have a normal business obligation to operate at a surplus rather than a break-even or deficit and that accumulating a reserve from operating at a surplus consistently over a period of time is an essential and worthy goal.  I encourage all of you to incorporate this concept into your organizational planning.

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements.

By Frank A. Monti, CPA

A week ago I Blogged (is this a real verb?) about the Super Bowl and its relationship to the not-for-profit organization.  So, of course you were expecting me to find a connection between St. Valentine and not-for-profits.  I will not disappoint my loyal reader.  Actually, I can’t take all of the credit for this.  It was my friends at Board Source who turned me onto the connection between Cupid and Board Governance.

Boards that work well, who govern their organizations properly are doing so because of the good relationships among board members and the good relationship between the board and the organization’s senior management.  So that’s it!  The secret to a good not-for-profit life is all in the relationships. 

Good governance is a partnership between the Board and the senior management that has to implement the board’s strategic plan designed to achieve the organization’s mission and purpose.  I’ve been involved in a few partnerships.  Some were good and some were difficult.  The good ones required a great deal of work to make them good and keep both parties happy.  The difficult ones were tough and, although a sufficient amount of hard work may have made them work, the hard work had to be done by every party, not just some of the partners.  So, I conclude that one of the foundations of a well-functioning board (and a good relationship) is that everyone is working toward the same objective and committed to expending the effort to make the relationship work.  This will likely lead to good boardroom chemistry and we all can agree that chemistry is a key to good relationships.

Two of the challenges that I hear boards complain about most frequently are dealing with the troublesome board member and managing the difficult executive director, especially when that person is part of the organization’s founding group.  Where to look for a part of the solution to these issues?  Yes, start with creating a good relationship - one that exists beyond the business of the organization.  Getting the board together socially (without significant others) is a task with a purpose and result that is well worth the time and cost involved.  Doing the same thing with the executive director pays similar dividends.  And don’t forget to build your relationship with your CPA as well!

I hope you all receive a number of Valentine cards this year – just like you did in elementary school.  When you do, think of all of the relationships in your life and commit to doing something at your next meeting to improve each of those relationships.

By Frank A. Monti, CPA

According to a recent article in the Wall Street Journal many charities finished 2011 with increased donations over 2010 and 2009, down years in the giving world.  What does this mean?

Does it mean that the recession is over?  Is charitable giving a leading indicator of the state of the economy?  I don’t think so, since charitable giving did not decline until after the recession was well recognized and the lead topic of the nightly news.  Charitable donations only declined when people lost their jobs and the rest of us were concerned about suffering a similar fate.

One thing that this information does confirm is that Americans are the most charitable people in the world.  In a massive global survey conducted by Charities Aid Foundation of America in 2011 the United States ranks highest in terms of charity.  In 2010 the U.S. ranked 5th.  The survey results are based on over 150,000 Gallup polling interviews with members of the public in 153 countries. 

There were some other interesting items in the WSJ article.  It was noted that the Salvation Army’s “Red Kettle” campaign raised $147.6 million up 4% from 2010 and 6% from 2009.  One of the big changes in the “Red Kettle” campaign is that the Salvation Army began accepting credit card donations in select markets to allow donors who don’t carry cash to give via credit card. They were able to do this via smart phones and a company called Square – because a little square card reader attaches to your smart phone and allows you to accept credit cards.  If you are not yet accepting contributions via credit card you need to do so soon.  I just hope my golfing opponents do not hear about this technology!

Another interesting item in the article was the fact that St. Jude Children’s Research Hospital raised more than $64 million in its “Thanks and Giving” campaign.  This is where they obtain donations from stores whose cashiers ask retail shoppers if they’d like to donate.  Have you thought about asking the merchants in your service area if they would conduct a campaign such as this on your behalf? Contact me, I can help you set up a similar program.

The last point I wish to make about this article is that it really highlights the amount of giving that occurs at the end of the year.  Some people think this is the result of tax planning on the part of donors.  Based on my many years in the tax business, I don’t think it is tax planning as much as it is a time of the year when people are feeling especially charitable.  If you want to participate in this charitable time, begin to plan now and realize that the competition is very difficult.  Design a campaign that will let you stand out from the crowd.

By Frank A. Monti, CPA

Like most people, I am spending a great deal of time reading articles about this Sunday’s Super Bowl 46 match up between the New England Patriots and New York Giants.  As I read article after article, I am amazed at how this game and these teams are so similar to my nonprofit clients.

The Patriots, of course, are in their 5th Super Bowl in 11 years.  This is a story within the story.  ABC news had an article about how Coach Belichick strives for a consistent approach in managing the team.  Various team members are quoted as saying “you know what to expect week-in and week-out with him.”  “He’s committed to winning and that commitment never falters, no matter what the circumstance.”  These quotes would be excellent qualities for any nonprofit organization CEO.  A consistent attention to the mission of the organization with a commitment to consistently trying to do a better job is a key to managing a nonprofit organization. 

