Top executives at nonprofits that rely on donations, and their CFOs, know that in terms of funding and expenditures, accounting for a nonprofit is a bit of a catch-22. That is, a nonprofit must expend money on its programs – the reason it exists in the first place – but it also needs to invest in fundraising eff orts. If it does not market its organization to potential donors, there will not be any revenue for the programs.
The trick to financing those interlocking needs, or the catch if you will, comes down to basically one word: allocation. Overspend on programs and you drain the money necessary to raise funds. Overspend on fundraising, at the expense of programs, and donors perceive the organization as more concerned with building up its bank account than delivering its programs. Result: donations suffer.
So, what is an executive director and/or CFO to do?
An effective accounting system for a nonprofit must diligently track expenses and appropriately allocate them between program and fundraising. Prager Metis has dedicated an entire practice section to consulting with nonprofits on accounting issues, including functional allocations and joint cost allocations. My recommendation to nonprofits for achieving that diligent tracking would be twofold:
First, when in doubt, consult with your accounting firm.
Second, know enough about the many subtleties of nonprofit accounting to hire the right one.
My purpose here is to offer some initial counsel and insight into how to maintain that delicate balance.
Let’s start with programs, keeping in mind that robust, high profile, effective programs are one of a nonprofit’s best tools for, yes, fundraising. Also, from an accounting standpoint, there are some less obvious methods of channeling expenditures into programs—which is what donors like to see.
For starters, let us remember that practically any eff ort that triggers an “action step” by the target audience of a nonprofit, in accounting terms, can be considered a program cost. For example, take a nonprofit whose mission is finding the cure for, and reduction of, a disease. The organization must create programs that support that mission.
Let’s say that nonprofit invests funds in a major multi-media campaign to promote diet and exercise regimens that research shows reduce the possibility of contracting that disease. The expected result? The targeted audience for that campaign will “take action,” that is, they will work those regimens into their lifestyle to reduce the likelihood of contracting the disease. Since the campaign triggered the action, the costs associated with promoting it can be considered a program cost. Unless…
To double the effectiveness of that promotion, it also includes an appeal for donations to the nonprofit. Such an appeal requires a joint cost allocation. Some of the cost of producing and distributing the multi-media campaign would be considered a program cost and some of the cost would be considered fundraising. We must also remember that fundraising expenses can come in many guises.
An Example – ‘But What If’
As the saying goes, some people are just really good at getting business. So, for nonprofits, sometimes an organization’s best fundraising vehicle may be the person running it. There have been cases where the board of a nonprofit questions all the expenses associated with some top-level executive’s spending on travel and meetings. That is, until they realize how many millions of dollars of donations can be attributed directly to that individual. Those travel and meeting expenses would go into the fundraising column.
But what if that nonprofit executive started a blog in which they documented going on the nonprofit’s recommended diet and did its exercise regimen? Along with the blog, there is an exercise video featuring the in-shape executive. Also on the site are firsthand stories of visitors doing the diet and exercise. Woven into all this online presence are multiple appeals for visitors to donate to the nonprofit.
And then, what if the executive went on a tour of cities, speaking about their experience with the regimen, showing the results, and, of course, pitching for donations to the nonprofit. All of this would trigger action and raise funds for the organization at the same time. Now the big question is: Who untangles these allocations using accepted accounting principles?
It may seem obvious that a nonprofit would engage a firm like ours to make sure, in situations like the above example, that the organization is properly, and advantageously, allocating expenses. Let us not forget two traditional fundraising vehicles: telemarketing and direct mail (printed materials). Traditionally, those expenses would be allocated to fundraising.
But what if your accounting firm read through your direct mail copy, and looked closely at those telemarking scripts, the way our firm does. What if, after doing so, your accounting firm suggested adding action steps to the copy and scripts? What would be the result? A portion of those expenditures may now get allocated to program expenses which is, as you may have already guessed, what donors like to see.