One of my favorite quotes about Belichick is that “The attention to detail is always there.”  We frequently say that to make your business 100% better, you need to do 100 small things.  There are many stories about how Steve Jobs obsessed about the smallest detail of Apple products.  Apparently Belichick is no different and the proof that success is in the details is in the results.

Another phrase I have heard this week is that neither the Patriots nor the Giants are the same team they were at the beginning of the season.  When I teach financial management techniques to nonprofit boards and their senior staff we spend a great deal of time talking about the budget process and how to use a budget during the year.  I talk about the need to change the budget whenever necessary.  This usually meets with a fair degree of resistance.  But if something has happened in the first quarter of the year and you need to make adjustments in order to avoid the year becoming a total disaster, you need to make adjustments and change your game plan (the budget) so that you have the use of this valuable tool for the remainder of the year. 

Each of the Super Bowl teams started the year with one idea on how they were going to play, what players they were going to use in various situations and what they thought would work for them during the upcoming season.  They are in the Super Bowl because they learned what didn’t work devised adjustments, implemented those adjustments and continually refined their game plan until the Super Bowl.  So I hope all nonprofit organizations will continually reassess, adjust and revise their plans to succeed.

The big unknown for Patriots fans is Rob Gronkowski’s ankle injury.  While I am sure that Coach Belichick would prefer to have a healthy Gronk on the field Sunday, I am equally sure that he has a contingency plan ready to implement.  Planning for the unknown problem is also a key factor of success whether in business, the nonprofit organization or the gridiron. 

Who will win Sunday?  Although I grew up as a NY Giants fan, long before the AFL and the Boston Patriots, I’m rooting for the Patriots to win and I don’t think I will be disappointed.  Who you are you rooting for?

Read more Nonprofit news on our Mission Matters Blog or visit our website.

By Frank A. Monti, CPA

The IRS Form 990 has a question asking if your organization’s organizing documents (bylaws and articles of incorporation) and other documents (conflict of interest policy and others) are available to the general public and, if so, how are they available.  Are they available upon request or are they posted on the internet at your website, etc?

This raises a few questions.  Is a not-for-profit corporation a public entity?  Are these documents public documents? 

In the U.S., nonprofit organizations are formed by filing bylaws and articles of incorporation in the state in which they expect to operate.  The act of incorporating creates a legal entity enabling the organization to be treated as a corporation by law and to enter into business dealings, form contracts, and own property as any other individual or for-profit corporation may do.  In general, there are no laws that require the public disclosure of the above items for nonprofit organizations. 

Bylaws are not public documents – they are the internal rules and regulations that guide your board’s activities.  However, they have been filed when your organization applied to the IRS for recognition of its tax-exempt status.  And, since that application is available to the public per IRS regulations, the bylaws are also available to the public.

Nonprofit organizations perform a public service and operate with a public subsidy in the form of their exemption from income tax and, in most states, sales taxes.  There is, therefore, a greater sense of public accountability inherent in the nonprofit corporation vs. the for-profit corporation.  Your willingness to make available all of the organizing documents as well as significant policies such as your conflict of interest policy increases your accountability and transparency to the public.  Such a posture can only help you in the long run and enhance your reputation with the public.

Does your nonprofit make organizing documents and significant policies available to the public? What guidelines do you use when making this decision?

By Frank A. Monti, CPA

Once upon a time there were nonprofit corporations and for-profit corporations.  The for-profit corporations were organized with the goal of making a profit, building a healthy business that contributes to the community by providing goods and services, employing people and delivering a return on the investment of the stockholder-owners.  The nonprofit corporation was organized for a reason that is not-for-profit – to address a societal need and provide a social good to the community that was otherwise not being attended to.

In the last couple of years, new forms of corporate existence have emerged.  Eight states and one Native American Tribe have authorized something called an L3C corporate form.  This form of organization will be allowed in Rhode Island starting July 1, 2012.

The L3C or low-profit, limited liability company is a legal form of business entity that was created to bridge the gap between non-profit and for-profit investing by providing a structure that facilitates investments in socially beneficial, for-profit ventures while allowing not-for-profits to pursue additional resources via for-profit ventures.  Some credit Bill Gates and his 2007 Harvard commencement address with planting the seed that has resulted in the L3C Corporation.  Gates urged the graduates to invent “a more creative capitalism” where “we can stretch the reach of market forces so that more people can make a profit, or at least make a living, serving people who are suffering from the worst inequalities.”

In California as of January 1, 2012, two new corporate forms have been created – a “flexible purpose corporation” and a “benefit corporation”.  On December 12, 2011 New York Governor Andrew Cuomo signed a law creating a New York Benefit Corporation form of entity.  The bill becomes effective in mid February 2012.  There is even a generic web site for these new corporations which refers to the need for various B Corp Legislation as “a new kind of corporation for a new economy”.

Why do some believe this new kind of corporation is necessary?  The proponents indicate that for-profit corporations operate within a construct that places interests of shareholders (specifically the return to shareholders) as the primary, if not sole, objective of the corporation.  So, if a corporation engages in philanthropy, acts in an environmentally conscious manner or promotes employee or community-friendly policies, the directors could face exposure if they are proven to favor social objectives at the expense of shareholder returns.  These same proponents also argue that not-for-profit organizations risk the loss of their tax-exempt status if they stray too far toward profit-producing activities. 

In many respects I think this structure could lead to weakening our existing free-market system of entrepreneurial capitalism and crack the door open to tax our financially strong not-for-profit organizations.  I know there are many examples of the evils of capitalism and the super wealthy not-for-profit, but there are far more examples of the benefits society has realized from these two corporate forms of activity and this blog does not have the space to put forth a comparative list.  But it is an undisputed truth that this country has become the greatest nation in the history of the world because of capitalism and a strong commitment to philanthropy by its citizens.

Here are a couple of examples of how the B Corp will hurt us.  I am concerned that the B Corp will be constrained from taking aggressive action when dealing with the normal business cycles of growth and loss.  For example, will B Corps be able to trim the workforce or lower compensation during downturns?  Or will their social benefit format preclude those actions?  The economies of Europe today are facing complete collapse due to these very policies constraining business and governments from acting in concert with the ebb and flow reality of every economy.  Is this where we want to take the USA?

The not-for-profit corporation is not immune from assault either.  For example, the academic not-for-profit corporations have attracted the interest of mayors, governors and the U.S. Congress as they have accumulated vast amounts of wealth.  Moving these corporations out of the tax-exempt arena with the enticement that they are free to pursue profitable activities is a rouse I expect none of these institutions to fall for. 

Why do I think this movement will eventually take over the majority of corporate formation?  I see how easily the existing laws creating the B Corp format have sailed through state legislatures and been signed into law.  No one is willing to fight something that calls for the creation of businesses with corporate social responsibility or that encourages not-for-profits to seek profitable activities so they have more resources to address the social issues they are in business to address.  This makes such a good read, who will fight it (besides me)?

I fear that within a short period of time one will face criticism if you create a business that is other than one of these socially responsible corporations.  And once this language is in your articles of incorporation and by-laws – woven into the very fabric of your organization - and you are not a tax-exempt entity or an entity free to manage for the bottom line, then life as we know it will have ended.

Food for thought as we as a society migrate through what will soon be history.  Weigh in on the topic; let me know what you think.

Looking for additional nonprofit news and information? Check out our Mission Matters Blog.

By Frank Monti

The electronic spreadsheet has changed our lives forever.  I am old enough to remember the era prior to the advent of these marvelous tools so I truly understand how and the extent to which they have changed the way we do business.

In the not-for-profit area, where the financial resources for sophisticated computer programs do not exist, the electronic spreadsheet may be used for any number of applications, many of which are very important to the efficient operation of the organization.  The purpose of this bog is to share some of tips and tricks that I have learned during my experience using electronic spreadsheets. 

Electronic spreadsheets frequently live beyond their author.  It is important to remember that even if the spreadsheet’s author has not left the company, it is common that they will be used by someone else who takes over the task for which the spreadsheet was created.  All too often, I have seen clients using a spreadsheet that they did not understand. Before working on a spreadsheet make sure you know what you are looking at and how to interpret the data.

Even a small error in a spreadsheet can have a significant impact on the accuracy of the information and calculation it was designed to produce.  If the spreadsheet’s user does not fully understand the purpose and computational logic initially designed into the spreadsheet, they are unlikely to realize that it is no longer working properly.  There can be cell referencing problems; data exporting issues; range definition errors as well as basic data entry mistakes.

What can one do?  Unfortunately, the answer is more work.  Your organization should adopt spreadsheet controls.  Develop documentation standards so that a worksheet in the workbook fully explains what the spreadsheet is for and how the spreadsheet is supposed to work. 

Build in cross checks.  In the pre-electronic spreadsheet era, accountants used to total down and across as a double check that the math of their manual spreadsheet was accurate.  However, today since the computer formula does the math, seldom do I see people checking the math to be sure the formula is correct.  How many times have you inserted a row only to find that it did not change the formula?

Here are some tips I have found useful for using electronic spreadsheets. Determine the variables on the spreadsheet and lock all of the other cells so that cells and formula which should not change cannot be accidently changed. Maintain a list of all spreadsheets and what they are used for.  Restrict access to the spreadsheets to only those who are trained on their use.  Use passwords to access the spreadsheets. Make backup copies. Implement a rotating testing program where spreadsheets are periodically tested to assure that they are still working as designed. Realize that spreadsheets are valuable company assets and treat them accordingly.

Electronic spreadsheet can be a budgetary sound financial resource for Nonprofit organizations but it is important to know exactly what you are looking at and how to manipulate the data.

By Frank A. Monti, CPA

Here is the latest update on the coming changes to financial reporting in the nonprofit area. 

In early November, the Financial Accounting Standards Board (FASB) added two agenda projects.  One is a standard-setting project, and the other is a research project.  Both are intended to improve financial reporting of not-for-profit organizations.  The current not-for-profit financial reporting model, promulgated in the early 1990’s is almost two decades old and the thought is that it is time to refresh it.

The standard-setting project will focus on financial statements and the related notes that are unique to not-for-profit organizations.  The project’s goal is to focus on improving the current net asset classification scheme (unrestricted, temporarily-restricted and permanently-restricted net asset classes) as well as reviewing information about an organization’s liquidity, financial performance and cash flows.  This is certainly an indication that not-for-profit organizations have become bigger businesses over the past two decades and, while attention to the mission is still the number one purpose of the not-for-profit organization, liquidity, financial performance and cash flow information is needed by the users of their financial statements.

The research project will study other means of communication that not-for-profit organizations currently use in telling their financial story. 

You can follow the progress of these two projects at the FASB website, or you can continue check the Nonprofit Blog Mission Matters, where we will be reporting and commenting as things unfold.

Read my previous post on the Financial Accounting Standards Board Nonprofit Advisory Committee.

By Meyer H. Levy, CPA

I cannot tell you how many times I have been asked if I would like to serve on a nonprofit board, or whether I know someone who would like to serve on a board. I imagine that most people, when asked to serve on a board, do so because someone is asking them for a favor.

The question is –should you serve on a board when asked? My immediate answer is yes, with a big IF.  You should serve IF you have an interest in the organization’s mission. Actually, your interest in the organization’s mission should be close to a passion for the mission.

However, there are pros and some cons of board service that you should go into this knowing about. From a recent Wall Street Journal article, “Before you join that Board, it may be an honor, and it may be a pain”; the author of the article explains that serving on a board can be a big commitment. Nonprofit Board members have certain responsibilities. Besides attending anywhere from 7–10 board meetings each year, serving on sub-committees, and attending events and galas, you may also be asked to assess programs, and possibly make a financial commitment. It is because of all this potential hard work that you must seriously evaluate your interest/passion for serving on a particular board.

Knowing your responsibilities as a nonprofit board member before joining a board will involve asking some or all of the following questions before deciding whether to accept the position. Questions about: the finances of the organization, the structure of the board, individual board member responsibilities, how long do board members serve, what committees does the board have, the programs of the organization, and questions about the organization’s management and staff .

As a board member, one needs to be committed to attending all board meetings, to be prepared for the meetings, be prepared to ask tough questions, and be willing to serve on one or two committees of the board. As a board member you have a fiduciary responsibility to the organization and to the general public.

When evaluating whether to serve on a board, you must decide:

1. whether you are so passionate about the mission of the organization that you are willing to work hard for no financial compensation,
2. If you are willing and eager to use your network and professional skills to further the organization’s mission
3. If you are sp passionate about the mission that you are prepared to be an ambassador for the organization
4. If you are so passionate about the mission that you will take on fundraising responsibilities

Visit our website for more information on nonprofit board member responsibilities. Click HERE to view our latest webinar and read more about this topic.

By Frank A. Monti, CPA

To help you follow the changes that are coming in the not-for-profit financial reporting area you need to know who is involved.  The Financial Accounting Standards Board (FASB) has created a Not-for-Profit Advisory Committee that is becoming known as the NAC. 

The NAC was established in 2009 because the FASB believes that the not-for-profit organization is unique. It is not considered a public company but they are also not a private company due to their great public accountability requirement to exist. The Board of the not-for-profit is unlike the Board of the public company where they are a significant part of senior management.  In the not-for-profit organization the Board is the liaison between the community it serves and the management that is running it on a day-to-day basis.  The not-for-profit board is driving the public accountability wagon.

Now that we know why there is a NAC, what are they up to?

Well, in the spring of 2011 the NAC formed three working groups.  These groups were charged with obtaining input from the nonprofit sector and providing guidance on proposed technical agenda projects to the FASB.  The three groups that have been started are dealing with

1. Reporting Financial Performance;
2. Liquidity and Financial Health; and
3. “Telling the Story” – helping the nonprofit communicate the agency’s story to the public and relating that to the annual financial report.

My next blog will explain what the FASB is doing with the NAC recommendations.  What is definite, however, is that change is coming.  Current financial reporting and communications from the not-for-profit world to the community that it serves are seen as improvable and changes will be mandated that will be billed as improvements.  Just when you were finally starting to understand your current financial statements…